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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 August 2, 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
(State or other jurisdiction of
incorporation or organization)          |  | 34-1453189
(I.R.S. Employer Identification No.)
|                                                                                
|1925 ENTERPRISE PARKWAY
TWINSBURG, OHIO
(Address of principal executive offices) |  | 44087
(Zip Code)                               

(330) 486-3100
(Registrants telephone number, including area code)

5915 Landerbrook Drive
Mayfield Heights, Ohio 44124
(Former name, former address and former fiscal year, if changed since last
report)

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 August 29, 2003, 16,303,438 shares of the registrants common stock were outstanding.



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TABLE OF CONTENTS



|                                                     |                                                                                               |  |  |  |  |  |  | 
|---------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|                                                     | PART I. FINANCIAL INFORMATION                                                                
|PART I  FINANCIAL INFORMATION                      
|                                                     | Item 1. Financial Statements                                                                 
|CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)   
|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 4. Submission of Matters to a Vote of Security Holders                                  
|                                                     | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                          
|EXHIBIT INDEX                                       
|Exhibit 3.2(II) Amended & Restated By-laws          
|Exhibit 10.1 Amended & Extended Credit Agreement    
|Exhibit 10.2 Separation Agreement                   
|Exhibit 10.3 Assignment of Life Insurance Policy    
|Exhibit 31.1 Section 302 CEO Cert                   
|Exhibit 31.2 Section 302 CFO Cert                   
|Exhibit 32 Section 906 Cert                         



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##### Table of Contents



COLE NATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED AUGUST 2, 2003
INDEX

| |  |         
| |  | --------
| |  | Page No.




PART I.   FINANCIAL INFORMATION

|                              |               |                                                                                                                                   |  |    |    | 
|----------------------------- | ------------- | --------------------------------------------------------------------------------------------------------------------------------- |  | -- | -- | 
|                              | Item 1.       | Financial Statements (unaudited)
 Condensed Consolidated Balance Sheets as of August 2, 2003, August 3, 2002 and
February 1, 2003 |  |    | 1 
|                             
|                              |               | Condensed Consolidated Statements of Operations for the 13 and 26 week periods ended
August 2, 2003 and August 3, 2002            |  |    | 2  | 
|                             
|                              |               | Condensed Consolidated Statements of Cash Flows for the 26 week periods ended
August 2, 2003 and August 3, 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                                                                        |  |    | 21 | 
|                             
|                              | Item 4.       | Controls and Procedures                                                                                                           |  |    | 21 | 
|                             
|PART II.    OTHER INFORMATION |               |                                                                                                                                   |  |   
|                             
|                              | Item 1.       | Legal Proceedings                                                                                                                 |  |    | 22 | 
|                             
|                              | Item 4.       | Submissions of Matters to a Vote of Security
Holders                                                                              |  |    | 22 | 
|                             
|                              | Item 6.       | Exhibits and Reports on Form 8-K                                                                                                  |  |    | 22 | 
|                             
|                              | Signatures    |                                                                                                                                   |  | 24 |   
|                             
|                              | Exhibit Index |                                                                                                                                   |  | 25 |   



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##### Table of Contents






PART I  FINANCIAL INFORMATION




Item 1.    Financial Statements

COLE NATIONAL CORPORATION AND SUBSIDIARIES




|                                                                                                        |                                                                                 |                                            |                                   |          |         |           |         |           |         |             |         |          |         |         |  | 
|------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------------------ | --------------------------------- | -------- | ------- | --------- | ------- | --------- | ------- | ----------- | ------- | -------- | ------- | ------- |  | 
|                                                                                                        |                                                                                 |                                            |                                   |          |         | August 2, |         | August 3, |         | February 1,
|                                                                                                        |                                                                                 |                                            |                                   |          |         | 2003      |         | 2002      |         | 2003       
|                                                                                                        |                                                                                 |                                            |                                   |          |         |           |         |           |         |            
|Assets                                                                                                  |                                                                                 |                                            |                                   |          |         |           |         |           |         |             |         |         
|Current assets:                                                                                         |                                                                                 |                                            |                                   |          |         |           |         |           |         |             |         |         
|                                                                                                        | Cash and cash equivalents                                                       |                                            | $                                 | 17,074   |         |           | $       | 48,926    |         |             | $       | 42,002   |        
|                                                                                                        | Accounts receivable, less allowances of
$3,455, $3,378 and $3,063, respectively |                                            |                                   | 57,440   |         |           |         | 45,063    |         |             |         | 51,088   |        
|                                                                                                        | Current portion of notes receivable                                             |                                            |                                   | 6,667    |         |           |         | 2,899     |         |             |         | 8,624    |        
|                                                                                                        | Inventories                                                                     |                                            |                                   | 130,727  |         |           |         | 127,911   |         |             |         | 120,645  |        
|                                                                                                        | Prepaid expenses and other                                                      |                                            |                                   | 23,264   |         |           |         | 26,526    |         |             |         | 24,213   |        
|                                                                                                        | Deferred income tax benefits                                                    |                                            |                                   | 31,393   |         |           |         | 27,326    |         |             |         | 31,333   |        
|                                                                                                        |                                                                                 |                                            |                                   |          |         |           |         |           |         |             |         |         
|                                                                                                        |                                                                                 |                                            | Total current assets              |          |         | 266,565   |         |           |         | 278,651     |         |          |         | 277,905 | 
|                                                                                                       
|Property and equipment, at cost                                                                         |                                                                                 |                                            | 330,916                           |          |         |           | 314,981 |           |         |             | 318,914 |         
|                                                                                                        | Less  accumulated depreciation and amortization                                |                                            |                                   | (209,033 | )       |           |         | (194,353  | )       |             |         | (197,906 | )      
|                                                                                                        |                                                                                 |                                            |                                   |          |         |           |         |           |         |             |         |         
|                                                                                                        |                                                                                 |                                            | Total property and equipment, net |          |         | 121,883   |         |           |         | 120,628     |         |          |         | 121,008 | 
|                                                                                                       
|Notes receivable, excluding current portion, less allowances
of $2,802, $4,239 and $3,010, respectively |                                                                                 |                                            | 23,618                            |          |         |           | 20,848  |           |         |             | 22,137  |         
|Deferred income taxes                                                                                   |                                                                                 |                                            | 36,502                            |          |         |           | 29,664  |           |         |             | 31,905  |         
|Other assets                                                                                            |                                                                                 |                                            | 54,674                            |          |         |           | 55,841  |           |         |             | 54,933  |         
|Other intangibles, net                                                                                  |                                                                                 |                                            | 50,425                            |          |         |           | 45,838  |           |         |             | 50,903  |         
|Goodwill, net                                                                                           |                                                                                 |                                            | 85,713                            |          |         |           | 85,542  |           |         |             | 85,557  |         
|                                                                                                        |                                                                                 |                                            |                                   |          |         |           |         |           |         |             |         |         
|                                                                                                        |                                                                                 |                                            | Total assets                      |          | $       | 639,380   |         |           | $       | 637,012     |         |          | $       | 644,348 | 
|                                                                                                        |                                                                                 |                                            |                                   |          |         |           |         |           |         |             |         |         
|Liabilities and Stockholders Equity                                                                    |                                                                                 |                                            |                                   |          |         |           |         |           |         |             |         |         
|Current liabilities:                                                                                    |                                                                                 |                                            |                                   |          |         |           |         |           |         |             |         |         
|                                                                                                        | Current portion of long-term debt                                               |                                            | $                                 | 5,250    |         |           | $       | 267       |         |             | $       | 232      |        
|                                                                                                        | Accounts payable                                                                |                                            |                                   | 68,687   |         |           |         | 59,449    |         |             |         | 67,581   |        
|                                                                                                        | Accrued interest                                                                |                                            |                                   | 7,990    |         |           |         | 7,690     |         |             |         | 8,199    |        
|                                                                                                        | Accrued liabilities                                                             |                                            |                                   | 93,842   |         |           |         | 96,792    |         |             |         | 92,413   |        
|                                                                                                        | Accrued income taxes                                                            |                                            |                                   | 6,411    |         |           |         | 9,049     |         |             |         | 4,957    |        
|                                                                                                        | Deferred revenue                                                                |                                            |                                   | 39,855   |         |           |         | 36,981    |         |             |         | 38,014   |        
|                                                                                                        |                                                                                 |                                            |                                   |          |         |           |         |           |         |             |         |         
|                                                                                                        |                                                                                 |                                            | Total current liabilities         |          |         | 222,035   |         |           |         | 210,228     |         |          |         | 211,396 | 
|                                                                                                       
|Long-term debt, net of discount and current portion                                                     |                                                                                 |                                            | 280,992                           |          |         |           | 285,546 |           |         |             | 286,553 |         
|Other long-term liabilities                                                                             |                                                                                 |                                            | 40,675                            |          |         |           | 24,224  |           |         |             | 41,587  |         
|Deferred revenue, long-term                                                                             |                                                                                 |                                            | 12,567                            |          |         |           | 11,696  |           |         |             | 11,559  |         
|Stockholders equity                                                                                    |                                                                                 |                                            | 83,111                            |          |         |           | 105,318 |           |         |             | 93,253  |         
|                                                                                                        |                                                                                 |                                            |                                   |          |         |           |         |           |         |             |         |         
|                                                                                                        |                                                                                 | Total liabilities and stockholders equity |                                   | $        | 639,380 |           |         | $         | 637,012 |             |         | $        | 644,348 |        
|                                                                                                        |                                                                                 |                                            |                                   |          |         |           |         |           |         |             |         |         

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

1



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COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)

|                                          |                                      |   |                                                |         |                             |         |                               |         |           |         |           |         |   |         |         |         |   |         | 
|----------------------------------------- | ------------------------------------ | - | ---------------------------------------------- | ------- | --------------------------- | ------- | ----------------------------- | ------- | --------- | ------- | --------- | ------- | - | ------- | ------- | ------- | - | ------- | 
|                                          |                                      |   |                                                |         | Thirteen Week Periods Ended |         | Twenty-Six Week Periods Ended
|                                          |                                      |   |                                                |         |                             |         |                              
|                                          |                                      |   |                                                |         | August 2,                   |         | August 3,                     |         | August 2, |         | August 3,
|                                          |                                      |   |                                                |         | 2003                        |         | 2002                          |         | 2003      |         | 2002     
|                                          |                                      |   |                                                |         |                             |         |                               |         |           |         |          
|Net revenue                               |                                      | $ | 307,659                                        |         |                             | $       | 292,390                       |         |           | $       | 595,908   |         |   | $       | 577,831 |        
|                                         
|Costs and expenses:                       |                                      |   |                                                |         |                             |         |                               |         |           |         |           |         |   |         |         |        
|                                          | Cost of revenues                     |   |                                                | 114,839 |                             |         |                               | 103,020 |           |         |           | 220,752 |   |         |         | 203,027 |  
|                                          | Operating expenses                   |   |                                                | 193,976 |                             |         |                               | 179,500 |           |         |           | 378,843 |   |         |         | 356,556 |  
|                                          |                                      |   |                                                |         |                             |         |                               |         |           |         |           |         |   |         |         |        
|                                          |                                      |   | Total costs and expenses                       |         |                             | 308,815 |                               |         |           | 282,520 |           |         |   | 599,595 |         |         |   | 559,583 | 
|                                          |                                      |   |                                                |         |                             |         |                               |         |           |         |           |         |   |         |         |        
|                                         
|Operating income (loss)                   |                                      |   | (1,156                                         | )       |                             |         | 9,870                         |         |           |         | (3,687    | )       |   |         | 18,248  |        
|                                         
|Interest and other (income) expense, net: |                                      |   |                                                |         |                             |         |                               |         |           |         |           |         |   |         |         |        
|                                          | Interest expense                     |   |                                                | 6,327   |                             |         |                               | 6,784   |           |         |           | 12,715  |   |         |         | 13,884  |  
|                                          | Interest and other (income), net     |   |                                                | (1,975  | )                           |         |                               | (2,098  | )         |         |           | (2,882  | ) |         |         | (3,709  | )
|                                          | Loss on early extinguishment of debt |   |                                                |        |                             |         |                               | 11,141  |           |         |           |        |   |         |         | 11,141  |  
|                                          |                                      |   |                                                |         |                             |         |                               |         |           |         |           |         |   |         |         |        
|                                          |                                      |   | Total interest and other (income) expense,
net |         |                             | 4,352   |                               |         |           | 15,827  |           |         |   | 9,833   |         |         |   | 21,316  | 
|                                          |                                      |   |                                                |         |                             |         |                               |         |           |         |           |         |   |         |         |        
|                                         
|Income (loss) before income taxes         |                                      |   | (5,508                                         | )       |                             |         | (5,957                        | )       |           |         | (13,520   | )       |   |         | (3,068  | )      
|                                         
|Income tax provision (benefit)            |                                      |   | (21                                            | )       |                             |         | (271                          | )       |           |         | (1,622    | )       |   |         | 1,752   |        
|                                          |                                      |   |                                                |         |                             |         |                               |         |           |         |           |         |   |         |         |        
|                                         
|Net income (loss)                         |                                      | $ | (5,487                                         | )       |                             | $       | (5,686                        | )       |           | $       | (11,898   | )       |   | $       | (4,820  | )      
|                                          |                                      |   |                                                |         |                             |         |                               |         |           |         |           |         |   |         |         |        
|                                         
|Earnings (loss) per common share:         |                                      |   |                                                |         |                             |         |                               |         |           |         |           |         |   |         |         |        
|                                          | Basic                                |   | $                                              | (0.34   | )                           |         | $                             | (0.35   | )         |         | $         | (0.73   | ) |         | $       | (0.30   | )
|                                          | Diluted                              |   |                                                | (0.34   | )                           |         |                               | (0.35   | )         |         |           | (0.73   | ) |         |         | (0.30   | )
|                                         
|Weighted average shares:                  |                                      |   |                                                |         |                             |         |                               |         |           |         |           |         |   |         |         |        
|                                          | Basic                                |   |                                                | 16,330  |                             |         |                               | 16,212  |           |         |           | 16,317  |   |         |         | 16,170  |  
|                                          | Diluted                              |   |                                                | 16,330  |                             |         |                               | 16,212  |           |         |           | 16,317  |   |         |         | 16,170  |  

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

2



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COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)

|                                      |                                                                                          |                                                                                           |                                                                  |                                                      |        |                               |         |           |        |        |         |  
|------------------------------------- | ---------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ---------------------------------------------------- | ------ | ----------------------------- | ------- | --------- | ------ | ------ | ------- | -
|                                      |                                                                                          |                                                                                           |                                                                  |                                                      |        | Twenty-Six Week Periods Ended
|                                      |                                                                                          |                                                                                           |                                                                  |                                                      |        |                              
|                                      |                                                                                          |                                                                                           |                                                                  |                                                      |        | August 2,                     |         | August 3,
|                                      |                                                                                          |                                                                                           |                                                                  |                                                      |        | 2003                          |         | 2002     
|                                      |                                                                                          |                                                                                           |                                                                  |                                                      |        |                               |         |          
|Cash flows from operating activities: |                                                                                          |                                                                                           |                                                                  |                                                      |        |                               |         |          
|                                      | Net income (loss)                                                                        |                                                                                           | $                                                                | (11,898                                              | )      |                               | $       | (4,820    | )     
|                                      | Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |                                                                                           |                                                                  |                                                      |        |                               |         |           |       
|                                      |                                                                                          | Depreciation and amortization                                                             |                                                                  |                                                      | 19,630 |                               |         |           | 18,059 |       
|                                      |                                                                                          | Loss on early extinguishment of debt                                                      |                                                                  |                                                      |       |                               |         |           | 11,141 |       
|                                      |                                                                                          | Deferred income tax benefit                                                               |                                                                  |                                                      | (4,596 | )                             |         |           | (1,795 | )     
|                                      |                                                                                          | Noncash compensation                                                                      |                                                                  |                                                      | 1,391  |                               |         |           | 866    |       
|                                      |                                                                                          | Noncash interest, foreign currency exchange (gains) losses and
other, net                 |                                                                  |                                                      | (1,129 | )                             |         |           | (2,346 | )     
|                                      |                                                                                          | Increases (decreases) in cash resulting from changes in operating
assets and liabilities: |                                                                  |                                                      |        |                               |         |           |        |       
|                                      |                                                                                          |                                                                                           | Accounts and notes receivable, prepaid expenses and other
assets |                                                      |        | (6,518                        | )       |           |        | (2,859 | )      
|                                      |                                                                                          |                                                                                           | Inventories                                                      |                                                      |        | (9,889                        | )       |           |        | (6,440 | )      
|                                      |                                                                                          |                                                                                           | Accounts payable, accrued liabilities and other liabilities      |                                                      |        | 11,020                        |         |           |        | 7,722  |        
|                                      |                                                                                          |                                                                                           | Accrued interest                                                 |                                                      |        | (209                          | )       |           |        | 942    |        
|                                      |                                                                                          |                                                                                           | Accrued and refundable income taxes                              |                                                      |        | 1,368                         |         |           |        | 304    |        
|                                      |                                                                                          |                                                                                           |                                                                  |                                                      |        |                               |         |          
|                                      |                                                                                          |                                                                                           |                                                                  | Net cash (used for) provided by operating
activities |        |                               | (830    | )         |        |        | 20,774  |  
|                                      |                                                                                          |                                                                                           |                                                                  |                                                      |        |                               |         |          
|Cash flows from investing activities: |                                                                                          |                                                                                           |                                                                  |                                                      |        |                               |         |          
|                                      | Purchases of property and equipment                                                      |                                                                                           |                                                                  | (15,503                                              | )      |                               |         | (13,944   | )     
|                                      | Systems development costs                                                                |                                                                                           |                                                                  | (4,308                                               | )      |                               |         | (2,330    | )     
|                                      | Contingent payments for and acquisition of businesses                                    |                                                                                           |                                                                  | (4,056                                               | )      |                               |         |          |       
|                                      | Investment and notes receivable in Pearle Europe, net                                    |                                                                                           |                                                                  | 2,459                                                |        |                               |         |          |       
|                                      |                                                                                          |                                                                                           |                                                                  |                                                      |        |                               |         |          
|                                      |                                                                                          |                                                                                           |                                                                  | Net cash used for investing activities               |        |                               | (21,408 | )         |        |        | (16,274 | )
|                                      |                                                                                          |                                                                                           |                                                                  |                                                      |        |                               |         |          
|Cash flows from financing activities: |                                                                                          |                                                                                           |                                                                  |                                                      |        |                               |         |          
|                                      | Repayment of long-term debt                                                              |                                                                                           |                                                                  | (51                                                  | )      |                               |         | (158,165  | )     
|                                      | Proceeds from issuance of long-term debt                                                 |                                                                                           |                                                                  |                                                     |        |                               |         | 150,000   |       
|                                      | Decrease in overdraft balances                                                           |                                                                                           |                                                                  | (3,471                                               | )      |                               |         | (5,896    | )     
|                                      | Net proceeds from exercise of stock options and issuance of stock                        |                                                                                           |                                                                  | 382                                                  |        |                               |         | 1,149     |       
|                                      | Payment of deferred financing fees                                                       |                                                                                           |                                                                  | (238                                                 | )      |                               |         | (5,921    | )     
|                                      | Other, net                                                                               |                                                                                           |                                                                  | 688                                                  |        |                               |         | (40       | )     
|                                      |                                                                                          |                                                                                           |                                                                  |                                                      |        |                               |         |          
|                                      |                                                                                          |                                                                                           |                                                                  | Net cash used for financing activities               |        |                               | (2,690  | )         |        |        | (18,873 | )
|                                      |                                                                                          |                                                                                           |                                                                  |                                                      |        |                               |         |          
|Cash and cash equivalents:            |                                                                                          |                                                                                           |                                                                  |                                                      |        |                               |         |          
|                                      | Net decrease during the period                                                           |                                                                                           |                                                                  | (24,928                                              | )      |                               |         | (14,373   | )     
|                                      | Balance, beginning of period                                                             |                                                                                           |                                                                  | 42,002                                               |        |                               |         | 63,299    |       
|                                      |                                                                                          |                                                                                           |                                                                  |                                                      |        |                               |         |          
|                                      | Balance, end of period                                                                   |                                                                                           | $                                                                | 17,074                                               |        |                               | $       | 48,926    |       
|                                      |                                                                                          |                                                                                           |                                                                  |                                                      |        |                               |         |          

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

3



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##### 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 2,472
company-owned retail locations and 463 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.

Managed care claims expense has been reclassified to cost of revenues from
operating expenses to provide improved transparency to gross margin.

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

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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.

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

|                   |                                  |  |   |                               |   |            |   |             |   |  |   |         |   | 
|------------------ | -------------------------------- |  | - | ----------------------------- | - | ---------- | - | ----------- | - |  | - | ------- | - | 
|                   |                                  |  |   | Twenty-Six Week Periods Ended |   | Year Ended
|                   |                                  |  |   |                               |   |           
|                   |                                  |  |   | August 2,                     |   | August 3,  |   | February 1,
|                   |                                  |  |   | 2003                          |   | 2002       |   | 2003       
|                   |                                  |  |   |                               |   |            |   |            
|Deferred revenues: |                                  |  |   |                               |   |            |   |             |   |  |   |        
|                   | Beginning balance                |  | $ | 49,573                        |   |            | $ | 46,511      |   |  | $ | 46,511  |  
|                   | Warranty contracts sold          |  |   | 28,412                        |   |            |   | 26,628      |   |  |   | 53,023  |  
|                   | Other deferred revenue           |  |   | 1,304                         |   |            |   | 314         |   |  |   | 1,080   |  
|                   | Amortization of deferred revenue |  |   | (26,867                       | ) |            |   | (24,776     | ) |  |   | (51,041 | )
|                   |                                  |  |   |                               |   |            |   |             |   |  |   |        
|                   | Ending balance                   |  | $ | 52,422                        |   |            | $ | 48,677      |   |  | $ | 49,573  |  
|                   |                                  |  |   |                               |   |            |   |             |   |  |   |        

Cash Flows

Net cash flows from operating activities reflect cash payments for income
taxes and interest of $1,512,000 and $12,345,000, respectively, for the 26 week
period ended August 2, 2003 and $3,074,000 and $12,596,000, respectively, for
the 26 week period ended August 3, 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 $24.7 million, $16.3 million and $28.4 million at
August 2, 2003, August 3, 2002 and February 1, 2003, respectively and to
accrued expenses amounted to $3.3 million, $3.1 million and $3.2 million at
August 2, 2003, August 3, 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 Periods Ended |        | Twenty-Six Week Periods Ended
|                                                |                                                           |   |                             |        |                              
|                                                |                                                           |   | August 2,                   |        | August 3,                     |   | August 2, |        | August 3,
|                                                |                                                           |   | 2003                        |        | 2002                          |   | 2003      |        | 2002     
|                                                |                                                           |   |                             |        |                               |   |           |        |          
|(In thousands, except per share amounts)        |                                                           |   |                             |        |                               |   |           |        |           |   |        |        |  |   |        |       
|Determination of shares:                        |                                                           |   |                             |        |                               |   |           |        |           |   |        |        |  |   |        |       
|                                                | Average common shares outstanding                         |   |                             | 16,330 |                               |   |           | 16,212 |           |   |        | 16,317 |  |   |        | 16,170 | 
|                                                | Assumed conversation of dilutive stock
options and awards |   |                             |       |                               |   |           |       |           |   |        |       |  |   |        |       | 
|                                                |                                                           |   |                             |        |                               |   |           |        |           |   |        |        |  |   |        |       
|Diluted average common shares outstanding       |                                                           |   | 16,330                      |        |                               |   | 16,212    |        |           |   | 16,317 |        |  |   | 16,170 |       
|                                                |                                                           |   |                             |        |                               |   |           |        |           |   |        |        |  |   |        |       
|Basic earnings (loss) per common share          |                                                           | $ | (0.34                       | )      |                               | $ | (0.35     | )      |           | $ | (0.73  | )      |  | $ | (0.30  | )     
|Diluted earnings (loss) shares per common share |                                                           | $ | (0.34                       | )      |                               | $ | (0.35     | )      |           | $ | (0.73  | )      |  | $ | (0.30  | )     

Total Other Comprehensive Income (Loss)

Total other comprehensive income (loss) for the 13 and 26 week periods
ended August 2, 2003 and August 3, 2002 is as follows (dollars in thousands):

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|                                        |  |                             |        |                               |  |           |        |           |  |   |         |   |  |   |        |  
|--------------------------------------- |  | --------------------------- | ------ | ----------------------------- |  | --------- | ------ | --------- |  | - | ------- | - |  | - | ------ | -
|                                        |  | Thirteen Week Periods Ended |        | Twenty-Six Week Periods Ended
|                                        |  |                             |        |                              
|                                        |  | August 2,                   |        | August 3,                     |  | August 2, |        | August 3,
|                                        |  | 2003                        |        | 2002                          |  | 2003      |        | 2002     
|                                        |  |                             |        |                               |  |           |        |          
|Net income (loss)                       |  | $                           | (5,487 | )                             |  | $         | (5,686 | )         |  | $ | (11,898 | ) |  | $ | (4,820 | )
|Cumulative translation income (loss)    |  |                             | 12     |                               |  |           | (117   | )         |  |   | 501     |   |  |   | 5      |  
|                                        |  |                             |        |                               |  |           |        |           |  |   |         |   |  |   |        |  
|Total other comprehensive income (loss) |  | $                           | (5,475 | )                             |  | $         | (5,803 | )         |  | $ | (11,397 | ) |  | $ | (4,815 | )
|                                        |  |                             |        |                               |  |           |        |           |  |   |         |   |  |   |        |  

Stock-Based Compensation

At August 2, 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 Periods Ended |       | Twenty-Six Week Periods Ended
|                                                                                                                                             |             |      |                             |       |                              
|                                                                                                                                             |             |      | August 2,                   |       | August 3,                     |      | August 2, |       | August 3,
|(In thousands, except per share amounts)                                                                                                     |             | 2003 |                             | 2002  |                               | 2003 |           | 2002 
|                                                                                                                                             |             |      |                             |       |                               |      |           |      
|Net income (loss), as reported                                                                                                               |             | $    | (5,487                      | )     |                               | $    | (5,686    | )     |           | $ | (11,898 | )     |   | $ | (4,820 | )    
|Deductions for total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related taxes |             |      | (237                        | )     |                               |      | (548      | )     |           |   | (683    | )     |   |   | (1,049 | )    
|                                                                                                                                             |             |      |                             |       |                               |      |           |       |           |   |         |       |   |   |        |      
|Net income (loss), pro forma                                                                                                                 |             | $    | (5,724                      | )     |                               | $    | (6,234    | )     |           | $ | (12,581 | )     |   | $ | (5,869 | )    
|                                                                                                                                             |             |      |                             |       |                               |      |           |       |           |   |         |       |   |   |        |      
|Basic earnings (loss) per common share                                                                                                       |             |      |                             |       |                               |      |           |       |           |   |         |       |   |   |        |      
|                                                                                                                                             | As reported |      | $                           | (0.34 | )                             |      | $         | (0.35 | )         |   | $       | (0.73 | ) |   | $      | (0.30 | )
|                                                                                                                                             | Pro forma   |      | $                           | (0.35 | )                             |      | $         | (0.38 | )         |   | $       | (0.77 | ) |   | $      | (0.36 | )
|Diluted earnings (loss) per common share                                                                                                     |             |      |                             |       |                               |      |           |       |           |   |         |       |   |   |        |      
|                                                                                                                                             | As reported |      | $                           | (0.34 | )                             |      | $         | (0.35 | )         |   | $       | (0.73 | ) |   | $      | (0.30 | )
|                                                                                                                                             | Pro forma   |      | $                           | (0.35 | )                             |      | $         | (0.38 | )         |   | $       | (0.77 | ) |   | $      | (0.36 | )

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 has been
reclassified. The pretax loss from the early extinguishment of debt has been
presented as a separate line within interest and other (income) expenses and
the related income tax benefit reduced 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.

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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.

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):

|                         |  |           |        |           |  |             |        |   |  |   |        |  
|------------------------ |  | --------- | ------ | --------- |  | ----------- | ------ | - |  | - | ------ | -
|                         |  | August 2, |        | August 3, |  | February 1,
|                         |  | 2003      |        | 2002      |  | 2003       
|                         |  |           |        |           |  |            
|Tradename                |  | $         | 49,460 |           |  | $           | 49,460 |   |  | $ | 49,460 |  
|Noncompete agreements    |  |           | 320    |           |  |             | 840    |   |  |   | 840    |  
|Contracts                |  |           | 8,947  |           |  |             | 3,460  |   |  |   | 8,847  |  
|Customer records         |  |           | 9      |           |  |             |       |   |  |   |       |  
|                         |  |           |        |           |  |             |        |   |  |   |        |  
|                         |  |           | 58,736 |           |  |             | 53,760 |   |  |   | 59,147 |  
|Accumulated amortization |  |           | (8,311 | )         |  |             | (7,922 | ) |  |   | (8,244 | )
|                         |  |           |        |           |  |             |        |   |  |   |        |  
|Other intangibles, net   |  | $         | 50,425 |           |  | $           | 45,838 |   |  | $ | 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 six months ended
August 2, 2003, reflect the write-off of a $600,000 agreement that had expired
and was fully amortized. The change in the carrying amount of contracts for the
six months ended August 2, 2003 resulted primarily from a contingent payment
for a previously acquired provider network. 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 August 2, 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. Net proceeds from the 8-7/8% note
offering, together with cash on hand, were used to retire Cole National Groups
$150.0 million of 9-7/8% Senior Subordinated Notes due 2006 and pay premiums
and other costs associated with retiring those notes. The Companys results for
fiscal 2002 included a loss on early extinguishment of debt of $11.1 million
representing the payment of premiums and other costs of retiring the notes and
the write offs of unamortized discount and deferred financing fees.

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.

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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 becomes due.

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 Cole National Groups $125.0 million of
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 August 2, 2003, the floating rate of swaps was
approximately 5.7% and the fair value of the swap agreements was an unrealized
gain of approximately $0.3 million. There was no impact to earnings in the
first six months of fiscal 2003 due to hedge ineffectiveness.

(4) Credit Facility

On June 27, 2003, the operating subsidiaries of Cole National Group, Inc.
amended, restated and extended its working capital credit facility with its
bank lenders. The maturity date of the credit facility was extended to February
1, 2007 from May 31, 2006. The size of the facility was adjusted to $60.0
million from $75.0 million. In addition, certain financial covenants were
amended. 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 2.50% or (b) 1.50% 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 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. The Company is in compliance with the covenants
in the credit agreement as of the date of this report.

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. If certain maximum leverage
targets are met, 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 August 2, 2003, the total availability under the credit facility
totaled $45.0 million after reduction for commitments outstanding of $15.0
million under letters of credit. There were no working capital borrowings under
the credit facility outstanding as of August 2, 2003 and August 3, 2002 and
there were no borrowings during the second quarter of fiscal 2003 and fiscal
2002.

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(5) Segment Information

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

|                         |                                          |                                |   |                             |         |                               |   |           |         |           |   |         |         |  |   |         |         | 
|------------------------ | ---------------------------------------- | ------------------------------ | - | --------------------------- | ------- | ----------------------------- | - | --------- | ------- | --------- | - | ------- | ------- |  | - | ------- | ------- | 
|                         |                                          |                                |   | Thirteen Week Periods Ended |         | Twenty-Six Week Periods Ended
|                         |                                          |                                |   |                             |         |                              
|                         |                                          |                                |   | August 2,                   |         | August 3,                     |   | August 2, |         | August 3,
|                         |                                          |                                |   | 2003                        |         | 2002                          |   | 2003      |         | 2002     
|                         |                                          |                                |   |                             |         |                               |   |           |         |          
|Net revenue:             |                                          |                                |   |                             |         |                               |   |           |         |           |   |         |         |  |   |        
|                         | Cole Vision                              |                                | $ | 228,832                     |         |                               | $ | 218,079   |         |           | $ | 462,373 |         |  | $ | 451,049 |        
|                         | Things Remembered                        |                                |   | 78,827                      |         |                               |   | 74,311    |         |           |   | 133,535 |         |  |   | 126,782 |        
|                         |                                          |                                |   |                             |         |                               |   |           |         |           |   |         |         |  |   |        
|                         |                                          | Total net revenue              |   | $                           | 307,659 |                               |   | $         | 292,390 |           |   | $       | 595,908 |  |   | $       | 577,831 | 
|                         |                                          |                                |   |                             |         |                               |   |           |         |           |   |         |         |  |   |        
|Operating income (loss): |                                          |                                |   |                             |         |                               |   |           |         |           |   |         |         |  |   |        
|                         | Cole Vision                              |                                | $ | 3,192                       |         |                               | $ | 2,906     |         |           | $ | 12,468  |         |  | $ | 16,197  |        
|                         | Things Remembered                        |                                |   | 9,940                       |         |                               |   | 9,795     |         |           |   | 7,360   |         |  |   | 7,956   |        
|                         |                                          |                                |   |                             |         |                               |   |           |         |           |   |         |         |  |   |        
|                         |                                          | Total segment operating income |   |                             | 13,132  |                               |   |           | 12,701  |           |   |         | 19,828  |  |   |         | 24,153  | 
|                        
|                         | Unallocated amounts:                     |                                |   |                             |         |                               |   |           |         |           |   |         |         |  |   |         |        
|                         |                                          | Corporate expenses             |   |                             | 14,288  |                               |   |           | 2,831   |           |   |         | 23,515  |  |   |         | 5,905   | 
|                         |                                          |                                |   |                             |         |                               |   |           |         |           |   |         |         |  |   |        
|                         | Total operating income (loss)            |                                |   | (1,156                      | )       |                               |   | 9,870     |         |           |   | (3,687  | )       |  |   | 18,248  |        
|                         | Interest and other (income) expense, net |                                |   | 4,352                       |         |                               |   | 15,827    |         |           |   | 9,833   |         |  |   | 21,316  |        
|                         |                                          |                                |   |                             |         |                               |   |           |         |           |   |         |         |  |   |        
|                         | Income (loss) before income taxes        |                                | $ | (5,508                      | )       |                               | $ | (5,957    | )       |           | $ | (13,520 | )       |  | $ | (3,068  | )      
|                         |                                          |                                |   |                             |         |                               |   |           |         |           |   |         |         |  |   |        

(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 $13.3 million, $14.0 million and $13.8 million as of August 2,
2003, August 3, 2002 and February 1, 2003, respectively. 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. As of August 2, 2003, HAL and the Company
had not agreed on the price to offer on September 3, 2003 or on the process to
agree on a price.

The Companys former Chairman and Chief Executive Officer retired at the
annual meeting of shareholders on June 25, 2003. The Company fulfilled its
obligations, including certain contingent obligations, to its former Chairman
and Chief Executive Officer under his employment agreement and for retirement
and life insurance benefits. These obligations required a one-time cash payment
of $11.9 million with a charge to operating expenses in the second quarter of
fiscal 2003 of $9.4 million.

(7) Subsequent
Events

On
September 3, 2003, HAL and the Company offered to purchase a total of
12,014 Pearle Europe shares from members of Pearle Europe management
for a price of 5,412 Euro per share. If all of the Pearle Europe
managers were to sell all of their shares at that price, the
resulting obligation to the Company would have been approximately
$17.0 million. Under certain circumstances, the members of Pearle

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Europe management could request that the price of the shares be
evaluated by an independent expert. On September 12, 2003, HAL
following the responses from Pearle Europe management to the offer
price, HAL proposed to the Company that they increase the offer. In
response to the Companys request, HAL agreed to assume the
Companys purchase obligation with respect to this offer and
purchase 100% of the shares offered by Pearle Europe management. As a
result of this assumption, on a fully diluted basis the Companys 21% ownership interest
in Pearle Europe will remain unchanged, and HALs ownership
interest in Pearle Europe may increase from 68% to approximately 79%.

(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 fiscal 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. The Company
and attorneys for the plaintiffs have agreed to 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 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 investigation 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.

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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 2,472 company-owned retail locations and 463 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.

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Results of Operations

The following schedule sets forth certain operating information for the
second quarters and the first six months 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.

|                                                    |                                |  |                               |                     |    |                       |       |       |   |        |       |                       |   |        |    |        |    |       |   |       |   |       |  |       |    |        |    | 
|--------------------------------------------------- | ------------------------------ |  | ----------------------------- | ------------------- | -- | --------------------- | ----- | ----- | - | ------ | ----- | --------------------- | - | ------ | -- | ------ | -- | ----- | - | ----- | - | ----- |  | ----- | -- | ------ | -- | 
|                                                    |                                |  |                               |                     |    | Second Quarter        |       |       |   |        |       | First Six Months      |   |        |    |       
|                                                    |                                |  |                               |                     |    |                       |       |       |   |        |       |                       |   |        |    |       
|                                                    |                                |  |                               |                     |    | 2003                  |       | 2002  |   | Change |       | 2003                  |   | 2002   |    | Change
|                                                    |                                |  |                               |                     |    |                       |       |       |   |        |       |                       |   |        |    |       
|                                                    |                                |  |                               |                     |    | (Dollars in millions) |       |       |   |        |       | (Dollars in millions) |   |        |    |       
|Net revenue:                                        |                                |  |                               |                     |    |                       |       |       |   |        |       |                       |   |        |    |        |    |       |   |       |   |       |  |      
|                                                    | Cole Vision                    |  | $                             | 228.9               |    |                       | $     | 218.1 |   |        |       | 4.9                   | % |        | $  | 462.4  |    |       | $ | 451.0 |   |       |  | 2.5   | % 
|                                                    | Things Remembered              |  |                               | 78.8                |    |                       |       | 74.3  |   |        |       | 6.1                   |   |        |    | 133.5  |    |       |   | 126.8 |   |       |  | 5.3   |   
|                                                    |                                |  |                               |                     |    |                       |       |       |   |        |       |                       |   |        |    |        |    |       |   |       |   |       |  |      
|                                                    |                                |  | Total net revenue             |                     | $  | 307.7                 |       |       | $ | 292.4  |       |                       |   | 5.2    | %  |        | $  | 595.9 |   |       | $ | 577.8 |  |       |    | 3.1    | % 
|                                                   
|Gross margin:                                       |                                |  |                               |                     |    |                       |       |       |   |        |       |                       |   |        |    |        |    |       |   |       |   |       |  |      
|                                                    | Cole Vision                    |  | $                             | 136.6               |    |                       | $     | 135.7 |   |        |       | 0.7                   | % |        | $  | 279.3  |    |       | $ | 282.5 |   |       |  | (1.1  | )%
|                                                    | Things Remembered              |  |                               | 56.2                |    |                       |       | 53.7  |   |        |       | 4.7                   |   |        |    | 95.9   |    |       |   | 92.3  |   |       |  | 3.9   |   
|                                                    |                                |  |                               |                     |    |                       |       |       |   |        |       |                       |   |        |    |        |    |       |   |       |   |       |  |      
|                                                    |                                |  | Total gross margin            |                     | $  | 192.8                 |       |       | $ | 189.4  |       |                       |   | 1.8    | %  |        | $  | 375.2 |   |       | $ | 374.8 |  |       |    | 0.1    | % 
|                                                   
|Operating expenses:                                 |                                |  |                               |                     |    |                       |       |       |   |        |       |                       |   |        |    |        |    |       |   |       |   |       |  |      
|                                                    | Cole Vision                    |  | $                             | 133.4               |    |                       | $     | 132.8 |   |        |       | 0.5                   | % |        | $  | 266.9  |    |       | $ | 266.3 |   |       |  | 0.2   | % 
|                                                    | Things Remembered              |  |                               | 46.3                |    |                       |       | 43.9  |   |        |       | 5.5                   |   |        |    | 88.5   |    |       |   | 84.3  |   |       |  | 5.0   |   
|                                                    | Unallocated corporate expenses |  |                               | 14.3                |    |                       |       | 2.8   |   |        |       | 404.7                 |   |        |    | 23.5   |    |       |   | 5.9   |   |       |  | 298.2 |   
|                                                    |                                |  |                               |                     |    |                       |       |       |   |        |       |                       |   |        |    |        |    |       |   |       |   |       |  |      
|                                                    |                                |  | Total operating expenses      |                     | $  | 194.0                 |       |       | $ | 179.5  |       |                       |   | 8.1    | %  |        | $  | 378.9 |   |       | $ | 356.6 |  |       |    | 6.3    | % 
|                                                   
|Operating income (loss):                            |                                |  |                               |                     |    |                       |       |       |   |        |       |                       |   |        |    |        |    |       |   |       |   |       |  |      
|                                                    | Cole Vision                    |  | $                             | 3.2                 |    |                       | $     | 2.9   |   |        |       | 9.8                   | % |        | $  | 12.4   |    |       | $ | 16.2  |   |       |  | (23.0 | )%
|                                                    | Things Remembered              |  |                               | 9.9                 |    |                       |       | 9.8   |   |        |       | 1.5                   |   |        |    | 7.4    |    |       |   | 8.0   |   |       |  | (7.5  | ) 
|                                                    | Unallocated corporate expenses |  |                               | (14.3               | )  |                       |       | (2.8  | ) |        |       | 404.7                 |   |        |    | (23.5  | )  |       |   | (5.9  | ) |       |  | 298.2 |   
|                                                    |                                |  |                               |                     |    |                       |       |       |   |        |       |                       |   |        |    |        |    |       |   |       |   |       |  |      
|                                                    |                                |  | Total operating income (loss) |                     | $  | (1.2                  | )     |       | $ | 9.9    |       |                       |   | (111.7 | )% |        | $  | (3.7  | ) |       | $ | 18.2  |  |       |    | (120.2 | )%
|                                                    |                                |  |                               |                     |    |                       |       |       |   |        |       |                       |   |        |    |        |    |       |   |       |   |       |  |      
|                                                   
|Percentage of net revenue:                          |                                |  |                               |                     |    |                       |       |       |   |        |       |                       |   |        |    |        |    |       |   |       |   |       |  |      
|                                                    | Gross margin                   |  |                               | 62.7                | %  |                       |       | 64.8  | % |        |       | (2.1                  | ) |        |    | 63.0   | %  |       |   | 64.9  | % |       |  | (1.9  | ) 
|                                                    | Operating expenses             |  |                               | 63.0                |    |                       |       | 61.4  |   |        |       | (1.6                  | ) |        |    | 63.6   |    |       |   | 61.7  |   |       |  | (1.9  | ) 
|                                                    | Operating income (loss)        |  |                               | (0.4                | )% |                       |       | 3.4   | % |        |       | (3.8                  | ) |        |    | (0.6   | )% |       |   | 3.2   | % |       |  | (3.8  | ) 
|                                                   
|Number of retail locations at the end of
the period |                                |  |                               |                     |    |                       |       |       |   |        |       |                       |   |        |    |        |    |       |   |       |   |       |  |      
|                                                    | Cole Licensed Brands           |  |                               | 1,324               |    |                       |       | 1,296 |   |        |       |                       |   |        |    |        |    |       |   |       |   |       |  |       |   
|                                                    | Pearle company-owned           |  |                               | 394                 |    |                       |       | 420   |   |        |       |                       |   |        |    |        |    |       |   |       |   |       |  |       |   
|                                                    | Pearle franchised              |  |                               | 463                 |    |                       |       | 446   |   |        |       |                       |   |        |    |        |    |       |   |       |   |       |  |       |   
|                                                    |                                |  |                               |                     |    |                       |       |       |   |        |       |                       |   |        |    |        |    |       |   |       |   |       |  |      
|                                                    |                                |  |                               | Total Cole Vision   |    |                       | 2,181 |       |   |        | 2,162 |                       |   |        |    |        |    |       |   |       |   |       |  |       |    |        |    | 
|                                                    | Things Remembered              |  |                               | 754                 |    |                       |       | 776   |   |        |       |                       |   |        |    |        |    |       |   |       |   |       |  |       |   
|                                                    |                                |  |                               |                     |    |                       |       |       |   |        |       |                       |   |        |    |        |    |       |   |       |   |       |  |      
|                                                    |                                |  |                               | Total Cole National |    |                       | 2,935 |       |   |        | 2,938 |                       |   |        |    |        |    |       |   |       |   |       |  |       |    |        |    | 
|                                                    |                                |  |                               |                     |    |                       |       |       |   |        |       |                       |   |        |    |        |    |       |   |       |   |       |  |      

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:

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|                               |                     |  |                |     |                  |  |      |     |  
|------------------------------ | ------------------- |  | -------------- | --- | ---------------- |  | ---- | --- | -
|                               |                     |  | Second Quarter |     | First Six Months
|                               |                     |  |                |     |                 
|Cole Licensed Brands (U.S.)    |                     |  | 9.4            | %   |                  |  | 4.5  | %  
|Pearle company-owned (U.S.)    |                     |  | 4.1            | %   |                  |  | 0.4  | %  
|                               | Total Cole Vision   |  |                | 7.0 | %                |  |      | 2.7 | %
|Things Remembered              |                     |  | 6.8            | %   |                  |  | 4.8  | %  
|                               | Total Cole National |  |                | 6.9 | %                |  |      | 3.2 | %
|                              
|Pearle franchise stores (U.S.) |                     |  | 0.8            | %   |                  |  | (1.3 | )% 

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.

Second Quarter Fiscal 2003 Compared to Second Quarter Fiscal 2002

Consolidated Operations

Total revenues were $307.7 million in the second quarter of fiscal 2003,
compared with $292.4 million in the same period of fiscal 2002. Total revenues
increased 5.2% in the second quarter of fiscal 2003, primarily attributable to
a 6.9% increase in same store sales and increases in revenues from managed
vision care programs. Undelivered orders taken for customers, as of the end of
second quarter, used in the calculation of same store sales in that period but
recognized as revenue in future periods due to the timing difference between
order placement and order delivery, increased in the second quarter of fiscal
2003.  The increase in the on-order amount in the second quarter of fiscal
2003 was primarily due to a successful promotion at Sears Optical at the end of
the second quarter. Same store sales increased 9.4% at Cole Licensed Brands,
4.1% at Pearle Vision company-owned stores and 6.8% at Things Remembered in the
second quarter of fiscal 2003.

Gross margin was $192.8 million in the second quarter of fiscal 2003,
compared with $189.4 million in the same period of fiscal 2002, an increase of
1.8%. The gross margin dollar increase was attributable to higher revenues at
both Cole Vision and Things Remembered. The gross margin rate for the second
quarter of fiscal 2003 was 62.7%, compared to 64.8% for the second quarter of
fiscal 2002. The gross margin rate at Cole Vision decreased 2.5% from the same
period last year (further discussion is included in the Cole Vision segment).
Managed care claims expense has been reclassified in both years to cost of
revenues from operating expenses to provide improved transparency to Cole
Visions gross margin. The gross margin rate at Things Remembered decreased by
0.9%, primarily due to reduced revenues from gift personalization.

Operating expenses were $194.0 million in the second quarter of fiscal
2003, compared with $179.5 million in the same period of fiscal 2002, an
increase of 8.1%. Included in operating expense was an increase of $11.5
million in unallocated corporate expenses. The Companys former Chairman and
Chief Executive Officer retired at the annual meeting of shareholders on June
25, 2003. The Company fulfilled its obligations, including certain contingent
obligations, to its former Chairman and Chief Executive Officer under his
employment agreement and for retirement and life insurance benefits. These
obligations required a one-time cash payment of $11.9 million with a charge to
operating expenses in the second quarter of fiscal 2003 of $9.4 million. The
Company incurred incremental charges of $1.2 million for legal and professional
fees primarily related to the reaudit and restatement of its financial
statements and the resulting SEC investigation. The Company incurred
incremental professional and legal fees of $0.7 million related to recent
management changes and other management initiatives. Operating expenses at the
Cole Vision and Things Remembered segments increased 1.7% primarily due to
higher store payroll including fringe benefits and workers compensation and
from rent and occupancy costs. These costs increased primarily in support of
higher revenues. The Company and its optical subsidiaries have been sued by the
State of California (see Note 8 of the Notes to Condensed Consolidated
Financial Statements). Legal costs associated with the defense of this matter
totaled $1.1 million in the second quarter of fiscal 2003, compared with $0.7
million in the same period last year. Partially offsetting expense increases
were savings from lower store marketing costs totaling $2.4 million, a
reduction of $1.0 million in claims processing costs in the second quarter of
fiscal 2003 compared to the same time last year, work force reductions and
costs for a point of sale system incurred in the second quarter of fiscal 2002
which were not repeated.

Operating loss was $1.2 million in the second quarter of fiscal 2003,
compared to operating income of $9.9 million in the same period of fiscal 2002.
The expenses associated with the retirement of the Companys former Chairman
and Chief Executive Officer, the lower gross margin rate, and higher corporate
expenses due to the restatement and reaudit of the fiscal 2000 and 2001
financial statements were the primary reasons for the decrease in operating
results.

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Interest and other (income) expense, net, was $4.4 million for the second
quarter of fiscal 2003, compared to $15.8 million for the same period of fiscal
2002. Second quarter fiscal 2002 results include a loss of $11.1 million on
the early extinguishment of debt. The charge represents the payment of premiums
and other costs of retiring Cole National Groups 9-7/8% Senior Subordinated
Notes due 2006 and the write-offs of unamortized discount and deferred
financing fees. The Company recorded lower interest expense in the second
quarter of fiscal 2003 compared to the same period last year, primarily due to
replacement of the $150.0 million 9-7/8% Senior Subordinated Notes with the
issuance of 8-7/8% Senior Subordinated Notes in May 2002 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 second quarter of fiscal 2003. The
Company recorded a foreign currency gain of $0.9 million related to its
investment in notes and interest receivable from Pearle Europe in the second
quarter of fiscal 2003. This compared to a foreign currency gain of $1.3
million for the same period of fiscal 2002.

The Company recorded a tax benefit based on its estimated annual effective
rate of 12%. The quarterly rate reflects the cumulative impact of changing the
estimated annual effective rate from 20% in the first quarter of fiscal 2003 to
12%. The estimated lower effective tax rate in fiscal 2003 compared to fiscal
2002 is based on the expected full year results and the impact of certain
nondeductible expenses.

Cole Vision Segment

Cole Vision revenues were $228.9 million in the second quarter of fiscal
2003, compared with $218.1 million in the same period of fiscal 2002, an
increase of 4.9%. 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 an 18.9% increase in same store sales at Target Optical and an
increase in the number of store locations. Same store sales improved 7.8% at
Sears Optical and 15.6% at BJs Optical during the second quarter of fiscal
2003. Same store sales results at Cole Licensed Brands were driven by increases
in both the number of transactions as well as the average transaction size.
Revenues from managed vision care programs were higher primarily due to an
increase in the number of capitated plans sold to employers, health plans and
associations and increased laser procedure volume and program changes in laser
vision correction resulting in higher revenues per procedure. Same-store sales
for the second quarter of fiscal 2003 increased 4.1% at Pearle Vision. Same
store sales at Pearle Vision reflected a decrease in the number of
transactions, offset by an increase in the average transaction size. Same store
sales increases at Pearle Vision were partially offset by a lower number of
company owned stores. Pearle Vision operated 26 fewer company owned stores than
the same time period last year, due to the subsequent net sale of 11 Company
stores to franchisees, the closure of 20 stores and the opening of 5 new
stores.

Gross margin was $136.6 million in the second quarter of fiscal 2003,
compared to $135.7 million in the same period last year, an increase of 0.7%
due to increased revenues, partially offset by a decrease in gross margin rate.
Gross margin, as a percentage of net revenues, decreased by 2.5 percentage
points at Cole Vision. Managed care claims expense has been reclassified in
both years to cost of revenues from operating expenses to provide improved
transparency to Cole Visions gross margin. Cole Managed Vision gross margin
rate decreased by 6.2 percentage points due to a shift in revenue mix toward
lower gross margin programs. Cole Licensed Brands gross margin rate decreased
by 2.0 percentage points and was impacted by higher inventory shrink results in
the second quarter of fiscal 2003, higher costs associated with a shift toward
premium product, lower contact lens gross margin and 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. Pearle Vision gross margin, as
a percent of net revenues, decreased by 1.3 percentage points due to higher
cost premium product driven by promotions and higher manufacturing costs.
Partially offsetting these factors was an increase in average spectacle selling
price. Gross margin was also negatively impacted by increased workers
compensation expense in the lab facilities. The Company closed its
manufacturing and distribution facility in Toronto, Canada in the second
quarter of fiscal 2003. The operations of this facility has been absorbed by
the Companys facility in Knoxville, TN. As part of the integration of the
Canadian operations into the Knoxville lab, the Company changed the Canadian
product assortment. As a result, the Company recorded a $0.3 million charge to
gross margin for obsolescence of inventory.

Operating expenses were $133.4 million in the second quarter of fiscal
2003, compared to $132.8 million for the same period last year, an increase of
0.5%. Operating expenses as a percent of net revenues decreased at Cole Vision
by 2.6% in the second quarter of fiscal 2003, compared to the same period of
fiscal 2002. Store payroll and rent and occupancy costs at Cole Vision were
$1.5 million and $0.7 million higher in the second quarter of fiscal 2003
compared to the same period last year, primarily to support the increase in
revenues. Pearle Vision recorded a charge of $0.6 million for assets disposed
of in a prior period. The Companys Canadian operations closed its
manufacturing and distribution facility located in Toronto, Canada. One time
costs associated with the closure of the facility totaled $0.4 million. The
Company and its optical subsidiaries have been sued by the State of California
(see Note 8 of the Notes to Condensed Consolidated Financial Statements). Legal
costs associated with the

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defense of this matter totaled $1.1 million in the
second quarter of fiscal 2003, compared with $0.7 million in the same period
last year. Fringe benefits costs increased $0.4 million in the second quarter
of fiscal 2003, compared to the same period last year. Partially offsetting
expense increases were a reduction of $1.0 million in claims processing costs,
savings from reduced bonus expense and work force reductions, lower marketing
costs of $2.3 million in the second quarter of fiscal 2003, compared to the
same period last year, and a gain of $1.0 million on the sale of five
Company-owned stores to a franchisee.

Operating income at Cole Vision increased to $3.2 million in the second
quarter of fiscal 2003, compared to $2.9 million in the same period of fiscal
2002. Improvements in the processing cost per claim and increases in sales
volume were partially offset by costs associated with the closure of the
Companys Canadian lab and manufacturing facility and decreases in the gross
margin rate at Pearle Vision, Cole Licensed Brands and Cole Managed Vision.

Things Remembered Segment

Things Remembered revenues were $78.8 million in the second quarter of
fiscal 2003, compared with $74.3 million in the same period of fiscal 2002, a
6.1% increase. The same-store sales increase of 6.8% and a 35% 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. Improvements in the average dollar
sale were offset by a lower number of transactions and a reduction in the
number of stores operating at the end of the second quarter. Store count at the
end of the second quarter of fiscal 2003 was 754 compared to 776 at the end of
the second quarter of fiscal 2002 due to store closings.

Gross margin was $56.2 million in the second quarter of fiscal 2003,
compared to $53.7 million for the same period last year, an increase of 4.7%.
Gross margin as a percent of revenues decreased 0.9% in the second quarter of
fiscal 2003 compared to the same period of fiscal 2002, primarily from reduced
revenues from gift personalization.

Operating expenses were $46.3 million in the second quarter of fiscal
2003, compared to $43.9 million for the same period last year, an increase of
5.5%. Operating expenses as a percent of revenues decreased 0.3% in the second
quarter of fiscal 2003 compared to the same period of fiscal 2002. Things
Remembered accrued higher management bonuses of $0.9 million. Store rent and
occupancy charges increased $0.5 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 second 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 second 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 second quarter of fiscal 2003.
Partially offsetting the expense increases were charges incurred in the second
quarter of fiscal 2002 for a new store point of sale system, the implementation
of which has been delayed. These costs were not repeated in the second quarter
of fiscal 2003. Savings from work force reductions taken in fiscal 2002 were
also realized.

Operating income for the second quarter of fiscal 2003 was $9.9 million
compared to $9.8 million in the same period of fiscal 2002. Increases in
revenue were offset by the lower gross margin rate, higher bonus
expense and increased workers compensation, store rent and occupancy costs.

First Six Months of Fiscal 2003 Compared to First Six Months of Fiscal 2002

Consolidated Operations

Total revenues were $595.9 million in the first six months of fiscal 2003,
compared with $577.8 million in the same period of fiscal 2002. Total revenues
increased 3.1% in the first six months of fiscal 2003, primarily attributable
to a 3.2% increase in same store sales and increases in revenues from managed
vision care programs. Same store sales increased 4.5% at Cole Licensed Brands,
0.4% at Pearle Vision company-owned stores and 4.8% at Things Remembered in the
first six months of fiscal 2003.

Gross margin was $375.2 million in the first six months of fiscal 2003,
compared with $374.8 million in the same period of fiscal 2002. Increases in
gross margin dollars at Things Remembered were partially offset by decreases at
Cole Vision. The gross margin rate for the first six months of fiscal 2003 was
63.0%, compared to 64.9% for the same period of fiscal 2002. The gross margin
rate at Cole Vision decreased 2.2% from the same period last year (further
discussion is included in the Cole Vision

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segment). The gross margin rate at
Things Remembered decreased by 1.0%, primarily due to reduced revenues from
gift personalization and higher freight costs associated with an increase in
customer orders fulfilled by central distribution.

Operating expenses were $378.9 million in the first six months of fiscal
2003, compared with $356.6 million in the same period of fiscal 2002, an
increase of 6.3%. Included in operating expense was an increase of $17.6
million in unallocated corporate expenses. The Companys former Chairman and
Chief Executive Officer retired at the annual meeting of shareholders on June
25, 2003 and the Company fulfilled its obligation, including certain contingent
obligations, under his employment agreement and for retirement and life
insurance benefits. These obligations required a one-time cash payment of $11.9
million with a charge to operating expenses in the second quarter of fiscal
2003 of $9.4 million. The Company incurred incremental charges of $4.3 million
for legal, audit and professional fees primarily related to the reaudit and
restatement of its financial statements and the resulting SEC investigation.
Settlement costs related to the class action lawsuit, alleging claims of
various violations of federal securities laws related to the Companys publicly
reporting revenues and earnings totaled $2.7 million. The Company incurred
incremental professional and legal fees of $1.0 million related to recent
management changes and management initiatives. Operating expenses at the Cole
Vision and Things Remembered segments increased 1.3% primarily due to higher
store payroll including fringe benefits and workers compensation and rent and
occupancy cost. These costs increased primarily in support of higher revenues.
The Company and its optical subsidiaries have been sued by the State of
California (see Note 8 of the Notes to Condensed Consolidated Financial
Statements). Legal costs associated with the defense of this matter totaled
$1.3 million in the first six months of fiscal 2003, compared $0.9 million in
the same period last year. Partially offsetting expense increases were savings
from lower store marketing costs totaling $1.2 million, a reduction of $1.9
million in claims processing costs in the first six months of fiscal 2003
compared to the same time last year, work force reductions and costs for a
point of sale system incurred in the first six months of fiscal 2002 which were
not repeated. In addition, the first six months of fiscal 2002 included charges
of $1.0 million for the closure of 12 Target Optical stores.

Operating loss was $3.7 million in the first six months of fiscal 2003,
compared to operating income of $18.2 million in the same period of fiscal
2002. The expenses associated with the retirement of the Companys Chairman and
Chief Executive Officer, the decrease in the gross margin rate, the costs
related to the settlement of the class action lawsuits, and higher corporate
expenses due to the restatement and reaudit of the fiscal 2000 and 2001
financial statements were the primary reasons for the decrease in operating
results.

Interest and other (income) expense, net, was $9.8 million for the first
six months of fiscal 2003, compared to $21.3 million for the same period of
fiscal 2002. Second quarter fiscal 2002 results include a loss of $11.1
million on the early extinguishment of debt. The charge represents the payment
of premiums and other costs of retiring Cole National Groups 9-7/8% Senior
Subordinated Notes due 2006 and the write-offs of unamortized discount and
deferred financing fees. The Company recorded lower interest expense in the
first six months of fiscal 2003 compared to the same period last year,
primarily due to replacement of the $150.0 million 9-7/8% Senior Subordinated
Notes with the issuance of 8-7/8% Senior Subordinated Notes in May 2002 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 six months of
fiscal 2003. The Company recorded a foreign currency gain of $1.1 million
related to its investment in notes and interest receivable from Pearle Europe
in the first six months of fiscal 2003. This compared to a foreign currency
gain of $2.0 million for the same period of fiscal 2002.

The Company recorded a tax benefit based on its estimated annual effective
rate of 12%. The estimated lower effective tax rate in fiscal 2003 compared to
fiscal 2002 is based on the expected full year results and the impact of
certain nondeductible expenses.

Cole Vision Segment

Cole Vision revenues were $462.4 million in the first six months of fiscal
2003, compared with $451.0 million in the same period of fiscal 2002, an
increase of 2.5%. The revenue increase was primarily due to increased revenues
at Cole Licensed Brands and increased revenues from managed vision care
programs, partially offset by sales decreases at Pearle Vision. The increase in
Cole Licensed Brands revenues was primarily attributable to a 17.1% increase in
same store sales at Target Optical and an increase in the number of store
locations. Same store sales improved 2.8% at Sears Optical and 7.8% at BJs
Optical during the first six months of fiscal 2003. Same store sales results
at Cole Licensed Brands were driven by increases in the average transaction
size. Revenues from managed vision care programs were higher primarily due to
an increase in the number of capitated plans sold to employers, health plans
and associations and increased laser procedure volume and program changes in
laser vision correction resulting in higher revenues per procedure. Same-store
sales for the first six months of fiscal 2003 increased 0.4% at Pearle Vision.
Same store sales at Pearle Vision reflected a decrease in the number of
transactions, offset by an increase in the average transaction size. Same store
sales increases at Pearle Vision were offset by a lower number of company owned
stores. Pearle Vision operated

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26 fewer company owned stores than the same time
period last year due to the subsequent net sale of 11 Company stores to
franchisees, the closure of 20 stores and the opening of 5 new stores.

Gross margin was $279.3 million in the first six months of fiscal 2003,
compared to $282.5 million in the same period last year, a decrease of 1.1% due
to increased revenues offset by a decrease in gross margin rate. Gross margin,
as a percentage of net revenues, decreased by 2.2 percentage points at Cole
Vision. Cole Managed Vision gross margin rate decreased by 9.8 percentage
points due to a shift in revenue mix toward lower gross margin programs and
from lower underwriting gains. Cole Licensed Brands gross margin rate decreased
by 0.9 percentage points and was impacted by higher inventory shrink results in
the second quarter of fiscal 2003, higher costs associated with a shift toward
premium product, lower contact lens gross margin and an increase in
paid-time-off expense at four labs due to a change in the PTO policy
implemented in the third quarter of fiscal 2002. Pearle Vision gross margin, as
a percent of net revenues, decreased by 2.0 percentage points, due to higher
cost premium product driven by promotions, higher manufacturing costs 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. The Company closed its
manufacturing and distribution facility in Toronto, Canada. The operations of
this facility has been absorbed by the Companys facility in Knoxville, TN. As
part of the integration of the Canadian operations into the Knoxville lab, the
Company changed the Canadian product assortment. As a result, the Company
recorded a $0.3 million charge to gross margin for obsolescence of inventory.

Operating expenses were $266.9 million in the first six months of fiscal
2003, compared to $266.3 million for the same period last year, an increase of
0.2%. Operating expenses as a percent of net revenues decreased at Cole Vision
by 1.3% in the first six months of fiscal 2003, compared to the same period of
fiscal 2002. Store payroll and rent and occupancy costs at Cole Vision were
$1.5 million and $1.1 million higher respectively, in the first six months of
fiscal 2003 compared to the same period last year. Pearle Vision recorded a
$0.6 million charge for assets disposed in a prior period. The Companys
Canadian operations closed its manufacturing and distribution facility located
in Toronto, Canada. One time costs associated with the closure of the facility
totaled $0.4 million. The Company and its optical subsidiaries
have been sued by
the State of California (see Note 8 to the Notes to Condensed Consolidated
Financial Statements). Legal costs associated with the defense of this matter
totaled $1.3 million in the first six months of fiscal 2003, compared with $0.9
million in the same period last year. Fringe benefits costs increased $1.0
million in the first six months of fiscal 2003, compared to the same period
last year. Partially offsetting expense increases were savings from a reduction
of $1.9 million in claims processing costs, reduced bonus expense, reduced
marketing costs and work force reductions. Marketing costs were $2.3 million
lower in the first six months of fiscal 2003, compared to the same period last
year. The first six months of fiscal 2002 included charges of $1.0 million for
the closure of 12 Target Optical stores. Pearle Vision recorded a gain of $1.0
million on the sale of five Company owned stores to a franchisee during the
first six months of fiscal 2003.

Operating income at Cole Vision decreased to $12.4 million in the first
six months of fiscal 2003, compared to $16.2 million in the same period of
fiscal 2002. The decrease in revenues at Pearle Vision and lower gross margin
rate at Pearle, Cole Licensed Brands and Cole Managed Vision and the costs
associated with the closure of the Companys Canadian lab and manufacturing
facility were offset by improved revenues at Cole Licensed Brands and
Cole Managed Vision and improvements in the processing cost per claim.

Things Remembered Segment

Things Remembered revenues were $133.5 million in the first six months of
fiscal 2003, compared with $126.8 million in the same period of fiscal 2002, a
5.3% increase. The same-store sales increase of 4.8% and a 34% 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. Improvements in the average dollar
sale were offset by a lower number of transactions and from a reduction in the
number of stores operating at the end of the second quarter. Store count at the
end of the second quarter of fiscal 2003 was 754 compared to 776 at the end of
the second quarter of fiscal 2002 due to store closings.

Gross margin was $95.9 million in the first six months of fiscal 2003,
compared to $92.3 million for the same period last year, an increase of 3.9%.
Gross margin as a percent of revenues decreased 1.0% in the first six months of
fiscal 2003 compared to the same period of fiscal 2002, primarily from reduced
revenues from gift personalization and higher freight costs associated with an
increase in customer orders fulfilled by centralized distribution.

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Operating expenses were $88.5 million in the first six months of fiscal
2003, compared to $84.3 million for the same period last year, an increase of
5.0%. Operating expenses as a percent of revenues decreased 0.2% in the first
six months of fiscal 2003 compared to the same period of fiscal 2002. Things
Remembered incurred incremental advertising costs of $1.1 million for the first
six months of fiscal 2003, compared to the same period last year and higher
management bonuses totaling $1.0 million were accrued. Store rent and
occupancy charges increased $0.9 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 six months 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 $0.8 million in the first six months 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 senior executives in the first six months of fiscal
2003. Partially offsetting the expense increases were charges incurred in the
first six months of fiscal 2002 for a new store point of sale system, the
implementation of which has been delayed. These costs were not repeated in the
second quarter of fiscal 2003. Savings from travel expense, store depreciation
and work force reductions taken in fiscal 2002 were also realized.

Operating income for the first six months of fiscal 2003 was $7.4 million
compared to $8.0 million in the same period of fiscal 2002. Increases in
revenue were offset by the lower gross margin rate, and higher
advertising, bonus expense, workers compensation, severance and store rent and
occupancy costs.

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          
|                              |                                |             |         |        |               
|                              |                                |             |         |        | Second Quarter |   | First Six Months
|                              |                                |             |         |        |                |   |                 
|                              |                                |             |         |        | (In thousands)
|Current year same-store sales |                                | $           | 270,147 |        |                | $ | 522,058          |       
|Prior year same-store sales   |                                |             | 252,623 |        |                |   | 505,972          |       
|Percent change                |                                |             | 6.9     | %      |                |   | 3.2              | %     
|                             
|Current year same-store sales |                                | $           | 270,147 |        |                | $ | 522,058          |       
|                             
|Adjustment for:               |                                |             |         |        |                |   |                  |       
|                              | Sales at new and closed stores |             |         | 4,017  |                |   |                  | 9,107  |        
|                              | Deferred revenue               |             |         | (890   | )              |   |                  | (2,849 | )      
|                              | Order vs. customer receipt     |             |         | (3,457 | )              |   |                  | (5,483 | )      
|                              | Returns, remakes and refunds   |             |         | (133   | )              |   |                  | (382   | )      
|                              | Other                          |             |         | 232    |                |   |                  | 299    |        
|                              |                                |             |         |        |                |   |                  |       
|                              |                                | Store sales |         |        | 269,916        |   |                  |        | 522,750 | 
|                             
|Nonstore revenues             |                                |             | 44,860  |        |                |   | 88,849           |       
|                             
|Intercompany eliminations     |                                |             | (7,117  | )      |                |   | (15,691          | )     
|                              |                                |             |         |        |                |   |                  |       
|GAAP Basis Net Revenue        |                                | $           | 307,659 |        |                | $ | 595,908          |       
|                              |                                |             |         |        |                |   |                  |       

Liquidity and Capital Resources

Cole National Corporations primary source of liquidity is funds provided
from operations of its operating subsidiaries. On June 27, 2003, its wholly
owned subsidiary, Cole National Group, Inc., and its operating subsidiaries
amended, restated and extended its

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working capital line of credit. The maturity
date of the credit facility was extended to February 1, 2007 from May 31, 2006.
The size of the facility was adjusted to $60.0 million from $75.0 million. In
addition, certain financial covenants were amended. As of the end of the second
quarter of fiscal 2003, the total commitment was $60.0 million and the
availability under the credit facility totaled $45.0 million after reduction
for commitments outstanding of $15.0 million under letters of credit. There
were no working capital borrowings outstanding at any time during the first six
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. The Company is in compliance with the covenants
in the credit agreement as of the date of this report.

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 of 8-5/8% 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 six months of fiscal 2003 used $0.8 million of
cash compared with cash provided by operations of $20.8 million in the same
period of fiscal 2002. The change in operating cash was primarily attributable
to lower operating results as described above in the Results of Operations
section of this report and from changes in operating assets and liabilities,
which used $4.2 million in the first six months of fiscal 2003, compared with
$0.3 million in the first six months of fiscal 2002. Changes in accounts
receivable and other assets resulted in a use of funds of $6.5 million in the
first six months of fiscal 2003, compared to a use of funds of $2.9 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. Changes in inventories resulted in a use of funds of $9.9 million in
the first six months, compared with $6.4 million in the prior year. The
increase was primarily due to earlier new product introduction, an increased
mix of premium products, additional inventory needed to change the product
assortment in the Canadian operations, and additional inventory needed to
support the increase in store count at Cole Licensed Brands. Changes in
accounts payable and accrued liabilities provided $11.0 million in the first
six months of fiscal 2003, compared with $7.7 million in the prior year. The
increase was primarily due to the timing of purchases and payments. Changes in
accrued and refundable income taxes provided $1.4 million compared to $0.3
million in the same period last year. The change was primarily due to lower tax
payments.

Net cash from investing activities resulted in a use of funds of $21.4
million for the first six months of fiscal 2003 compared to a use of funds
totaling $16.3 million in the same period of fiscal 2002. Capital expenditures,
which accounted for most of the cash used for investing, were $15.5 million and
$13.9 million in the first six months of fiscal 2003 and 2002, respectively.
The majority of capital expenditures for both periods were for store fixtures,
equipment and leasehold improvements for new stores and remodeling of existing
stores. Expenditures for systems development costs totaled $4.3 million and
$2.3 million for the first six months of fiscal 2003 and 2002, respectively.
The Company used $3.8 million in the first six months of fiscal 2003 for a
contingent payment in connection with the prior acquisition of MetLifes
managed vision business. The Company received a loan repayment from Pearle
Europe totaling $2.5 million in the first six months of fiscal 2003.

Net cash used for financing activities totaled $2.7 million in the first
six months of fiscal 2003, compared with $18.9 million in the prior year. In
May 2002, Cole National Group, Inc., issued $150.0 million of 8-7/8% Senior
Subordinated Notes due May 2012. The net proceeds of this issuance and cash on
hand were used to retire all of Cole National Groups $150.0 million 9-7/8%
Senior Subordinated Notes due 2006. Finance fees and early repayment premium of
the 9-7/8% notes resulted in a net cash usage of $14.2 million. Changes in
overdraft balances resulted in a use of funds totaling $3.5 million compared to
$5.9 million in the prior year. The change was due to the timing of payments.

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

Off Balance Sheet Arrangements and Contractual Commitments

The Company leases a substantial portion of its equipment and facilities
including laboratories, office and warehouse space, and retail locations. In
addition, Cole Licensed Brands primarily 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

As described in the Companys 2002 Annual Report on Form 10-K,
agreements between 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. The obligations to fund
the purchase of any shares as to which the offer is accepted are pro rata to
HAL and to the Company based on their respective ownership interests on the
date of the offer. Pursuant to
these agreements, on September 3, 2003, HAL and the Company offered to purchase
a total of 12,014 Pearle Europe shares from members of Pearle Europe management
for a price of 5,412 Euro per share. If all of the Pearle Europe
managers were to sell all of their shares at that price, the
resulting obligation to the Company would have been approximately $17
million. Under certain circumstances, the members
of Pearle Europe management could request that the price of the
shares be evaluated by an independent expert. On September 12, 2003,
following the responses from Pearle Europe management to the offer
price, HAL proposed to the Company that they increase the offer. In
response to the Company's request, HAL agreed to assume the Company's
purchase obligation with respect to this offer and purchase 100% of
the shares offered by Pearle Europe management. As a result of this
assumption, on a fully diluted basis the Company's 21% ownership interest in Pearle Europe
will remain unchanged, and HAL's ownership interest in Pearle Europe
may increase from 68% to up to approximately 79%.

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

The same-store sales in the Companys vision segment increased in the
second quarter of fiscal 2003 compared to the same period last year and the
Company continues to see that trend in August, with same-store sales for the
vision segment increasing in the mid single digits. Things Remembered Augusts
same-store sales continued their trend from the first six months of fiscal
2003. There is no assurance that these same-store sales trends will continue
for the remainder of the third quarter.

The Company expects that certain cost of revenues and operating expense
trends experienced in the first half of fiscal 2003, such as higher managed
care claims expense, shrink expense, product cost, workers
compensation and
occupancy costs, are likely to continue through the second half of
fiscal 2003. The Company also expects it will continue to incur legal
expenses as a result of the previously disclosed SEC investigation
and California lawsuit.

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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 and the seasonality of the Companys business.




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 second quarter of fiscal
2003, the market rate for six month LIBOR was 1.15%, which resulted in a rate
of 5.6838% applied from February 15, 2003 through August 2, 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 5.6838% rate in effect for the second 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)  Attached as Exhibits 31.1 and 31.2 to 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 Certifications). 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) and (5) of the Section 302 Certifications and
should be read in conjunction with the Section 302 Certifications for a more
complete understanding of the topics presented.

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,
operation and effectiveness of its disclosure controls and procedures. The
Companys Chief Executive Officer and Chief Financial Officer concluded that
based on such evaluation, as of August 2, 2003, 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) There have not been any changes in the internal controls or in other
factors during the quarter ended August 2, 2003 that have, or are
reasonably likely to, materially affect the Companys internal controls
over financial reporting.

21



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##### Table of Contents






PART II  OTHER INFORMATION




Item 1.    Legal Proceedings

As previously reported in the Companys report on Form 10-Q for the
quarter ended May 3, 2003, 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 executed a memorandum of
understanding for a settlement to resolve the lawsuit. On July 3, 2003, the
Company and attorneys for the plaintiffs executed a formal Stipulation of
Settlement. The settlement has received preliminary court approval but remains
subject to final court approval following a fairness hearing. A charge of
$2,687,500 for the settlement was recorded in the first quarter of fiscal 2003.




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

On June 25, 2003 the Company held its annual meeting of stockholders. At
that meeting, the stockholders elected nine directors to serve until the next
annual meeting of stockholders.

Of the total eligible votes 16,226,562 stockholders cast votes of
13,909,702 or 85.7% of the total eligible votes. The votes cast for the
election of directors were as follows:

|                  |  |     |            |          |  |           |           |  |  |  |   | 
|----------------- |  | --- | ---------- | -------- |  | --------- | --------- |  |  |  | - | 
|                  |  | For |            | Withheld |  | Non-votes
|                  |  |     |            |          |  |          
|Larry Pollock     |  |     | 13,720,719 |          |  |           | 188,983   |  |  |  | 0 | 
|Jeffrey A. Cole   |  |     | 12,928,066 |          |  |           | 981,636   |  |  |  | 0 | 
|Ronald E. Eilers  |  |     | 13,722,099 |          |  |           | 187,603   |  |  |  | 0 | 
|Timothy F. Finley |  |     | 11,616,267 |          |  |           | 2,293,435 |  |  |  | 0 | 
|Irwin W. Gold     |  |     | 13,721,999 |          |  |           | 187,703   |  |  |  | 0 | 
|Melchert F. Groot |  |     | 13,549,596 |          |  |           | 360,106   |  |  |  | 0 | 
|Peter V. Handal   |  |     | 13,543,699 |          |  |           | 366,003   |  |  |  | 0 | 
|Charles A. Ratner |  |     | 11,614,695 |          |  |           | 2,295,007 |  |  |  | 0 | 
|Walter J. Salmon  |  |     | 13,717,799 |          |  |           | 191,903   |  |  |  | 0 | 




Item 6.    Exhibits and Reports on Form 8-K

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

|        |  |                                                                                                                                                                                  |  |  | 
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | 
|3.2(ii) |  | Amended and Restated By-Laws of Cole National Corporation, dated July 28, 2003.                                                                                                 
|       
|10.1    |  | Amended, restated and extended Credit Agreement, dated June 27, 2003, among Cole Vision, Things Remembered
and Pearle, Inc. and Canadian Imperial Bank of Commerce.             
|       
|10.2    |  | Separation Agreement entered into as of July 16, 2003 by and among Cole National Corporation and Jeffrey A. Cole.                                                               
|       
|10.3    |  | Assignment of Life Insurance Policy, Termination of Split-Dollar Agreement and Satisfaction of Collateral
Assignment by and among Cole National Corporation and Jeffrey A. Cole.

22



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##### Table of Contents



|     |  |                                                                                                                                                     |                                                                                                                                                                                |  | 
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | 
|31.1 |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. 
|    
|31.2 |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of 
the Sarbanes-Oxley Act of 2002.
|    
|32   |  |                                                                                                                                                     | 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 (Items 7 and 9) on June 17, 2003 announcing financial results for the first fiscal quarter
of 2003.                                                                                                                                                                                                                                                     
|
| | The Company filed a report on Form 8-K (Items 5 and 7) on June 27, 2003
announcing that it had amended, restated and extended its Credit
Agreement with bank lenders.                                                                                                                                                                                                                
|
| | The Company filed a report on Form 8-K (Items 5 and 7) on June 30,
2003 announcing that Cole National Corporation and 1-800-CONTACTS, Inc.,
had signed a marketing agreement under which customers of 1-800-CONTACTS
can receive eye exams at a discount from a network of doctors associated
with Cole Nationals stores, including Pearle Vision, Sears Optical and
Target Optical.

23



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##### 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:    September 15, 2003 |  |                           |  |                                                                                                                       

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##### Table of Contents



COLE NATIONAL CORPORATION
FORM 10-Q
QUARTER ENDED AUGUST 2, 2003




EXHIBIT INDEX

|         |  |                                                                                                                                                                                 
|-------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |  |                                                                                                                                                                                 
|Number   |  | Description                                                                                                                                                                     
|         |  |                                                                                                                                                                                 
|3.2(ii) |  | Amended and Restated By-Laws of Cole National Corporation, dated
July 28, 2003.                                                                                                 
|        
|10.1    |  | Amended, restated and extended Credit Agreement, dated June 27,
2003, among Cole Vision, Things Remembered and Pearle, Inc. and
Canadian Imperial Bank of Commerce.             
|        
|10.2    |  | Separation Agreement entered into as of July 16, 2003 by and
among Cole National Corporation and Jeffrey A. Cole.                                                               
|        
|10.3    |  | Assignment of Life Insurance Policy, Termination of Split-Dollar
Agreement and Satisfaction of Collateral Assignment by and among
Cole National Corporation and Jeffrey A. Cole.
|        
|31.1    |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.                              
|        
|31.2    |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.                              
|        
|32      |  | 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.
|-----------------

25