UNITED STATES SECURITIES AND EXCHANGE COMMISSION

~~SECURITIES~~WASHINGTON, ~~AND~~D.C. ~~EXCHANGE COMMISSION~~20549

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


[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended July 31, 2004


[ ]		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)

(Exact Name of Registrant as Specified in Its Charter)


DELAWARE		34-1453189
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

1925 ENTERPRISE PARKWAY		44087
TWINSBURG, OHIO		(Zip Code)
(Address of principal executive offices)

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

~~5915~~Indicate ~~Landerbrook~~by ~~Drive~~check mark whether the registrant (1) has filed all reports ~~Mayfield~~required ~~Heights,~~to ~~Ohio~~be ~~44124~~filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (~~Former~~or ~~name,~~for ~~former~~such ~~address~~shorter ~~and~~period ~~former~~that ~~fiscal~~the registrant ~~year~~was required to file such reports), ifand ~~changed~~(2) has ~~since~~been ~~last~~subject to such ~~report)~~filing requirements for the past 90 days Yes [X] No [ ]

Indicate by check mark whether the registrant ~~(1) has~~is ~~filed~~an ~~all~~accelerated ~~reports~~filer (as ~~required~~defined toin ~~be filed by Section~~Rule 1312b-2 ~~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~~Yes ~~(2) has~~[X] ~~been subject to such filing requirements for the past 90 days Yes x~~ No [ ]

~~Indicate~~As of byAugust 27, ~~check~~2004, ~~mark~~16,950,098 ~~whether~~shares of the registrant’s iscommon ~~an accelerated filer (as~~stock ~~defined~~were ~~in Rule 12b-2 of the Exchange Act)~~outstanding. ~~Yes x No~~

AsCOLE ofNATIONAL ~~August 29,~~CORPORATION ~~2003,~~AND ~~16,303,438~~SUBSIDIARIES FORM ~~shares~~10-Q QUARTER ofENDED ~~the~~JULY ~~registrant’s~~31, ~~common stock were outstanding.~~2004 INDEX

TABLE OF CONTENTS


	Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of July 31, 2004, August 2, 2003 and January 31, 2004		1
Condensed Consolidated Statements of Operations for the 13 and 26 week periods ended July 31, 2004 and August 2, 2003		2
Condensed Consolidated Statements of Cash Flows for the 26 week period ended July 31, 2004 and August 2, 2003		3
Notes to Condensed Consolidated Financial Statements		4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3. Quantitative and Qualitative Disclosures about Market Risk		25
Item 4. Controls and Procedures		26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		27
Item 4. Submission of Matters to a Vote of Security Holders		27
Item 6. Exhibits		28
Signatures		29
Exhibit Index		30
Exhibit 31.1 Cert
Exhibit 31.2 Cert
Exhibit 32 Cert

	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

~~COLE~~PART ~~NATIONAL~~I ~~CORPORATION~~– ~~AND~~FINANCIAL ~~SUBSIDIARIES~~INFORMATION ~~FORM 10-Q~~ ~~QUARTER ENDED AUGUST 2, 2003~~ ~~INDEX~~

~~Page~~Item No1. Financial Statements

~~PART~~COLE ~~I. FINANCIAL~~NATIONAL CORPORATION ~~INFORMATION~~AND SUBSIDIARIES

	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

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


	July 31,			August 2,			January 31,
	2004			2003			2004
Assets
Current assets:
Cash and cash equivalents	$	63,975		$	17,074		$	59,184
Accounts receivable, less allowances of $4,239, $3,455 and $3,449, respectively		62,007			57,388			55,266
Current portion of notes receivable, less allowances of $852, $427 and $571.		8,719			6,249			2,047
Inventories		119,932			130,727			120,927
Prepaid expenses and other		23,725			23,316			25,674
Deferred income taxes		34,195			31,414			34,194

Total current assets		312,553			266,168			297,292
Property and equipment, at cost		330,109			330,916			318,389
Less - accumulated depreciation and amortization		(212,656	)		(209,033	)		(199,987	)

Total property and equipment, net		117,453			121,883			118,402
Notes receivable, excluding current portion, less allowances of $829, $2,384 and $2,287, respectively		4,838			24,036			11,348
Deferred income taxes		32,474			36,517			35,509
Other assets		42,030			54,674			46,442
Other intangibles, net		49,121			50,425			49,773
Goodwill, net		85,734			85,713			85,734

Total assets	$	644,203		$	639,416		$	644,500

Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt	$	1,614		$	5,250		$	5,608
Accounts payable		65,365			68,687			61,180
Accrued interest		7,752			7,990			8,111
Accrued liabilities		95,771			93,842			96,847
Accrued income taxes		2,255			6,504			3,208
Deferred revenue		42,161			39,855			41,122

Total current liabilities		214,918			222,128			216,076
Long-term debt, net of current portion		282,214			280,992			284,229
Other long-term liabilities		39,690			40,675			37,979
Deferred revenue, long-term		12,558			12,567			12,129
Stockholders’ equity		94,823			83,054			94,087

Total liabilities and stockholders’ equity	$	644,203		$	639,416		$	644,500

~~PART~~The Iaccompanying —notes ~~FINANCIAL~~to ~~INFORMATION~~condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.

~~Item~~ 1~~. Financial Statements~~

COLETable NATIONALof CORPORATION AND SUBSIDIARIES Contents

				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

COLE NATIONAL CORPORATION AND SUBSIDIARIES

~~The~~CONDENSED ~~accompanying~~CONSOLIDATED ~~notes~~STATEMENTS toOF ~~condensed consolidated financial statements are an~~OPERATIONS ~~integral~~(Unaudited) (In ~~part~~thousands, ofexcept ~~these~~per ~~condensed~~share ~~consolidated financial statements.~~ amounts)


	Thirteen Week Period Ended						Twenty-Six Week Period Ended
	July 31,			August 2,			July 31,			August 2,
	2004			2003			2004			2003
Net revenues	$	312,767		$	307,659		$	620,419		$	595,908
Costs and expenses:
Cost of revenues		115,930			115,515			229,796			222,107
Operating expenses		183,656			193,300			374,498			377,488

Total costs and expenses		299,586			308,815			604,294			599,595

Operating income (loss)		13,181			(1,156	)		16,125			(3,687	)
Interest and other (income) expense:
Interest expense		6,382			6,327			12,709			12,715
Interest and other (income) expense, net		(580	)		(1,975	)		(578	)		(2,882	)

Total interest and other (income) expense, net		5,802			4,352			12,131			9,833

Income (loss) before income taxes		7,379			(5,508	)		3,994			(13,520	)
Income tax provision (benefit)		6,425			(21	)		3,515			(1,622	)

Net income (loss)	$	954		$	(5,487	)	$	479		$	(11,898	)

Earnings (loss) per common share:
Basic	$	0.06		$	(0.34	)	$	0.03		$	(0.73	)
Diluted	$	0.05		$	(0.34	)	$	0.03		$	(0.73	)
Weighted average shares:
Basic		16,880			16,330			16,815			16,317
Diluted		17,517			16,330			17,133			16,317

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

~~COLE NATIONAL CORPORATION AND SUBSIDIARIES~~2

			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~~COLE ~~accompanying~~NATIONAL ~~notes~~CORPORATION toAND ~~condensed consolidated financial statements are an~~SUBSIDIARIES ~~integral part of these condensed consolidated financial statements.~~

2CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)


	Twenty-Six Week Period Ended
	July 31,			August 2,
	2004			2003
				As Restated,
				See Note 10)
Cash flows from operating activities:
Net income (loss)	$	479		$	(11,898	)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Depreciation and amortization		19,094			19,617
Store closing and impairment losses		1,000			—
Currency loss (gain) on Pearle Europe notes and interest		182			(1,067	)
Deferred income tax provision (benefit)		3,036			(4,596	)
Noncash compensation		638			1,391
Noncash interest and other, net		497			(743	)
Increases (decreases) in cash resulting from changes in operating assets and liabilities:
Accounts and notes receivable, prepaid expenses and other assets		(5,461	)		(5,971	)
Inventories		997			(9,892	)
Accounts payable, accrued liabilities and other liabilities		(5,587	)		6,562
Accrued interest		(359	)		(209	)
Accrued and refundable income taxes		(954	)		1,530

Net cash provided by (used for) operating activities		13,562			(5,276	)

Cash flows from investing activities:
Purchases of property and equipment		(11,024	)		(15,424	)
Systems development costs		(1,198	)		(4,308	)
Acquisition of businesses		—			(4,056	)
Investment and notes receivable in Pearle Europe		—			3,140

Net cash used for investing activities		(12,222	)		(20,648	)

Cash flows from financing activities:
Repayment of long-term debt		(5,295	)		(119	)
Increase in overdraft balances		3,605			824
Net proceeds from exercise of stock options and issuance of stock		4,933			382
Payment of deferred financing fees		—			(238	)
Other, net		208			147

Net cash provided by financing activities		3,451			996

Cash and cash equivalents:
Net increase (decrease) during the period		4,791			(24,928	)
Balance, beginning of period		59,184			42,002

Balance, end of period	$	63,975		$	17,074

~~COLE~~The ~~NATIONAL~~accompanying ~~CORPORATION~~notes ~~AND~~to ~~SUBSIDIARIES~~condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.

					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

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

3COLE NATIONAL CORPORATION AND SUBSIDIARIES

~~Table~~NOTES ofTO ~~Contents~~CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~COLE~~(1) Summary ~~NATIONAL~~of ~~CORPORATION~~Significant ~~AND~~Accounting ~~SUBSIDIARIES~~Policies

~~(1) Summary~~Basis of ~~Significant Accounting Policies~~Presentation

~~Basis~~ The condensed consolidated financial statements include the accounts of Cole ~~Presentation~~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.

~~The~~Fiscal ~~condensed~~years ~~consolidated~~end ~~financial~~on ~~statements~~the ~~include~~Saturday ~~the~~closest ~~accounts~~to ~~of Cole~~January 31 ~~National~~and ~~Corporation~~are ~~(“the~~identified according ~~Parent”),~~to ~~its~~the ~~wholly~~calendar ~~owned~~year ~~subsidiary,~~in ~~Cole National~~which ~~Group,~~they ~~Inc~~begin. ~~and~~For ~~its~~example, ~~wholly~~the ~~owned~~fiscal year ~~subsidiaries~~ended ~~(collectively~~January 31, 2004 is referred to as “~~the~~fiscal ~~Company”)~~2003.” The ~~Company’s~~current ~~21%~~fiscal year, ~~investment~~which inends ~~Pearle~~January 29, ~~Europe~~2005, ~~B.V.~~ is ~~accounted~~ ~~for~~referred ~~using~~to ~~the~~as ~~cost~~“fiscal ~~method~~2004.” ~~All~~Fiscal ~~significant~~2004 and ~~intercompany~~fiscal ~~transactions have~~2003 ~~been~~each ~~eliminated~~consists inof ~~consolidation~~52 weeks.

~~Fiscal~~The ~~years~~accompanying ~~end~~condensed onconsolidated ~~the~~financial ~~Saturday~~statements ~~closest~~have tobeen prepared ~~January 31~~without audit and ~~are~~certain ~~identified~~information and footnote disclosures ~~according~~normally toincluded ~~the~~in ~~calendar~~financial ~~year~~statements prepared in ~~which~~accordance ~~they~~with accounting ~~begin.~~principles ~~For~~generally ~~example,~~accepted in the ~~fiscal~~United States have been ~~year~~condensed ~~ended~~or ~~February 1~~omitted, ~~2003~~although ismanagement ~~referred~~believes that the disclosures herein are adequate to asmake ~~“fiscal~~the ~~2002~~information not misleading.” The ~~current~~condensed ~~fiscal~~consolidated ~~year,~~financial ~~which~~statements ~~ends~~should ~~January 31,~~be ~~2004,~~read isin ~~referred~~conjunction towith asthe ~~“fiscal~~consolidated financial ~~2003.”~~statements ~~Fiscal~~and notes thereto included in the Company’s 2003 Annual ~~and~~Report ~~fiscal~~on ~~2002~~Form ~~each~~10-K/A. ~~consists~~Results for interim periods are not necessarily indicative of ~~52 weeks~~the results to be expected for the full year.

~~The~~Nature ~~accompanying~~of ~~condensed consolidated financial statements have been~~Operations ~~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~~ The Company is a specialty service retailer operating in both host and nonhost environments, whose primary lines of ~~Operations~~business are optical products and services and personalized gifts. The Company sells its products through 2,417 Company-owned retail locations and 484 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 6).

~~The~~Use ~~Company is a specialty service retailer operating in both host and nonhost environments, whose primary lines~~ of ~~business are optical products and~~Estimates ~~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~~ The preparation of ~~Estimates~~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.

~~The~~Significant ~~preparation~~estimates ofare ~~financial~~required ~~statements,~~ in ~~conformity~~determining ~~with accounting principles generally accepted in~~ the ~~United~~allowance ~~States, requires management to make~~for ~~estimates~~uncollectible ~~and~~accounts, ~~assumptions~~inventory ~~that~~reserves, ~~affect~~depreciation, ~~the~~amortization ~~reported amounts of assets~~ and ~~liabilities~~recoverability ~~and disclosure~~ of ~~contingent~~long-lived assets, ~~and~~deferred ~~liabilities~~income attaxes, ~~the~~remakes ~~date~~and ofreturns ~~the financial statements~~allowances, ~~and~~managed ~~the~~vision ~~reported~~underwriting ~~amounts~~results, ofself-insurance ~~revenues~~reserves, and ~~expenses~~ ~~during~~retirement ~~the~~and ~~reporting~~post-employment ~~period~~benefits. ~~Actual results could differ from those estimates.~~

~~Significant estimates are required in determining the allowance for~~Reclassifications ~~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.

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

~~Managed~~The ~~care~~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 ~~expense~~are ~~has~~expensed ~~been~~as ~~reclassified~~incurred. Incremental costs directly related to ~~cost~~the sale of ~~revenues~~such ~~from~~contracts, such as sales commissions and ~~operating~~percentage rent, are deferred in prepaid expenses toand ~~provide~~charged ~~improved~~to ~~transparency~~expense in proportion to ~~gross~~the ~~margin~~revenue recognized.

~~Deferred Revenue~~4

TheTable 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 Contents

4 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 Period Ended						Year Ended
	July 31,			August 2,			January 31,
	2004			2003			2004
Deferred revenues:
Beginning balance	$	53,251		$	49,573		$	49,573
Warranty contracts sold		28,993			28,412			56,479
Other deferred revenue		1,585			1,304			3,264
Amortization of deferred revenue		(29,110	)		(26,867	)		(56,065	)

Ending balance	$	54,719		$	52,422		$	53,251

~~are~~Cash ~~expensed as incurred. Incremental costs~~Flows ~~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.~~

ANet ~~reconciliation~~cash offlows ~~the~~from ~~changes~~operating inactivities ~~deferred~~reflect ~~revenue~~cash ~~from~~payments ~~the~~for ~~sale~~income taxes and interest of $1.4 million and $12.6 million, respectively, for the 26 ~~warranty~~week ~~contracts~~period ended July 31, 2004 and ~~other~~$1.5 million ~~deferred~~and ~~items~~$12.3 million, respectively, ~~follows~~for ~~(dollars~~the in26 week ~~thousands):~~period ending August 2, 2003.

		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

Overdrafts resulting from outstanding checks at the end of each reporting period are reclassified as current liabilities in either accounts payable or accrued expenses. This reclassification to accounts payable amounted to $24.9 million, $24.7 million and $21.1 million at July 31, 2004, August 2, 2003 and January 31, 2004, respectively, and to accrued expenses amounted to $3.6 million, $3.3 million and $3.8 million at July 31, 2004, August 2, 2003 and January 31, 2004, respectively.

~~Cash~~Earnings ~~Flows~~Per Common Share

~~Net~~Basic ~~cash~~earnings ~~flows~~per ~~from~~common ~~operating~~share ~~activities~~is ~~reflect~~computed ~~cash~~by ~~payments~~dividing ~~for~~net income ~~taxes~~available ~~and~~to ~~interest~~common shareholders by the weighted average number of $1common 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 effects of stock options have not been included in diluted loss per share as their effect would have been anti-dilutive. The number of anti-dilutive stock options were 115,~~512,000~~664 and ~~$12~~2,~~345~~078,~~000,~~867 ~~respectively,~~ for the 2613 week ~~period~~ periods ended ~~August~~July 231, ~~2003~~2004 and $3August 2,~~074~~ 2003,~~000~~ ~~and~~respectively. ~~$12~~The number of anti-dilutive stock options were 426,~~596~~564 and 2,~~000~~131,739 ~~respectively,~~ for the 26 week ~~period~~periods ended July 31, 2004 and August 32, ~~2002~~2003, respectively. The following represents a reconciliation from basic earnings per share to diluted earnings per share:

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.


	Thirteen Week Period Ended					Twenty-Six Week Period Ended
	July 31,		August 2,			July 31,		August 2,
(In thousands, except per share amounts)	2004		2003			2004		2003
Determination of shares:
Average common shares outstanding		16,880		16,330			16,815		16,317
Assumed conversion of dilutive stock options and awards		637		—			318		—

Diluted average common shares outstanding		17,517		16,330			17,133		16,317

Basic earnings (loss) per common share	$	0.06	$	(0.34	)	$	0.03	$	(0.73	)
Diluted earnings (loss) shares per common share	$	0.05	$	(0.34	)	$	0.03	$	(0.73	)

~~Earnings~~Total ~~Per~~Comprehensive ~~Common~~Income ~~Share~~(Loss)

~~Basic~~Total ~~earnings~~comprehensive ~~per common share is computed by dividing net~~ income ~~available~~ to(loss) for ~~common shareholders by~~ the ~~weighted~~13 ~~average~~and ~~number~~26 week ~~of common shares outstanding for the~~ periods ~~presented. Diluted earnings per common share~~ended ~~also~~July 31, ~~includes~~2004 ~~the~~and ~~dilutive~~August 2, ~~effect~~2003 ofis ~~potential~~as ~~common~~follows ~~shares~~ (~~primarily dilutive~~dollars ~~stock~~in ~~options~~thousands) ~~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	)

TotalTable Otherof Comprehensive Income (Loss) Contents

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):


	Thirteen Week Period Ended					Twenty-Six Week Period Ended
	July 31,		August 2,			July 31,		August 2,
	2004		2003			2004		2003
Net income (loss)	$	954	$	(5,487	)	$	479	$	(11,898	)
Translation income (loss)		40		(26	)		14		444

Total comprehensive income (loss)	$	994	$	(5,513	)	$	493	$	(11,454	)

5Stock- Based Compensation

~~Table~~ At July 31, 2004, the Company has various stock-based employee compensation plans which are described more fully in Note 7 of ~~Contents~~the Notes to Consolidated Financial Statements in the Company’s 2003 Annual Report on Form 10-K/A. The Company accounts for those plans in accordance with Accounting Principles Board Opinion No. 25, “Accounting For Stock Issued to Employees”, and related Interpretations. In connection with the variable stock options, compensation (income) expense of ($0.4) million and $0.5 million has been recorded for the 13 and 26 week period ended July 31, 2004, respectively, due to the exercise of variable stock options at a price lower than the amount recorded in the first quarter of fiscal 2004. No stock-based employee compensation expense for variable stock options was recorded in the 13 and 26 week period ended August 2, 2003.

	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	)

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”.

Stock-Based Compensation


	Thirteen Week Period Ended						Twenty-Six Week Period Ended
	July 31,			August 2,			July 31,			August 2,
(In thousands, except per share amounts)	2004			2003			2004			2003
Net income (loss), as reported	$	954		$	(5,487	)	$	479		$	(11,898	)
Additions for stock-based employee compensation expense included in reported net income (loss), net of related taxes		(231	)		520			411			868
Deductions for total stock-based employee compensation expense determined under fair value based method for all awards, net of related taxes		(407	)		(756	)		(766	)		(1,550	)

Net income (loss), pro forma	$	316		$	(5,723	)	$	124		$	(12,580	)

Basic earnings (loss) per common share
As reported	$	0.06		$	(0.34	)	$	0.03		$	(0.73	)
Pro forma	$	0.02		$	(0.35	)	$	0.01		$	(0.77	)
Diluted earnings (loss) per common share
As reported	$	0.05		$	(0.34	)	$	0.03		$	(0.73	)
Pro forma	$	0.02		$	(0.35	)	$	0.01		$	(0.77	)

~~At August 2, 2003, the Company has various stock-based employee compensation plans which are described more fully in Note 7 of the~~ Notes toReceivable ~~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~~In July ~~following~~2004, ~~table~~the ~~illustrates~~Company received a request from Pearle Europe to permit the ~~pro~~early ~~forma~~repayment ~~effect~~in onfull ~~net~~of ~~income~~principal and interest on the ~~earnings~~one ~~per~~remaining ~~share~~note ofreceivable ~~the~~due 2009. The Company ~~had~~agreed to the early ~~Company~~repayment ~~applied~~and ~~the~~it ~~fair~~is ~~value recognition~~expected ~~provisions~~to ofbe ~~Statement~~received in the third quarter of ~~Financial~~fiscal ~~Accounting~~2004. ~~Standards~~The ~~(SFAS) No~~$5.6 ~~123~~million note and interest receivable, ~~“Accounting~~which ~~for~~had ~~Stock~~been included in long-~~Based~~term ~~Compensation”~~notes receivable, were included in current portion of notes receivables in the accompanying balance sheet as of July 31, 2004.

		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

~~Recently~~ The ~~Issued~~Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46) in January 2003 and revised FIN 46 (FIN 46R) in December 2003. The Interpretations require certain variable interest entities (VIE), 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. The Interpretations immediately applied to entities created after January 31, 2003, was effective at the end of the fourth quarter of fiscal 2003 for certain special purpose entities and was effective for the first quarter of fiscal 2004 for other existing VIE. The synthetic operating lease for the Highland Heights, Ohio facility required consolidation under this Interpretation. The consolidation resulted in an additional $2.2 million in assets and liabilities on the consolidated balance sheet as of January 31, 2004 and the consolidation of operating results into the financial statements of the Company beginning February 1, 2004.

The ~~Financial~~remaining ~~Accounting~~portion ~~Standards Board (FASB) has issued SFAS No. 145, “Rescission~~ of ~~FASB~~FIN ~~Statements~~46R 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~~adopted ~~as an extraordinary item~~ in ~~prior periods presented that does not meet~~ the ~~criteria in~~first ~~Accounting~~quarter ~~Principles Board (APB) Opinion 30, “Reporting the Results~~ of ~~Operations~~fiscal — 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 expenses2004. ~~The~~In ~~Company~~adopting ~~adopted~~FIN ~~SFAS 145 as of the beginning of fiscal 2003. As a result~~46R, the ~~loss~~Company onconsidered ~~early~~its ~~extinguishment of debt reported as an extraordinary~~financial ~~item~~relationships inwith ~~the~~Pearle ~~second~~Vision ~~quarter of the year ended February 1~~franchisees, ~~2003 has been reclassified. The pretax loss from the early extinguishment of debt has been presented as a separate line within interest~~ and ~~other~~concluded ~~(income) expenses~~that ~~and the~~it ~~related~~is ~~income tax benefit reduced the reported income tax provision. Other~~not ~~portions~~required ofto ~~the~~consolidate ~~statement~~any ~~are~~franchise ~~not applicable to the Company~~entities.

~~The FASB has also issued SFAS No. 143, “Accounting for Asset Retirement~~6 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.

6 Table of Contents

~~Table~~The Company has no equity interest in any of ~~Contents~~its franchisees, has no “off-balance sheet” exposure relative to any of its franchisees except for certain lease and other guarantees, and generally does not provide financial support to franchise entities in a typical franchise relationship. Creditors of the franchise entities have no recourse to the Company. There are certain franchise entities for which the Company has provided financial support and are considered to be VIE. However, the Company is not the primary beneficiary, as it is not the entity that is expected to absorb a majority of the risk of loss for the VIE’s activities, nor is it entitled to receive a majority of the VIE’s residual returns. The Company did not consolidate any franchise entities and the adoption of the remaining portion of FIN 46R had no effect on the Company’s financial position or results of operations.

In ~~January~~ December 2003, the FASB issued ~~FASB~~SFAS ~~Interpretation~~ No. ~~46, “Consolidation~~132 ~~of Variable Interest Entities”~~ (~~FIN~~Revised 462003)~~. FIN 46 requires certain variable interest entities~~, ~~including certain special purpose entities, to be~~“Employers’ ~~consolidated~~Disclosures byabout ~~the~~Pensions ~~primary~~and ~~beneficiary~~Other ifPostretirement ~~the~~Benefits” ~~equity~~(SFAS ~~investors~~132). ~~in the entity~~This dostatement ~~not~~revises ~~have~~employers’ ~~all~~disclosures ~~the~~about ~~essential~~pension ~~characteristics~~plans ofand ~~a controlling financial~~other ~~interest~~postretirement orbenefit doplans ~~not have sufficient equity at risk. FIN 46 immediately applies~~ to ~~entities~~require ~~created~~more ~~after~~information ~~January 31,~~about ~~2003, and at~~ the ~~beginning of the~~economic ~~Company’s~~resources ~~2003~~and ~~third~~obligations ~~quarter for existing variable interest entities. Management is still assessing the impacts~~ of ~~FIN~~such ~~46 on its condensed consolidated financial statements~~plans. ~~However,~~Certain itdisclosure isprovisions ~~reasonably possible that the~~were ~~synthetic~~effective ~~operating lease~~ for ~~the~~fiscal ~~Highland~~2003 ~~Heights,~~and ~~Ohio~~were ~~facility will require consolidation under FIN 46~~adopted. The ~~consolidation~~remaining ~~will require an additional $2.4~~disclosure ~~million~~provisions inof ~~assets~~SFAS ~~and~~132 ~~liabilities~~have onbeen ~~the~~adopted ~~consolidated~~in ~~balance~~fiscal ~~sheet~~2004.

InOn ~~November~~December 8, ~~2002~~2003, the ~~Emerging~~Medicare ~~Issues~~Prescription ~~Task~~Drug, ~~Force~~Improvement ofand Modernization ~~the~~Act ~~FASB~~of 2003 (“~~EITF~~the Act”) was signed into law. In accordance with ~~reached~~FASB aStaff ~~consensus~~Position on106-1 ~~Issue~~(FSP 02FAS 106-161), ~~“Accounting~~the byCompany’s ameasurement ~~Reseller~~of ~~for~~the accumulated ~~Cash~~postretirement benefit obligation and net periodic benefit cost in ~~Consideration~~the ~~Received~~consolidated ~~from~~financial astatements ~~Vendor”~~do ~~(Issue~~not ~~02-16).~~reflect ~~Certain~~the ~~aspects~~effects of ~~Issue~~the Act on ~~02-16~~the ~~were~~Company’s ~~effective~~postretirement inbenefit ~~fiscal~~plan ~~2002,~~because ~~which~~the ~~were~~Company has ~~adopted~~not ~~and~~concluded ~~did~~whether ~~not~~the ~~have~~benefits aprovided by the plan are actuarially equivalent ~~significant~~to ~~impact~~Medicare onPart D ~~operations~~under the act. The ~~remaining~~FASB ~~portion~~has ofsince ~~Issue~~issued ~~02-16~~FSP ~~has~~FAS ~~been~~106-2, ~~adopted~~which insupersedes ~~fiscal~~FSP ~~2003~~FAS 106-1, and ~~does~~is ~~not~~effective ~~have~~for athe ~~material~~Company’s ~~effect~~third quarter onbeginning ~~the~~August 1, 2004. The Company’s has not yet ~~financial~~determined ~~position~~whether it will be using retroactive or ~~operations~~prospective adoption.

(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,
	July 31,			August 2,			January 31,
	2003			2002			2003
	2004			2003			2004
Non-amortizable:
Tradename	$	49,460		$	49,460		$	49,460
Noncompete agreements		320			840			840
Amortizable:
Contracts		8,947			3,460			8,847
Noncompete agreements		320			320			320
Customer records		9			—			—
Contracts		8,947			8,947			8,947
		58,736			53,760			59,147
Customer records		9			9			9
Accumulated amortization		(8,311	)		(7,922	)		(8,244	)
Total amortizable		9,276			9,276			9,276
Other intangibles, net	$	50,425		$	45,838		$	50,903
Accumulated amortization		(9,615	)		(8,311	)		(8,963	)
Other intangibles, net	$	49,121		$	50,425		$	49,773

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~~additional inchanges 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~~were due to foreign currency translation at Cole Vision. The net carrying amount of goodwill at ~~August~~July 231, ~~2003~~2004, by business segment was $64.3 million at Cole Vision and $21.4 million at Things Remembered.

(3) Long-Term Debt

On ~~May~~August 2215, ~~2002~~2003, Cole National Group ~~issued~~retired $~~150.0 million~~385,000 of 8-75/8% ~~Senior~~ Senior Subordinated Notes ~~that~~due ~~mature~~December 31, in2006 ~~2012.~~that ~~Interest~~the onCompany ~~the~~had ~~notes~~received isas ~~payable~~part ~~semi-annually~~of onthe ~~each~~full ~~May 15~~repayment ~~and~~for ~~November 15.~~a ~~Net~~note ~~proceeds~~receivable from the ~~8-7/8% note offering, together with cash on hand, were used to retire Cole National Group~~Company’s ~~$150.0 million~~ offormer ~~9-7/8% Senior Subordinated Notes due 2006 and pay premiums~~Chairman and ~~other~~Chief ~~costs~~Executive ~~associated~~Officer ~~with retiring those notes~~(CEO). ~~The~~A ~~Company’s~~$15,400 ~~results~~gain ~~for fiscal 2002 included a loss~~ on early extinguishment of debt ofand $~~11.1 million representing~~15,400 ~~the payment~~ of ~~premiums~~compensation ~~and~~expense ~~other~~were ~~costs~~recorded ofin ~~retiring~~connection ~~the~~with ~~notes and~~ the ~~write offs of unamortized discount and deferred financing fees~~ transaction.

~~On August 22, 1997, Cole National Group issued $125.0 million of 8-5/8%~~7 ~~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.~~

7 Table of Contents

~~Table~~ On May 22, 2002, Cole National Group issued $150.0 million of ~~Contents~~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.

~~The~~On ~~8-5/8%~~August 22, ~~notes~~1997, ~~and the 8-7/8% notes are general unsecured obligations of~~ Cole National Group, ~~subordinated~~issued in$125.0 million ~~right~~ of ~~payment to senior indebtedness of~~8-5/8% ~~Cole~~Senior ~~National~~Subordinated ~~Group~~Notes ~~and~~that ~~senior~~mature in ~~right~~2007 ofwith ~~payment~~no toearlier ~~any~~scheduled redemption ~~current~~ or ~~future subordinated~~sinking ~~indebtedness~~fund ~~of Cole National Group~~payments. ~~The~~Interest ~~indentures~~on ~~pursuant to which~~ the 8-5/8% notes ~~and~~is ~~the 8~~payable semi-~~7/8%~~annually ~~notes~~on ~~were~~February 15 ~~issued restrict dividend payments to the Company. The indentures also contain certain optional~~ and ~~mandatory~~ ~~redemption features and other financial covenants~~August 15.

OnThe ~~April 23,~~8-5/8% ~~1999,~~notes and the ~~Company~~8-7/8% ~~issued~~notes aare ~~$10.0 million~~general ~~promissory~~unsecured ~~note~~obligations of ~~bearing~~Cole ~~interest~~National atGroup, ~~5.0%~~subordinated ~~per annum~~ in ~~recognition~~right of apayment ~~commitment~~ to ~~contribute $10.0 million~~senior toindebtedness ~~a leading medical institution, supporting the development~~ of a ~~premier~~Cole ~~eye~~National ~~care~~Group ~~research~~ and ~~surgical~~senior ~~facility.~~in ~~The~~right ~~note~~of ~~requires a $5.0 million principal~~ payment to beany ~~made~~current onor ~~April 23,~~future subordinated ~~2004,~~indebtedness ~~and~~of ~~principal~~Cole ~~payments in~~National ~~the~~Group. ~~amount~~The ofindentures ~~$1.0 million~~pursuant to which bethe ~~made~~8-5/8% onnotes and the ~~anniversary~~8-7/8% ~~date~~notes ofwere ~~the~~issued ~~note~~restrict dividend ~~each~~payments ~~successive~~to ~~year~~the ~~through 2009~~Company. ~~Interest~~The ~~only~~indentures isalso ~~payable~~contain ~~annually~~certain ~~for~~optional ~~the~~and ~~first~~mandatory ~~5 years,~~redemption features and ~~thereafter~~other ~~with~~financial ~~each payment of principal~~covenants.

~~The~~On ~~Company~~April 23, ~~has~~1999, nothe ~~significant~~Company ~~principal~~issued ~~payment~~a ~~obligations~~$10.0 million ~~under~~promissory ~~its~~note ~~outstanding~~bearing ~~indebtedness~~interest ~~until~~at ~~the~~5.0% per annum in recognition of a commitment to contribute $510.0 million ~~principal~~to ~~payment~~a ~~due~~leading inmedical ~~2004 under~~institution, supporting the development of a premier eye care research and surgical facility. A $5.0% million ~~promissory~~principal payment ~~note~~along ~~and~~with ~~until~~accrued ~~2007~~interest was made on April 23, ~~when~~2004. Additional principal payments in the amount of $~~125~~1.0 million ~~Senior~~are required to be made on the ~~Subordinated~~anniversary ~~debt~~date ~~becomes~~of ~~due~~the note each successive year through 2009. Interest is payable annually with each payment of principal.

~~During~~No ~~the~~significant ~~third~~principal ~~quarter~~payment ofobligations ~~fiscal~~are ~~2002,~~due under the Company’s outstanding ~~entered~~indebtedness ~~into~~until ~~interest rate~~April 2005, ~~swap~~when ~~agreements~~a to$1.0 million ~~take~~principal payment ~~advantage~~is ofdue ~~favorable~~under ~~market~~a ~~interest rates~~5. ~~These~~0% ~~agreements~~promissory ~~require~~note ~~the~~discussed ~~Company~~above, towith ~~pay~~annual an$1.0 million ~~average~~principal ~~floating~~payments ~~interest~~due ~~rate based~~ on ~~six-month~~the ~~LIBOR~~anniversary ~~plus~~date ~~4.5375%~~of tothe anote ~~counter~~in ~~party while receiving a~~each ~~fixed~~successive ~~interest~~year ~~rate~~through on2009. aThe ~~portion of Cole National Group’s~~ $125.0 million of 8-5/8% Senior Subordinated Notes ~~due 2007. The counter party~~ is adue ~~major commercial~~in ~~bank~~2007. ~~The~~Following ~~agreements~~the ~~mature~~consummation ~~August 15,~~of ~~2007~~the ~~and~~merger ~~qualify~~with ~~as fair~~Luxottica ~~value~~Group ~~hedges~~S.p.A. ~~The~~(see ~~aggregate~~Note ~~notional~~9 ~~amount~~ of the ~~interest~~Notes ~~rate~~to ~~swap agreements~~Condensed isConsolidated ~~$50.0 million.~~Financial ~~At August 2~~Statements), ~~2003,~~ the holders ~~floating rate~~ of ~~swaps~~the ~~was approximately~~ 8-5.7/8% notes and the ~~fair~~8-7/8% ~~value~~notes ofwill have the ~~swap~~right ~~agreements~~to ~~was~~put ~~an unrealized~~the ~~gain~~notes ofto ~~approximately~~Cole ~~$0.3 million.~~National ~~There~~Group ~~was~~at noa ~~impact~~price toof ~~earnings~~101% ~~in the first six months~~ of ~~fiscal~~par ~~2003~~plus ~~due~~accrued ~~to hedge ineffectiveness~~interest.

( 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 ~~Credit~~million ~~Facility~~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 July 31, 2004, the floating rate of the swaps was approximately 6.5% and the fair value of the swap agreements was an unrealized gain of approximately $0.1 million. There was no impact to earnings in the first six months of fiscal 2004 due to hedge ineffectiveness.

OnThe ~~June 27,~~Company ~~2003,~~leases ~~the~~an ~~operating~~office ~~subsidiaries~~and ofgeneral ~~Cole~~operating ~~National~~facility ~~Group,~~in ~~Inc.~~Highland ~~amended~~Heights, ~~restated~~Ohio ~~and~~from ~~extended~~a ~~its~~special ~~working~~purpose ~~capital~~entity ~~credit~~(the ~~facility~~“Trust”), ~~with~~which ~~its~~was created in ~~bank~~1997 ~~lenders.~~specifically ~~The~~for ~~maturity~~the ~~date~~purpose of ~~the~~structuring ~~credit~~a ~~facility~~four-year ~~was~~operating ~~extended~~lease with toannual ~~February 1,~~renewal ~~2007~~options ~~from~~up ~~May 31,~~to ~~2006~~six years. The ~~size~~lease ofprovides ~~the~~for ~~facility~~regular payments ~~was~~based ~~adjusted~~on toLIBOR ~~$60.0 million~~plus ~~from $75~~1.~~0 million~~50%. In ~~addition,~~accordance ~~certain~~with ~~financial~~this ~~covenants~~agreement, ~~were~~the ~~amended.~~Company ~~Borrowings~~must ~~under~~maintain ~~the~~compliance ~~credit~~with ~~facility~~a ~~presently~~minimum ~~bear~~net ~~interest~~worth ~~based~~covenant. ~~on leverage~~At ~~ratios~~the end of ~~Cole~~this ~~National~~lease ~~Group~~in at2007, athe ~~rate~~Company ~~equal~~has the option to ~~either~~purchase ~~(a)~~ the property or ~~Eurodollar~~arrange ~~Rate~~for ~~plus~~the ~~2.50%~~sale orof ~~(b) 1~~the property.~~50%~~ ~~plus~~If the ~~highest~~Company ofdoes ~~(i) the~~not ~~CIBC~~exercise ~~prime~~its ~~rate,~~purchase ~~(ii) the~~option ~~three-week~~at ~~moving~~the ~~average~~end of the ~~secondary~~lease, ~~market~~it ~~rates~~is ~~for three-month~~contingently ~~certificates~~liable ofto ~~deposit~~the ~~plus~~Trust for up to $1.0%7 million. orThe ~~(iii) the~~Company ~~federal~~does ~~funds~~not ~~rate plus~~believe ~~0.5%.~~it ~~Cole~~will ~~National~~have ~~Group~~any ~~pays~~payment obligation aat ~~commitment~~the ~~fee~~end of ~~0.75%~~the ~~per~~lease ~~annum~~because oneither the ~~total~~ ~~unused~~Company ~~portion~~will ofexercise the purchase ~~facility~~option, ~~based~~or on the ~~percentage~~net ofproceeds ~~revolving credit~~from ~~commitments~~the ~~used.~~sale ~~The~~of ~~Company~~the ~~and~~property ~~Cole~~will ~~National~~exceed the ~~Group~~amount ~~guarantee~~payable ~~this credit~~to ~~facility~~the Trust. The ~~credit~~Trust ~~facility~~assets isand ~~secured~~liabilities byhave been consolidated into the ~~assets~~financial statements of the ~~operating subsidiaries~~Company as of ~~Cole~~January 31, 2004 ~~National~~and ~~Group~~operating results beginning February 1, ~~Inc~~2004.

~~The~~(4) Credit ~~credit facility requires the principal operating subsidiaries of Cole~~Facility ~~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 operating subsidiaries of Cole National Group, Inc. have a working capital credit facility ~~restricts~~of ~~dividend~~$60.0 million ~~payments~~with their bank lenders that extends to February 1, 2007. Borrowings under the credit facility presently bear interest based on leverage ratios of Cole National Group ~~from~~ ~~its~~at ~~subsidiaries~~a rate equal to either ~~amounts~~(a) the ~~needed~~Eurodollar toRate ~~pay~~plus ~~interest~~2.50% onor (b) 1.50% plus the ~~8-7/8%~~highest ~~notes~~of ~~and~~(i) the ~~8-5/8%~~CIBC ~~notes~~prime rate, ~~and~~(ii) the ~~certain~~three-week ~~amounts~~moving ~~related~~average toof ~~taxes,~~the ~~along~~secondary ~~with~~market rates upfor tothree-month 0certificates of deposit plus 1.250% or (iii) the federal offunds rate plus 0.5%. Cole National Group’s ~~consolidated~~pays ~~net~~a ~~revenue~~commitment ~~annually~~fee ~~for~~of ~~other~~0.75% ~~direct~~per ~~expenses~~annum on the total unused portion of the facility based on the percentage of revolving credit commitments used. The Company orand Cole National Group guarantee this credit facility. IfThe ~~certain~~credit ~~maximum~~facility ~~leverage targets~~is ~~are~~secured ~~met,~~by the ~~credit~~assets ~~facility~~of the ~~restricts~~operating ~~dividend~~subsidiaries ~~payments~~of to Cole National Group, inInc. anThe ~~aggregate~~credit ~~amount~~facility permits ~~not~~indebtedness toof ~~exceed~~up to $5010.0 million toof ~~allow~~documentary ~~for~~letters of credit from sources other than the ~~repurchase~~lenders and liens on inventory pursuant to documentary letters of ~~Senior~~credit ~~Subordinated~~issued ~~Notes~~under such financing.

~~As of August 2, 2003, the total availability under the credit facility~~8 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.

8 Table of Contents

~~Table~~ The credit facility requires the principal operating subsidiaries of ~~Contents~~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 Cole National Group to comply with certain financial covenants, including covenants regarding interest coverage and maximum leverage. Cole National Group is in compliance with the covenants in the credit agreement as of July 31, 2004.

( 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, certain amounts related to taxes and $7.5 ~~Segment~~million ~~Information~~for direct expenses of Cole National Group, along with up to 0.25% of Cole National Group’s consolidated net revenue annually for other direct expenses of the Company. If certain maximum leverage targets are met, the credit facility restricts dividend payments to Cole National Group in an aggregate amount not to exceed $25.0 million to allow for the repurchase of Senior Subordinated Notes.

~~Information~~As onof July 31, 2004, the ~~Company’s~~total ~~reportable~~availability ~~segments~~under isthe credit facility totaled $43.7 million after reduction for commitments outstanding of $16.3 million under letters of credit. There were no working capital borrowings under the credit facility outstanding as ~~follows~~of ~~(dollars~~July 31, in2004 and August 2, 2003 and ~~thousands):~~there were no borrowings during the first six months of fiscal 2004 and fiscal 2003.

			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	)

The Company has an agreement with a bank to provide documentary letters of credit for import inventory purchases not to exceed $7.0 million. The letters of credit are secured by the inventory purchased. As of July 31, 2004, the Company had $3.8 million outstanding under this facility.

(65) ~~Commitments~~Retirement ~~and Contingencies~~Plans

The Company ~~leases~~uses a ~~substantial~~December 31 ~~portion~~measurement ofdate for its ~~computers,~~plans. ~~equipment~~Net ~~and~~pension ~~facilities~~expense ~~including~~and ~~laboratories,~~postretirement ~~office~~expense ~~and~~for ~~warehouse~~the ~~space,~~13 and ~~retail~~26 week ~~store locations.~~periods ~~These~~ended ~~leases generally have initial terms of up to 10~~July ~~years~~31, ~~and~~2004 ~~often contain renewal or purchase options. Operating~~ and ~~capital lease obligations are based upon contractual minimum rates and~~August 2, in2003 ~~most leases covering retail store locations; additional rents~~ are ~~payable~~as ~~based~~follows on(dollars ~~store sales. In addition, Cole Vision operates departments~~ in ~~various host stores~~thousands): ~~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.


	Pension Benefits						Postretirement Benefits
	July 31,			August 2,			July 31,		August 2,
	2004			2003			2004		2003
Service cost - benefits earned during the period	$	140		$	119		$	—	$	—
Interest cost on the projected benefit obligation		1,373			1,303			80		60
Expected return on plan assets		(1,244	)		(1,080	)		—		—
Recognized net actuarial (gain) loss		1,092			434			49		34
Amortization of initial asset		(80	)		(80	)		—		—
Amortization of prior service cost		—			—			3		2

Net expense (income)	$	1,281		$	696		$	132	$	96

~~Agreements~~The ~~between~~Company ~~HAL~~previously ~~Holding~~disclosed ~~N.V.~~in ~~(“HAL”),~~its ~~the~~financial ~~Company~~statements ~~and~~for ~~members~~the ofyear ~~Pearle~~ended ~~Europe~~January 31, ~~management~~2004, ~~require~~that ~~HAL~~it ~~and~~expected ~~the Company~~ to ~~periodically~~contribute ~~offer~~$7.5 million to its ~~purchase~~pension ~~Pearle~~plan ~~Europe~~in ~~shares~~2004. ~~held~~As ~~by the members~~ of ~~Pearle Europe Management. These offers are required to be made (1)~~July ~~not later than September 3~~31, ~~2003~~2004, ~~(2) in May 2005, and (3)~~$1.8 ~~biannually~~million inof ~~May~~contributions ~~commencing~~have been ~~in 2007~~made. The ~~obligations~~Company ~~to fund~~presently ~~the~~anticipates ~~purchase~~contributing ofan ~~any~~additional ~~shares as to which the offer to purchase is accepted~~$3.7 ~~are~~million ~~pro rata~~ to ~~HAL~~fund ~~and~~its topension ~~the~~plan ~~Company~~in ~~based~~2004 onfor ~~their~~a ~~respective~~total ~~ownership interests on the date~~ of ~~the offer~~$5. ~~As of August~~5 2,million. ~~2003,~~The decrease ~~HAL~~in ~~and~~expected ~~the~~funding ~~Company had~~for ~~not~~fiscal ~~agreed~~2004 onis ~~the~~due ~~price~~ to ~~offer~~passage onof ~~September 3, 2003 or on the process to~~further ~~agree~~pension onrelief aby ~~price~~Congress.

~~The Company’s former Chairman and Chief Executive Officer retired at the annual meeting of shareholders on June~~(6) ~~25,~~Segment ~~2003. The Company fulfilled its~~Information ~~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.~~

Information on the Company’s reportable segments is as follows (7dollars in thousands) ~~Subsequent~~: ~~Events~~

On9 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

9 Table of Contents


	Thirteen Week Period Ended					Twenty-Six Week Period Ended
	July 31,		August 2,			July 31,		August 2,
	2004		2003			2004		2003
Net revenues:
Cole Vision	$	232,854	$	228,832		$	482,787	$	462,373
Things Remembered		79,913		78,827			137,632		133,535

Total net revenues	$	312,767	$	307,659		$	620,419	$	595,908

Operating income (loss):
Cole Vision	$	9,630	$	3,192		$	22,318	$	12,468
Things Remembered		11,790		9,940			10,725		7,360

Total segment operating income		21,420		13,132			33,043		19,828
Unallocated corporate expenses		8,239		14,288			16,918		23,515

Total operating income (loss)		13,181		(1,156	)		16,125		(3,687	)
Interest and other (income) expense, net		5,802		4,352			12,131		9,833

Income (loss) before income taxes	$	7,379	$	(5,508	)	$	3,994	$	(13,520	)

~~Europe management could request that the price of the shares be evaluated by an independent expert. On September~~(7) ~~12,~~Commitments 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~~Contingencies ~~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)~~ 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 ~~Legal~~years ~~Proceedings~~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. The Sears agreement contains a short-term cancellation clause. 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 ~~and~~guarantees ~~its~~future ~~optical~~minimum ~~subsidiaries~~lease ~~have~~payments ~~been sued by the State of California, which alleges claims~~ for ~~various~~certain ~~statutory violations related to~~store ~~the~~locations ~~operation~~leased ofdirectly 24by ~~Pearle Vision Centers in California~~franchisees. ~~The~~These ~~claims~~guarantees ~~include~~totaled ~~untrue~~approximately ~~or misleading advertising~~$12.2 million, ~~illegal~~$13.3 million ~~dilation~~and ~~fees,~~$13.4 million ~~unlawful~~as ~~advertising~~ of ~~eye exams~~July 31, ~~maintaining an optometrist on or near the premises of a~~ ~~registered dispensing optician~~2004, ~~unlawful advertising of an optometrist~~August 2, ~~unlicensed~~ ~~practice~~2003 ~~of optometry,~~ and ~~illegal relationships between dispensing opticians~~January 31, ~~optical retailers and optometrists. The action seeks unspecified damages~~2004, ~~restitution and injunctive relief~~respectively. ~~Although~~Performance ~~the~~under ~~State of California obtained~~ a ~~preliminary injunction to enjoin certain advertising practices and~~ ~~from~~guarantee ~~charging~~by ~~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 intriggered ~~compliance~~by ~~with California~~default ~~law~~of ~~and~~a ~~intends~~franchisee ~~to continue to defend the issues raised~~ in ~~the~~their ~~case~~lease ~~vigorously~~commitment. Generally, itthese ~~may~~guarantees bealso ~~required~~extend to ~~further~~payments ~~modify~~of ~~its~~taxes ~~activities or might be~~and ~~required~~other tonormal ~~pay~~expenses ~~damages~~payable ~~and~~under orthese ~~restitution in a currently undeterminable amount if it is not successful~~leases, the ~~cost~~amounts of which, asare ~~well as continuing defense~~not ~~costs,~~readily ~~might have a material adverse effect on the Company’s operating results and cash flow in one or more periods~~quantifiable.

~~Things~~In ~~Remembered~~fiscal 2003, ~~Inc.~~the ~~settled~~Company aentered ~~class~~into ~~action~~an ~~complaint~~agreement into ~~California~~guarantee a ~~alleging~~portion ~~that~~of the ~~putative~~amount ~~class~~owed ~~(alleged~~ to ~~include~~a ~~200~~bank ~~members)~~by ~~were improperly~~a ~~denied~~franchisee ~~overtime~~as ~~compensation~~a inresult ~~violation~~ of a ~~California~~loan granted ~~law~~in connection with the purchase of five stores. The guaranteed amount ~~action~~equals ~~sought~~the ~~unspecified~~cumulative ~~damages,~~value ~~interest,~~of ~~restitution,~~the asstore ~~well~~assets. asThe Company is released from ~~declaratory~~its ~~and~~obligation ~~injunctive~~once ~~relief~~the ~~and~~landlords ~~attorneys’~~of ~~fees.~~the Onstore ~~February 3,~~locations ~~2003,~~execute subordination ~~Things~~agreements ~~Remembered~~or ~~and~~ the ~~plaintiffs~~bank ~~reached~~is angranted ~~agreement~~access to ~~resolve~~the store assets in the event of ~~lawsuit~~the ~~for~~default ~~$562,500~~by the franchisee. The ~~settlement~~Company isreceived ~~subject~~four toexecuted ~~court~~subordination agreements ~~approval.~~as ~~A liability~~ of ~~$562~~July 31,~~500~~ ~~was~~2004. ~~recorded~~The inmaximum ~~the~~exposure ~~fourth~~under ~~quarter~~the ofagreement ~~fiscal 2002~~is $47,000.

~~Cole~~Agreements ~~National~~between ~~Corporation~~HAL isHolding ~~defending~~N.V. a(“HAL”), ~~purported~~the ~~class~~Company ~~action~~and ~~lawsuit~~members of ~~alleging~~Pearle ~~claims~~Europe ~~for~~management ~~various~~require ~~violations~~HAL ofand ~~federal~~the ~~securities~~Company ~~laws~~to ~~related~~periodically offer to ~~the~~purchase ~~Company’s~~Pearle ~~publicly~~Europe ~~reported~~shares ~~revenues~~held ~~and~~by ~~earnings.~~the ~~The~~members ~~action,~~of ~~which~~Pearle Europe Management. ~~pleaded~~These ~~claims~~offers ~~under~~are ~~Section 10(b)~~required ~~and~~to ~~20(a)~~be ofmade ~~the~~in ~~Securities~~May 2005 ~~Exchange~~and ~~Act~~biannually ofin May ~~1934,~~commencing ~~and~~in ~~named~~2007. ~~the~~The ~~Company~~obligations ~~and~~to ~~certain~~fund ~~present~~the ~~and~~purchase ~~former~~of ~~officers~~any ~~and directors~~shares as ~~defendants,~~to which ~~seeks~~the ~~unspecified~~offer ~~compensatory~~to ~~damages,~~purchase ~~punitive damages~~is ~~“where~~accepted ~~appropriate”,~~are ~~costs,~~pro ~~expenses~~rata ~~and~~to ~~attorneys'~~HAL ~~fee.~~and ~~The~~to the Company ~~and~~based ~~attorneys~~on ~~for~~their respective ownership interests on the ~~plaintiffs~~date ~~have~~of ~~agreed~~the tooffer. As of July 31, 2004, on a ~~settlement~~fully todiluted ~~resolve~~basis, the ~~lawsuit.~~ ~~The~~Company’s ~~settlement~~ownership isinterest ~~subject~~in Pearle toEurope ~~Court~~is ~~approval~~21.1%, AHAL’s ~~charge~~ownership ofinterest ~~$2,687,500 was~~in ~~recorded~~Pearle inEurope ~~the~~is approximately ~~first~~78.3% ~~quarter~~and ofthe ~~fiscal~~Pearle ~~2003~~Europe ~~with~~management ~~respect~~team toowns the ~~Company’s~~remaining ~~portion~~0.6% ofinterest, ~~the~~or ~~settlement~~590 shares.

~~Following~~(8) Legal ~~the Company’s announcement in November 2002 of the restatement~~Proceedings ~~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~~On ~~National~~July 14, ~~Group~~2004, ~~Inc.~~a ~~has~~Company ~~been~~shareholder ~~named~~filed as a ~~defendant~~shareholders’ ~~along~~class ~~with~~action ~~numerous~~complaint ~~other~~against ~~retailers~~the Company, inits ~~patent~~directors, ~~infringement~~and ~~litigation~~Luxottica ~~challenging~~Group ~~the~~S.p.A. ~~defendants’~~(“Luxottica”). ~~use~~The ofcomplaint ~~bar~~alleges, ~~code~~among ~~technology.~~other ~~The~~things, ~~Company~~that ~~believes~~the itindividual defendants ~~has~~breached ~~available defenses~~their fiduciary duties as directors and/or ~~does~~officers ~~not~~to ~~expect~~the Company ~~any~~by ~~liability.~~causing ~~However,~~the ifCompany ~~Cole~~to ~~National~~enter ~~Group, Inc.~~into ~~were~~an agreement to be ~~found~~acquired ~~liable~~by Luxottica for an$22.50 ~~infringement,~~per itshare ~~might~~“without ~~have~~having aexposed ~~material~~the Company to the ~~adverse~~marketplace ~~effect~~through onfair ~~our~~and ~~operating~~open ~~results~~negotiations with all potential bidders and/or ~~cash~~an ~~flow~~active inmarket ~~the~~check ~~period~~or ~~incurred~~open auction for sale of the company.” The complaint seeks preliminary and

~~In the ordinary course of business, the Company is involved in various~~10 other legal proceedings. The Company is of the opinion that the ultimate resolution of these matters will not have a material adverse effect on the results of operations, liquidity or financial position of the Company.

10 Table of Contents

~~Table~~permanent injunctive relief against the merger, rescission of ~~Contents~~the merger if it is consummated, and/or damages and other associated relief. The Company believes that the action is without merit.

~~Item~~ 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 23 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. In July 22002, the State of California obtained a preliminary injunction to enjoin certain advertising practices and from charging dilation fees. ~~Management~~The trial court’s ~~Discussion~~decision was appealed by both the Company and ~~Analysis~~the State. On November 26, 2003, the appellate court ruled on the appeal in a manner adverse to the Company with respect to continued advertising in California by Pearle Vision that expressly or implicitly advertises the furnishing of ~~Financial~~optometric ~~Condition~~services, disallowing continued advertising of the availability of optometric services with a disclaimer that had been previously approved by the trial court. The appellate court ruled in the Company’s favor with respect to charging dilation fees. On March 3, 2004, the California Supreme Court granted the Company’s petition for review of the Appellate Court’s decision. Although the Company believes that its advertising and ~~Results~~operational practices in California complied with California law, the appellate ruling may, if unmodified by the Supreme Court, compel the Company to modify or close its activities in California. Further, the Company might be required to pay damages and or restitution in a currently undeterminable amount, the cost of ~~Operations~~which might have a material adverse effect on the Company’s operating results and cash flow in one or more periods.

~~Overview~~ Cole National Corporation settled 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 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, sought unspecified compensatory damages, punitive damages “where appropriate”, costs, expenses and attorneys’ fees. On May 30, 2003, the Company and the plaintiffs reached an agreement to resolve the lawsuit. On September 29, 2003, the Court approved final settlement of the lawsuit. 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.

~~Cole~~Following ~~National~~the ~~Corporation~~Company’s announcement in November 2002 of the restatement of the Company’s financial statements, ~~primarily~~the ~~through~~Securities and Exchange Commission began an investigation into the ~~subsidiaries~~Company’s ~~owned~~previous byaccounting. ~~its~~The course of ~~direct~~this ~~subsidiary,~~investigation ~~Cole~~or ~~National~~other ~~Group,~~litigation ~~Inc~~or investigations arising out of the restatement of the Company’s financial statements cannot be predicted. In addition, isunder acertain ~~leading~~circumstances ~~provider~~the ofCompany ~~optical~~would be obliged to ~~products~~indemnify the individual current and ~~services~~former directors and ~~personalized~~officers ~~gifts~~who are named as defendants in litigation or who are or become involved in an investigation. The Company ~~sells~~believes ~~its~~it ~~products~~has insurance that should be available ~~and~~with ~~services~~respect ~~through~~to ~~2,472~~a ~~company-owned~~portion ~~retail~~of ~~locations~~its ~~and~~indemnification ~~463~~obligations. ~~franchised~~If the Company is ~~locations~~unsuccessful in 50defending ~~states~~against the current investigation or any litigation, there ~~Canada~~may ~~and~~be a material adverse effect on the ~~Caribbean~~Company’s financial condition, cash flow and results of operations.

~~Fiscal~~Cole ~~years~~National ~~end~~Group, onInc. has been named as a defendant along with numerous other retailers, in patent infringement litigation challenging the defendants’ ~~Saturday~~use ~~closest~~of bar code technology. A stay of the proceeding has been sought and was granted, in deference to ~~January 31~~prior pending declaratory judgment suits brought by the manufacturers and ~~are~~suppliers ~~identified~~of the implicated technology ~~according~~seeking to declare the ~~calendar~~patents ~~year~~ in ~~which~~suit ~~they~~invalid, ~~begin~~unenforceable and not infringed. ~~For~~On ~~example~~January 23, 2004, a court in Nevada entered a memorandum of decision in favor of the ~~fiscal~~manufacturers declaring the patents unenforceable and ~~year~~not ~~ended~~infringed. ~~February 1~~This judgment has been appealed, ~~2003~~and isthe ~~referred~~infringement tolitigation against asCole ~~“fiscal~~National ~~2002.”~~Group ~~The~~will ~~current~~remain ~~fiscal~~stayed pending the final resolution of ~~year~~the appeal. Cole National Group, ~~which~~Inc. ~~ends~~believes ~~January 31~~it has available defenses and does not expect any liability. However, ~~2004~~if Cole National Group, isInc. ~~referred~~were to asbe found ~~“fiscal~~liable ~~2003.”~~for ~~Fiscal~~an ~~2003~~infringement, it might have a material adverse effect on its operating results and ~~fiscal~~cash ~~2002~~flow ~~each~~in ~~consists~~the ofperiod ~~52 weeks~~incurred.

~~The~~In ~~Company~~the ~~has~~ordinary ~~two~~course ~~reportable~~of ~~segments~~business, ~~Cole~~the ~~Vision~~Company ~~and~~is ~~Things Remembered.~~involved ~~Most~~in ofvarious other ~~Cole~~legal ~~Vision’s~~proceedings. ~~revenue~~The ~~represents~~Company ~~sales~~is of ~~prescription eyewear,~~the ~~accessories,~~opinion ~~warranties~~that ~~and~~the ~~other services through its Cole Licensed~~ultimate ~~Brands~~resolution ~~and~~of ~~Pearle~~these ~~Vision~~matters ~~retail~~will ~~locations.~~not ~~Cole~~have ~~Vision~~a ~~revenue~~material ~~also~~adverse ~~includes sales~~effect ~~of merchandise to franchisees, royalties based~~ on ~~franchise sales,~~the ~~initial~~results ~~franchise~~of ~~fees for Pearle Vision and capitation revenue~~operations, ~~administrative service~~liquidity ~~fee~~or ~~revenue~~financial ~~and~~position ~~discount~~of ~~program~~the ~~service fees from its Cole Managed Vision business~~Company.

~~Things~~(9) Luxottica ~~Remembered’s~~Merger ~~revenue represents sales of engraveable gift~~Agreement ~~merchandise, personalization and other services primarily through retail~~ ~~in-line stores and kiosks. Things Remembered revenue also includes direct sales~~ ~~through its e-commerce site, www.ThingsRemembered.com, revenues through Things~~ ~~Remembered catalogs and through affiliate programs direct to businesses.~~

11 On January 23, 2004, the Company and Luxottica Group S.p.A. (“Luxottica”) entered into a merger agreement (the “Luxottica merger agreement”) pursuant to which a subsidiary of Luxottica would be merged with and into the Company and the Company would thereafter become a subsidiary of Luxottica. Under the Luxottica merger agreement, Luxottica would acquire all of the outstanding shares of the Company in a merger for a cash price of $22.50 per share, together with the purchase of all outstanding options and similar equity rights at the same price per share, less their respective exercise price. On June 2, 2004, the Company and

~~Table of Contents~~11

ResultsTable of Operations Contents

~~The~~Luxottica ~~following~~entered ~~schedule~~into ~~sets~~the ~~forth~~first ~~certain~~of ~~operating~~two ~~information~~amendments ~~for~~to the ~~second~~ ~~quarters~~Luxottica ~~and~~merger agreement. Under the first ~~six~~amendment ~~months~~to the Luxottica merger agreement, the original $22.50 per share cash merger consideration would be increased by an amount equal to 4% per annum from the date on which the Company’s stockholders approve the Luxottica merger agreement, as amended, through the closing date of the ~~fiscal~~merger, ~~2003~~subject ~~and~~to ~~fiscal~~certain ~~2002~~conditions. ~~This~~On July 14, 2004, the Company ~~schedule~~amended ~~and~~its ~~subsequent~~merger ~~discussions~~agreement ~~should~~with Luxottica once again. Under the Luxottica merger agreement, as amended, the original $22.50 per share cash merger consideration to be ~~read~~paid by Luxottica was increased to $27.50 per share in cash, ~~conjunction~~plus ~~with~~an additional amount equal to 4% per annum from the date of ~~condensed~~stockholder ~~consolidated~~approval ~~financial~~through ~~statements~~the ~~included~~closing indate ~~this~~of ~~Form~~the merger. On July ~~10-Q~~22, 2004, at the 2004 annual meeting of the Company’s stockholders which was held on July 20, 2004 and subsequently adjourned to July 22, 2004, the Company received votes from a majority of the outstanding shares to approve the Luxottica merger agreement, as amended. Based upon the $27.50 price, the total purchase price of the Company’s outstanding shares and related equity rights is approximately $495 million, plus an amount equal to 4% per annum from July 22, 2004 through the date of closing.

				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

The Luxottica merger is subject to the satisfaction of customary conditions, including compliance with applicable antitrust clearance requirements. On February 27, 2004, the Company and Luxottica filed pre-merger notifications with the U.S. antitrust authorities pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“the HSR Act”). On March 30, 2004, the Company and Luxottica jointly announced that they had received a request from the Federal Trade Commission (the “FTC”) for additional information and documentary material with respect to the Luxottica merger. Luxottica and the Company completed their required information submissions and related certifications to the FTC in connection with its antitrust review on July 19, 2004 and have committed to the FTC not to close the transaction before September 30, 2004, without its consent. The Luxottica merger is expected to close in the second half of 2004.

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

12 Subsequent to the issuance of the fiscal 2003 condensed consolidated financial statements, the Company determined that certain components in its condensed consolidated statement of cash flows for fiscal 2003 were incorrectly classified. Mistakes were discovered in the calculation of the fiscal 2002 overdraft balance resulting in misstatements of changes in accounts payable, accrued liabilities and other liabilities within cash flows from operating activities with corresponding misstatements of changes in overdraft balances within cash flows from financing activities. Certain other individually insignificant items for fiscal 2003 were also incorrectly classified. As a result, the accompanying condensed consolidated statement of cash flows for the first half of fiscal 2003 has been restated from the amounts previously reported to decrease cash flows from operating activities by $4.4 million, increase cash flows from investing activities by $0.7 million, and increase cash flows from financing activities by $3.7 million.

~~Table of Contents~~12

		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~~Item ~~sales for Pearle U~~2.S. ~~franchise~~Management’s ~~stores~~Discussion isand aAnalysis ~~non-GAAP~~of ~~financial measure~~Financial ~~that~~Condition isand ~~provided~~Results ~~for comparative purposes only. The Company believes that its franchisees’ method~~ of ~~reporting sales is consistent on a year-to-year basis.~~ Operations

~~Second~~ Subsequent ~~Quarter~~to ~~Fiscal~~the issuance of the Company’s condensed consolidated financial statements for fiscal 2003, ~~Compared~~the Company determined that certain components in its condensed consolidated statement of cash flows for fiscal 2003 were incorrectly classified. As a result, the accompanying condensed consolidated statement of cash flows for the first six months of fiscal year 2003 has been restated from the amounts previously reported. See Note 10 of the Notes to ~~Second~~the ~~Quarter~~Condensed ~~Fiscal~~Consolidated ~~2002~~Financial Statements for a summary of the significant effects of the restatement. This management’s discussion and analysis of financial condition and results of operations reflects the effect of the restatement.

~~Consolidated~~ On ~~Operations~~January 23, 2004, the Company and Luxottica Group S.p.A. (“Luxottica”) entered into a merger agreement (the “Luxottica merger agreement”) pursuant to which a subsidiary of Luxottica would be merged with and into the Company and the Company would thereafter become a subsidiary of Luxottica. Under the Luxottica merger agreement, Luxottica would acquire all of the outstanding shares of the Company in a merger for a cash price of $22.50 per share, together with the purchase of all outstanding options and similar equity rights at the same price per share, less their respective exercise price. On June 2, 2004, the Company and Luxottica entered into the first of two amendments to the Luxottica merger agreement. Under the first amendment to the Luxottica merger agreement, the original $22.50 per share cash merger consideration would be increased by an amount equal to 4% per annum from the date on which the Company’s stockholders approve the Luxottica merger agreement, as amended, through the closing date of the merger, subject to certain conditions. On July 14, 2004, the Company amended its merger agreement with Luxottica once again. Under the Luxottica merger agreement, as amended, the original $22.50 per share cash merger consideration to be paid by Luxottica was increased to $27.50 per share in cash, plus an additional amount equal to 4% per annum from the date of stockholder approval through the closing date of the merger. On July 22, 2004, at the 2004 annual meeting of the Company’s stockholders which was held on July 20, 2004 and subsequently adjourned to July 22, 2004, the Company received votes from a majority of the outstanding shares to approve the Luxottica merger agreement, as amended. Based upon the $27.50 price, the total purchase price of the Company’s outstanding shares and related equity rights is approximately $495 million, plus an amount equal to 4% per annum from July 22, 2004 through the date of closing.

~~Total~~The ~~revenues~~Luxottica ~~were~~merger ~~$307.7 million~~is insubject to the ~~second~~satisfaction ~~quarter~~ of ~~fiscal 2003,~~customary ~~compared~~conditions, including compliance with ~~$292~~applicable antitrust clearance requirements.4 On February ~~million~~27, in2004, the ~~same~~Company ~~period~~and ofLuxottica ~~fiscal~~filed ~~2002. Total revenues~~pre-merger ~~increased~~notifications ~~5.2%~~with in the ~~second~~U.S. ~~quarter~~antitrust ofauthorities ~~fiscal~~pursuant ~~2003, primarily attributable~~ to the aHart-Scott-Rodino ~~6.9%~~Antitrust ~~increase~~Improvements inAct ~~same~~of ~~store~~1976 ~~sales~~(“the ~~and~~HSR ~~increases~~Act”). inOn ~~revenues from managed~~March ~~vision~~30, ~~care~~2004, ~~programs.~~the ~~Undelivered~~Company ~~orders~~and ~~taken~~Luxottica ~~for~~jointly ~~customers,~~announced asthat ofthey ~~the~~had ~~end~~received ofa ~~second~~request ~~quarter,~~from ~~used in~~ the ~~calculation~~Federal ofTrade ~~same~~Commission ~~store~~(the ~~sales~~“FTC”) infor ~~that period but~~additional ~~recognized~~information asand ~~revenue~~documentary inmaterial ~~future~~with ~~periods~~respect ~~due~~ to the ~~timing~~Luxottica ~~difference between~~merger. ~~order~~Luxottica ~~placement~~ and ~~order~~the ~~delivery,~~Company ~~increased~~completed intheir ~~the~~required ~~second~~information ~~quarter~~submissions ~~of fiscal~~and ~~2003. The~~related ~~increase~~certifications into the ~~“on-order”~~FTC ~~amount~~ in ~~the~~connection ~~second~~with ~~quarter~~its ofantitrust ~~fiscal~~review on ~~2003~~July 19, ~~was~~2004 ~~primarily~~and ~~due~~have committed to athe ~~successful~~FTC ~~promotion~~not atto ~~Sears~~close ~~Optical at~~ the ~~end~~transaction ofbefore ~~the~~September 30, ~~second~~2004, ~~quarter.~~without ~~Same~~its ~~store~~consent. ~~sales~~The ~~increased~~Luxottica ~~9.4%~~merger atis ~~Cole~~expected ~~Licensed Brands,~~to ~~4.1%~~close ~~at Pearle Vision company-owned stores and 6.8% at Things Remembered~~ in the second ~~quarter~~half of ~~fiscal 2003~~2004.

~~Gross margin was $192.8 million in the second quarter of fiscal 2003,~~Overview ~~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~~Cole ~~expenses~~National ~~were~~Corporation, ~~$194.0 million~~primarily inthrough the ~~second~~subsidiaries ~~quarter~~owned ofby ~~fiscal~~its ~~2003,~~direct ~~compared with $179.5 million in the same period of fiscal 2002~~subsidiary, ~~an increase~~Cole ofNational 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 25Group, ~~2003~~Inc. ~~The Company fulfilled its obligations~~, ~~including~~is ~~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~~leading ~~cash~~provider ~~payment~~ of ~~$11.9 million with a charge to~~optical ~~operating~~products ~~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~~services ~~primarily related to the reaudit~~ and ~~restatement~~personalized ~~of its financial statements and the resulting SEC investigation~~gifts. The Company ~~incurred incremental~~sells ~~professional~~its ~~and legal fees of $0.7 million related to recent~~products ~~management changes~~ and ~~other~~services ~~management~~through ~~initiatives.~~2,417 ~~Operating~~Company-owned ~~expenses~~retail atlocations ~~the Cole Vision~~ and ~~Things~~484 ~~Remembered segments increased 1.7% primarily due to~~franchised ~~higher~~locations ~~store payroll including fringe benefits and workers compensation and from rent and occupancy costs. These costs increased primarily~~ in ~~support~~50 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 2003states, ~~compared~~Canada 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~~Caribbean.

~~Operating~~Fiscal ~~loss~~years ~~was~~end ~~$1.2 million~~on in the ~~second~~Saturday ~~quarter~~closest ~~of fiscal 2003, compared~~ to ~~operating income of $9.9~~January ~~million~~31 inand ~~the~~are ~~same period of fiscal 2002.~~identified ~~The~~according ~~expenses~~to ~~associated with~~ the ~~retirement~~calendar ofyear ~~the~~in ~~Company’s~~which ~~former~~they ~~Chairman and~~begin. ~~Chief~~For ~~Executive Officer~~example, the ~~lower~~fiscal year ~~gross~~ended ~~margin rate~~January 29, ~~and~~2005 ~~higher~~is ~~corporate expenses~~referred ~~due~~ to ~~the~~as ~~restatement~~“fiscal ~~and~~2004”. ~~reaudit~~Fiscal of2004 ~~the fiscal 2000~~ and ~~2001~~ ~~financial~~fiscal ~~statements~~2003 ~~were~~each ~~the~~consists ~~primary~~of ~~reasons~~a ~~for~~52-week ~~the decrease in operating results~~period.

13 The Company has two reportable segments, Cole Vision and Things Remembered. Most of Cole Vision’s revenue represents sales of prescription eyewear, accessories and 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 and initial franchise fees for Pearle Vision and capitation revenue, administrative service fee revenue and discount program service fees from its Cole Managed Vision business.

~~Table~~ Things Remembered’s revenue represents sales of ~~Contents~~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, http://www.ThingsRemembered.com, sales through Things Remembered catalogs and through third party partner programs.

~~Interest and other (income) expense, net, was $4.4 million for the second~~13 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.

TheTable 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. Contents

~~Cole~~Results ~~Vision~~of ~~Segment~~Operations

~~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~~following ~~increase~~schedule ~~was~~sets ~~primarily~~forth ~~due~~certain tooperating ~~increased~~information ~~revenues at~~for 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~~second ~~Optical~~quarters and ~~15.6% at BJ’s Optical during~~ the ~~second~~first ~~quarter~~six months of fiscal ~~2003.~~ ~~Same~~2004 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~~This ~~store~~schedule ~~sales~~and atsubsequent ~~Pearle~~discussions ~~Vision~~should ~~reflected~~be aread ~~decrease~~ in ~~the~~conjunction ~~number~~with ofthe ~~transactions,~~condensed ~~offset~~consolidated byfinancial anstatements ~~increase~~included in ~~the~~this ~~average~~Form ~~transaction size~~10-Q. ~~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.


	Second Quarter						Change			First Six Months						Change
	2004			2003			Fav/(Unfav)			2004			2003			Fav/(Unfav)
	(Dollars in millions)									(Dollars in millions)
Net revenues:
Cole Vision	$	232.9		$	228.9			1.8	%	$	482.8		$	462.4			4.4	%
Things Remembered		79.9			78.8			1.4			137.6			133.5			3.1

Total net revenues	$	312.8		$	307.7			1.7	%	$	620.4		$	595.9			4.1	%

Gross margin:
Cole Vision	$	139.7		$	136.0			2.8	%	$	291.5		$	278.0			4.9	%
Things Remembered		57.1			56.1			1.6			99.1			95.8			3.4

Total gross margin	$	196.8		$	192.1			2.4	%	$	390.6		$	373.8			4.5	%

Operating expenses:
Cole Vision	$	130.1		$	132.8			2.0	%	$	269.2		$	265.5			(1.4	)%
Things Remembered		45.3			46.2			2.0			88.4			88.5			0.1
Unallocated corporate expenses		8.2			14.3			42.3			16.9			23.5			28.1

Total operating expenses	$	183.6		$	193.3			5.0	%	$	374.5		$	377.5			0.8	%

Operating income (loss):
Cole Vision	$	9.6		$	3.2			201.7	%	$	22.3		$	12.5			79.0	%
Things Remembered		11.8			9.9			18.6			10.7			7.3			45.7
Unallocated corporate expenses		(8.2	)		(14.3	)		42.3			(16.9	)		(23.5	)		28.1

Total operating income (loss)	$	13.2		$	(1.2	)	N/A			$	16.1		$	(3.7	)		N/A

~~Operating~~Information ~~expenses~~on ~~were $133.4 million in~~ the ~~second~~number ~~quarter~~ of ~~fiscal 2003, compared to $132.8 million for~~ the ~~same~~Company’s ~~period~~retail ~~last~~locations ~~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~~business ~~fiscal~~open ~~2002. Store payroll and rent and occupancy costs~~ at ~~Cole Vision were $1.5~~July ~~million and $0.7 million higher in the second quarter of fiscal 2003 compared to the same period last year~~31, ~~primarily~~2004 ~~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~~August 2, ~~Canada.~~2003 ~~One~~is ~~time costs~~presented ~~associated with the closure of the facility totaled $0.4 million. The~~below: ~~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~~


	Second Quarter
	2004		2003
Number of retail locations at the end of the period
Sears Optical		938		943
Target Optical		248		253
BJ’s Optical		134		128

Total Cole Licensed Brands		1,320		1,324
Pearle Company-owned		375		394
Pearle franchised		484		463

Total Cole Vision		2,179		2,181
Things Remembered		722		754

Total Cole National		2,901		2,935

~~Table~~ Results of ~~Contents~~operations below are reflected as a percentage of net revenues. Data for the Cole Vision and Things Remembered segments are shown as a percentage of their respective net revenues. Unallocated corporate expenses and classification totals are shown as a percentage of total net revenues.

~~defense of this matter totaled $1.1 million in the~~14 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.

OperatingTable 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. Contents

Things Remembered Segment


	Second Quarter						First Six Months
	2004			2003			2004			2003
Gross margin:
Cole Vision		60.0	%		59.4	%		60.4	%		60.1	%
Things Remembered		71.5	%		71.3	%		72.0	%		71.8	%
Total gross margin		62.9	%		62.5	%		63.0	%		62.7	%
Operating expenses:
Cole Vision		55.9	%		58.0	%		55.8	%		57.4	%
Things Remembered		56.7	%		58.7	%		64.2	%		66.2	%
Unallocated corporate expense		2.6	%		4.6	%		2.7	%		3.9	%
Total operating expenses		58.7	%		62.8	%		60.4	%		63.3	%
Operating income:
Cole Vision		4.1	%		1.4	%		4.6	%		2.7	%
Things Remembered		14.8	%		12.6	%		7.8	%		5.5	%
Unallocated corporate expense		(2.6	)%		(4.6	)%		(2.7	)%		(3.9	)%
Total operating income		4.2	%		(0.4	)%		2.6	%		(0.6	)%

~~Things~~As ~~Remembered~~used ~~revenues~~in ~~were $78.8~~Item ~~million~~2 inof ~~the~~this ~~second~~Form ~~quarter~~10-Q, ~~of fiscal~~same ~~2003,~~store ~~compared~~sales ~~with~~growth ~~$74.3 million~~is ina ~~the~~non-GAAP financial ~~same~~measure, ~~period~~which ofincludes ~~fiscal~~deferred ~~2002,~~warranty ~~a 6.1%~~sales ~~increase.~~on ~~The~~a ~~same-store~~cash ~~sales~~basis ~~increase~~and undelivered ofcustomer ~~6.8%~~orders, and adoes ~~35%~~not ~~increase~~reflect inprovisions for returns, ~~direct~~remakes ~~channel~~and ~~revenues~~certain ~~were~~other ~~the~~items. ~~primary~~The ~~reasons~~Company’s ~~for~~current ~~the~~systems ~~increase.~~do ~~Direct~~not gather ~~channel~~data ~~revenues~~on ~~include~~these ~~revenues~~items ~~from~~on ~~its~~an ~~e-commerce~~individual ~~site, www~~store basis.~~ThingsRemembered.com,~~ ~~revenues~~Adjustments ~~from~~to ~~Things~~the ~~Remembered~~cash ~~catalogs~~basis sales ~~and~~information ~~through affiliate~~accumulated ~~programs~~at ~~direct~~the tostore ~~businesses.~~level ~~Improvements~~are inmade ~~the~~for ~~average~~these ~~dollar sale~~items ~~were~~on ~~offset~~an aggregate bybasis. As a ~~lower~~retailer, ~~number~~the ofCompany ~~transactions~~believes ~~and~~that a ~~reduction~~measure inof ~~the~~same ~~number~~store ofsales ~~stores~~performance ~~operating~~is atimportant ~~the~~for ~~end~~understanding ofits ~~the~~operations. ~~second~~The Company ~~quarter.~~calculates ~~Store~~same ~~count~~store atsales ~~the end~~for ofstores ~~the~~opened ~~second~~for ~~quarter~~at ofleast ~~fiscal~~twelve months. ~~2003~~A ~~was~~reconciliation ~~754~~of ~~compared~~same store sales to ~~776~~revenue atis ~~the~~presented ~~end~~in of the section ~~second~~“Reconciliation ~~quarter~~ of ~~fiscal~~Same ~~2002~~Store ~~due~~Sales toGrowth”. Same store ~~closings.~~sale growth follows:

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.


	Second Quarter			First Six Months
Sears Optical (U.S.)		(4.0	)%		0.5	%
Target Optical		4.7	%		10.9	%
BJ’s Optical		11.0	%		15.2	%
Cole Licensed Brands (U.S.)		(2.0	)%		2.6	%
Pearle Company-owned (U.S.)		(2.0	)%		(0.3	)%
Total Cole Vision		(1.3	)%		2.2	%
Things Remembered		1.9	%		3.8	%
Total Cole National		(0.5	)%		2.6	%
Pearle franchise stores (U.S.)		(1.4	)%		(0.5	)%

~~Operating~~Same ~~expenses~~store ~~were~~sales ~~$46.3 million in the second quarter of fiscal 2003, compared to $43.9 million~~ for ~~the~~Pearle ~~same period last year, an increase of 5~~U.5%S. ~~Operating~~franchise ~~expenses~~stores asis a ~~percent~~non-GAAP ~~of revenues decreased 0.3% in the second~~financial ~~quarter~~measure ofthat ~~fiscal~~is ~~2003~~provided ~~compared~~for tocomparative ~~the~~purposes ~~same~~only. ~~period~~The ofCompany ~~fiscal 2002. Things~~believes ~~Remembered~~that ~~accrued~~its ~~higher~~franchisees’ ~~management~~method ~~bonuses~~ of ~~$0.9 million.~~reporting ~~Store~~sales ~~rent~~is ~~and occupancy~~consistent ~~charges~~on ~~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~~basis. ~~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~~Net ~~income for the second quarter of fiscal 2003 was $9.9 million~~Revenues ~~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~~Consolidated ~~Six Months of Fiscal 2003 Compared to First Six Months of Fiscal 2002~~Operations

~~Consolidated~~ Total ~~Operations~~revenues were $312.8 million in the second quarter of fiscal 2004, compared with $307.7 million in the same period of fiscal 2003, an increase of 1.7%, primarily attributable to increases in revenues from managed vision care programs, partially offset by a 0.5% decrease in same store sales. Total revenues were $620.4 million in the first six months of fiscal 2004, compared with $595.9 million in the same period of fiscal 2003, an increase of 4.1%, primarily attributable to a 2.6% increase in same store sales and increases in revenues from managed vision care programs.

~~Total revenues were $595.9 million in the first six months of fiscal 2003,~~15 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.

GrossTable 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 Contents

15Cole Vision Segment

~~Table~~ For the second quarter of ~~Contents~~fiscal 2004, Cole Vision revenues were $232.9 million, compared with $228.9 million in the same period of fiscal 2003, an increase of 1.8%. The revenue increase was primarily due to increased revenues from managed vision care programs, increases at the Company’s Canadian operations and at Cole Licensed Brands, partially offset by revenue decreases at Pearle Vision U.S. Revenues from managed vision care programs were higher than last year primarily due to an increase in the number of capitated plans and increases in revenues from existing plans sold to employers, health plans and associations, increases in administrative revenues from capitated and fee for service programs and increased laser procedure volume. The increase at the Company’s Canadian operation was due to improved merchandise assortment compared to last year and to the impact in 2003 of SARS to the Canadian economy. The increase in Cole Licensed Brands revenues was attributable to store sales increases at Target Optical and BJ’s Optical, partially offset by a same store sales decrease at Sears Optical. Same store sales increases at both Target Optical and BJ’s Optical were driven by increases in the average transaction size and in the number of transactions. A continuing focus on selling premium products and additional features were the key factors in the average transaction size increase. The increase in the number of transactions was primarily due to more aggressive promotional offers. Same store sales decreased 4.0% at Sears Optical due to decreases in the average transaction size and in the number of transactions. Aggressive promotions which focus less on premium products and additional features resulted in a lower average transaction. Revenues decreased at Pearle Vision Company-owned stores primarily due to fewer stores and a 2.0% decrease in same store sales in the second quarter of fiscal 2004 due to a decrease in the number of transactions. The Company believes that the decrease in the number of transactions in Pearle Vision and Sears Optical during the quarter is due primarily to the increasingly competitive promotional nature of the optical retail industry. Pearle Vision operated 19 fewer Company-owned stores at the end of the second quarter of fiscal 2004 than it did at the end of the second quarter of fiscal 2003, due to the net sale of 10 Company stores to franchisees, the closure of 12 stores and the opening of 3 new stores. The Company is continuing to divest Company-owned stores in markets that are predominantly franchised in order to lower its store supervision costs, and provide growth opportunities for franchisees already operating in those markets.

~~segment).~~ For ~~The~~the ~~gross~~first ~~margin~~six ~~rate~~months atof fiscal 2004, Cole Vision revenues were $482.8 ~~Things~~million, ~~Remembered~~compared ~~decreased~~with by$462.4 million 1in the same period of fiscal 2003, an increase of 4.04%,. The revenue increase was primarily due to ~~reduced~~increased revenues from Cole Licensed Brands and from managed vision care programs, partially ~~gift~~offset ~~personalization~~by ~~and~~revenue ~~higher~~decreases ~~freight~~at ~~costs~~Pearle ~~associated~~Vision ~~with~~U.S. anThe increase in Cole Licensed ~~customer~~Brands ~~orders~~revenues ~~fulfilled~~was attributable to same store sales increases at all brands driven by ~~central~~increases ~~distribution~~in the average transaction size and an increase in the number of transactions. Revenues from managed vision care programs were higher than last year due to the reasons discussed above. Revenues decreased at Pearle Vision Company-owned stores primarily due to fewer stores and a 0.3% decrease in same store sales in the first six months of fiscal 2004. Same store sales decreased in the first six months of fiscal 2004 due to a decrease in the number of transactions.

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~~Segment ~~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~~For ~~loss~~the ~~was~~second quarter of fiscal 2004, Things Remembered revenues were $379.79 million compared with $78.8 million in the ~~first~~same ~~six~~period ~~months~~ of fiscal 2003, a ~~compared~~1.4% increase, due to a same store sales increase of 1.9% and a 43% increase in direct channel revenues, partially offset by a lower number of stores operating than ~~income~~last year. For the first six months of fiscal 2004, Things Remembered revenues were $18137.26 million compared with $133.5 million in the same period last ofyear, ~~fiscal 2002~~a 3.1% ~~The~~increase, ~~expenses~~due ~~associated~~to ~~with~~a ~~the~~same ~~retirement~~store ofsales ~~the~~increase ~~Company’s~~of ~~Chairman~~3.8% and a ~~Chief~~49% ~~Executive~~increase ~~Officer,~~in ~~the~~direct ~~decrease~~channel inrevenues, ~~the~~partially ~~gross~~offset ~~margin~~by ~~rate,~~a ~~the~~lower ~~costs~~number of ~~related~~stores tooperating. ~~the~~Direct ~~settlement~~channel ofrevenues ~~the~~include ~~class~~revenues ~~action~~from ~~lawsuits~~its e-commerce site, www.ThingsRemembered.com, revenues from Things Remembered catalogs, and ~~higher~~revenues ~~corporate~~generated through third party ~~expenses~~partner ~~due~~programs. toFor the ~~restatement~~second quarter and ~~reaudit~~first six months of fiscal 2004, improvements in the ~~fiscal~~average ~~2000~~transaction ~~and~~size ~~2001~~were partially offset by a lower ~~financial~~number ~~statements~~of ~~were~~transactions ~~the~~and ~~primary~~a ~~reasons~~reduction ~~for~~in the ~~decrease~~number inof stores operating. There ~~results~~were 722 Things Remembered store locations operating as of July 31, 2004, compared to 754 at August 2, 2003. The reduction was primarily due to the Company’s decision to allow the leases at under-performing stores to expire.

~~Interest~~Gross ~~and other (income) expense, net, was $9.8 million for the first~~Margin ~~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~~Consolidated ~~Company recorded a tax benefit based on its estimated annual effective~~Operations ~~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~~ Gross ~~Vision~~margin ~~Segment~~was $196.8 million in the second quarter of fiscal 2004, compared with $192.1 million in the second quarter of fiscal 2003, an increase of 2.4%. Gross margin was $390.6 million in the first six months of fiscal 2004, compared with $373.8 million in the same period last year, an increase of 4.5%. Both periods’ increases are attributable to an increase in net revenues and an increase in the gross margin rate. The gross margin rate was 62.9% in the second quarter of fiscal 2004 compared to 62.5% in the

~~Cole Vision revenues were $462.4 million in the first six months of fiscal~~16 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

16 Table of Contents

~~Table~~second quarter of fiscal ~~Contents~~2003 and the gross margin rate was 63.0% in the first six months of fiscal 2004, compared to 62.7% for the same period last year.

26Cole ~~fewer~~Vision ~~company owned stores than the same time~~Segment ~~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~~For ~~margin was $279.3 million in~~ the ~~first~~second ~~six~~quarter ~~months~~ of fiscal ~~2003~~2004, gross margin was $139.7 million compared to $~~282~~136.50 million in the ~~same~~second ~~period~~quarter ~~last~~of ~~year~~fiscal 2003, aan ~~decrease~~increase of gross 1margin dollars of 2.18% compared to the previous year, due to increased revenues ~~offset~~and byan aincrease ~~decrease~~ in the gross margin rate. Gross margin, as a ~~percentage~~ percent of net revenues, ~~decreased~~was by60.0% 2and 59.~~2 percentage~~4% ~~points~~in atthe ~~Cole~~second quarter of fiscal 2004 and ~~Vision~~fiscal 2003, respectively. ~~Cole~~Increases ~~Managed~~in ~~Vision~~the gross margin rate ~~decreased~~occurred byat ~~9.8 percentage~~Cole ~~points~~Licensed ~~due~~Brands, toin aCanada ~~shift~~and inat ~~revenue~~Cole ~~mix~~Managed ~~toward~~Vision, partially offset by a lower gross margin ~~programs~~rate ~~and from~~at ~~lower~~Pearle ~~underwriting~~Vision ~~gains~~U.S. Cole Licensed Brands gross margin rate ~~decreased by~~increased ~~0.9 percentage points~~ and was impacted by a higher contact lens gross margin rate and improved inventory shrink and obsolescence results. The increase in contact ~~the~~lens ~~second~~gross ~~quarter~~margin ofrate ~~fiscal~~was ~~2003,~~due ~~higher~~primarily ~~costs~~to ~~associated~~an ~~with~~increase ain ~~shift~~the ~~toward~~average ~~premium~~transaction ~~product,~~size. ~~lower~~The ~~contact~~increase ~~lens~~in the gross margin ~~and~~rate anin ~~increase~~Canada inwas due ~~paid-time-off~~primarily ~~expense~~to atcosts ~~four~~incurred ~~labs~~in ~~due~~the second quarter of fiscal 2003 resulting from the Company’s decision to close its manufacturing and distribution facility in Toronto, Canada and a change in the ~~PTO~~Canadian ~~policy~~product assortment. As a result ~~implemented~~of this decision, the Company recorded a $0.3 million charge to gross margin for obsolescence in the ~~third~~second quarter of fiscal ~~2002~~2003. ~~Pearle~~The ~~Vision~~ gross margin, asrate aat ~~percent~~Cole ofManaged ~~net~~Vision ~~revenues,~~increased ~~decreased~~primarily bydue ~~2.0 percentage~~to ~~points,~~a ~~due~~projected tolower ~~higher~~benefit ~~cost~~utilization ~~premium~~by ~~product~~plan ~~driven~~members bywithin ~~promotions~~funded programs, ~~higher~~a ~~manufacturing~~reduction ~~costs~~in the estimated reserve for underwriting gains and ~~an increase~~from increases in ~~product~~administrative revenues ~~sold~~from tocapitated ~~Pearle~~and ~~franchisees~~fee-for-service programs. ~~Partially~~The ~~offsetting~~underwriting ~~these~~gain ~~factors~~reserve ~~were~~percentage was reduced based on historical experience. The Pearle Vision gross margin rate decreased slightly compared to the ~~increase~~same inperiod ~~average~~last year, ~~spectacle~~due ~~selling~~to ~~price.~~an ~~Product~~increased mix of sales of products to franchisees compared to revenues from Company-owned stores. Sales to franchisees carry a lower gross margin rate than revenues from Company-owned stores, but offer benefits ~~for~~to the Company, including producing a more uniform merchandise assortment and a consistent brand look across all stores. ~~Gross~~The gross margin rate was also ~~negatively~~lower due ~~impacted~~to by increased ~~workers~~ ~~compensation~~promotional ~~expense~~activity in the ~~lab~~second ~~facilities.~~quarter ~~The Company closed its manufacturing and distribution facility in Toronto, Canada. The operations~~ of ~~this~~ ~~facility~~fiscal ~~has been absorbed by the Company’s facility in Knoxville, TN~~2004. As ~~part~~Partially ofoffsetting the ~~integration~~gross ofmargin ~~the~~rate ~~Canadian~~decline ~~operations~~was ~~into~~lower ~~the~~manufacturing costs ~~Knoxville~~compared ~~lab,~~to the ~~Company~~ ~~changed~~prior ~~the Canadian product assortment~~year. AsLower amanufacturing ~~result,~~costs ~~the~~were ~~Company~~achieved ~~recorded~~primarily athrough ~~$0.3 million~~in-store ~~charge~~lab tocost ~~gross~~reductions ~~margin~~and ~~for~~central ~~obsolescence~~lab ~~of inventory~~efficiencies.

~~Operating~~For ~~expenses were $266.9 million in~~ the first six months of fiscal ~~2003~~ 2004, ~~compared~~gross tomargin was $~~266~~291.35 million ~~for the same period last year, an increase of~~ ~~0.2%.~~compared ~~Operating~~to ~~expenses as a percent of net revenues decreased at Cole Vision by 1~~$278.3%0 million in the first six months of fiscal 2003, ~~compared~~an toincrease of ~~the~~gross ~~same~~margin ~~period~~dollars of ~~fiscal~~ ~~2002~~4.9% ~~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~~the ~~year.~~previous ~~Pearle Vision recorded a~~year, ~~$0.6 million~~due ~~charge~~to ~~for~~increased ~~assets~~revenues ~~disposed in a prior period. The Company’s Canadian operations closed its manufacturing~~ and ~~distribution~~an ~~facility~~increase ~~located~~ in ~~Toronto, Canada. One time costs associated with~~ the ~~closure~~gross ofmargin ~~the facility totaled $0~~rate.~~4 million.~~ ~~The Company and its optical subsidiaries~~Gross ~~have~~margin, ~~been~~as ~~sued~~a ~~by the~~percent ~~State~~ of ~~California~~net ~~(see~~revenues, ~~Note~~was ~~8 to the Notes to Condensed Consolidated Financial Statements)~~60.4% ~~Legal~~and ~~costs associated with the defense of this matter totaled $1~~60.~~3 million~~1% in the first six months of fiscal ~~2003,~~2004 ~~compared~~and ~~with~~fiscal ~~$0.9 million~~2003, ~~in the same period last year~~respectively. ~~Fringe~~The ~~benefits~~Company ~~costs increased $1.0~~recorded ~~million~~increases in the ~~first~~gross ~~six~~margin ~~months~~rate ofat ~~fiscal~~both ~~2003,~~Cole ~~compared~~Managed toVision ~~the~~and ~~same period last year. Partially offsetting expense increases were savings~~ from ~~a reduction~~its ofCanadian ~~$1.9 million~~operations indue ~~claims~~to ~~processing~~the ~~costs,~~reasons ~~reduced~~discussed ~~bonus expense, reduced marketing costs and work force reductions~~above. ~~Marketing~~The ~~costs~~gross ~~were~~margin ~~$2.3 million~~rate ~~lower~~for inCole ~~the~~Licensed ~~first~~Brands ~~six~~was ~~months of fiscal 2003, compared to~~ the same ~~period~~as last year. ~~The~~for the first six months ~~of fiscal 2002 included charges of $1~~.~~0 million for~~ ~~the~~The ~~closure of 12 Target Optical stores.~~ Pearle Vision ~~recorded~~gross amargin ~~gain~~rate ofwas ~~$1.0 million~~slightly onlower ~~the~~than ~~sale~~last ofyear ~~five~~due ~~Company –owned stores~~ to ~~a franchisee during the~~ ~~first~~promotional ~~six months of fiscal 2003~~activity.

~~Operating~~Things ~~income~~Remembered ~~at Cole Vision decreased to $12.4 million in the first~~Segment ~~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~~ For ~~Remembered~~the ~~Segment~~second quarter of fiscal 2004, gross margin was $57.1 million compared to $56.1 million in the second quarter of fiscal 2003, an increase of 1.6%. For the first six months of fiscal 2004, gross margin was $99.1 million compared to $95.8 million in the first six months of fiscal 2003, an increase of 3.4%. The increase in the second quarter and the first six months was primarily driven by the same store sales performance and an increase in the gross margin rate. Gross margin, as a percent of net revenues, was 71.5% in the second quarter of fiscal 2004 compared to 71.3% in the second quarter of fiscal 2003 and gross margin rate was 72.0% in the first six months of fiscal 2004 compared to 71.8% in the first six months of fiscal 2003. The increase was primarily due to higher revenues from gift personalization.

~~Things~~Operating ~~Remembered revenues were $133.5 million in the first six months of~~Expenses ~~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~~Consolidated ~~margin was $95.9 million in the first six months of fiscal 2003,~~Operations ~~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.~~

17 For the second quarter of fiscal 2004, operating expenses were $183.6 million compared to $193.3 million in the second quarter of fiscal 2003. Of the decrease in the second quarter of fiscal 2004 compared to the same period last year, $3.6 million is attributable to the operating segments and $6.1 million to unallocated corporate expenses. For the first six months of fiscal 2004, operating expenses were $374.5 million compared with $377.5 million in the first six months of fiscal 2003. Of the decrease in the first six months of fiscal 2004 compared to the same period last year, $6.6 million is attributable to unallocated corporate expenses partially offset by an increase in operating expenses at the operating segments of $3.6 million.

~~Table~~ As ofdiscussed ~~Contents~~in detail below, certain unusual items affected the Company’s operating expenses during these periods. The Company defines unusual items as transactions that are non-comparable or infrequent in nature, including significant one time

~~Operating expenses were $88.5 million in the first six months of fiscal~~17 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.

OperatingTable 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. Contents

~~Reconciliation~~transactions unrelated to core operations and special charges and impairments. Management believes that operating expenses excluding unusual items is a useful measure for understanding trends in core operations and excludes some of ~~Same~~these items in the management bonus plans. Operating expenses excluding unusual items is a non-~~Store~~GAAP ~~Sales~~financial ~~Growth~~measure and should not be used as a substitute for the directly comparable GAAP financial measure. In order to facilitate an understanding of such unusual items and their effect on the results of the operations, the following table is provided as a reconciliation of reported operating expense to operating expense excluding certain unusual items.

~~Same-store~~(Dollars ~~sales~~in ~~growth is a non-GAAP financial measure, which includes~~millions) ~~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
					Second Quarter				First Six Months
		2004				2003				ChangeFav/(Unfav)		2004			2003			ChangeFav/(Unfav)
					(In thousands)
Operating expenses, as reported		$	183.6			$	193.3			$	9.7	$	374.5		$	377.5		$	3.0
Current year same-store sales					$	270,147			$	522,058
Unusual items:
Prior year same-store sales						252,623				505,972
Evaluation of strategic alternatives			4.9				—						8.3			—
Percent change						6.9	%			3.2	%
Legal & professional fees for restatement & SEC investigation			0.8				0.9						1.1			2.6
Current year same-store sales					$	270,147			$	522,058
Legal fees for California litigation			0.4				1.1						1.3			1.9
Adjustment for:
Target Optical store closure costs			(0.6	)			—						1.5			—
	Sales at new and closed stores					4,017				9,107
CEO Retirement			—				9.4						—			9.4
	Deferred revenue					(890	)			(2,849	)
Shareholder settlement			—				—						—			2.7
	Order vs. customer receipt					(3,457	)			(5,483	)
Audit fees for restatement			—				—						—			1.7
	Returns, remakes and refunds					(133	)			(382	)
Total unusual items			5.5				11.4						12.2			18.3
	Other					232				299
Operating expenses, excluding unusual items		$	178.1			$	181.9			$	3.8	$	362.3		$	359.2		$	(3.1	)
		Store sales				269,916				522,750
Operating expenses, excluding unusual items, as a percent of total net revenues			57.0	%			59.1	%					58.4	%		60.3	%
Nonstore revenues						44,860				88,849
Operating expenses, as reported, as a percent of total net revenues			58.7	%			62.8	%					60.4	%		63.3	%
Intercompany eliminations						(7,117	)			(15,691	)
GAAP Basis Net Revenue					$	307,659			$	595,908

~~Liquidity~~Unusual ~~and Capital Resources~~Items

~~Cole~~The ~~National~~Company ~~Corporation~~announced on October 8, 2003 that its Board of Directors had formed a Special Committee of independent directors on July 28, 2003 to evaluate the Company’s ~~primary~~strategic ~~source~~alternatives, including a possible merger or sale of ~~liquidity~~the isCompany, ~~funds~~a ~~provided~~corporate restructuring or other alternatives. The ~~from~~Company ~~operations~~and Luxottica entered into a definitive merger agreement on January 23, 2004 with the unanimous approval of ~~its~~the ~~operating~~Boards ~~subsidiaries.~~of OnDirectors of both companies, which was subsequently amended on June 272, ~~2003~~2004 and July 14, ~~its~~2004. ~~wholly owned~~On ~~subsidiary~~July 22, 2004, ~~Cole~~the ~~National~~Company ~~Group,~~received ~~Inc~~votes from a majority of the outstanding shares to approve the merger agreement with Luxottica. (See Note 9 of the Notes to Condensed Consolidated Financial Statements). The Company incurred incremental legal, advisory, and ~~its~~other ~~operating~~professional ~~subsidiaries~~expenses of $4.9 million and $8.3 ~~amended~~million in the second quarter and first six months of fiscal 2004, respectively, ~~restated~~related to the evaluation of strategic alternatives, compliance with the FTC’s request for additional information and ~~extended~~documentary material with respect to the Luxottica merger, and the negotiation of the definitive merger agreement and its amendments.

18 The Company incurred charges of $0.8 million and $1.1 million in the second quarter and first six months of fiscal 2004, respectively, for legal and professional fees related to the SEC investigation regarding the reaudit and restatement of its financial statements, compared to $0.9 million and $2.6 million for the second quarter and first six months of fiscal 2003, respectively.

~~Table~~ The Company and certain of ~~Contents~~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 $0.4 million and $1.3 million in the second quarter and first six months of fiscal 2004, respectively, and $1.1 million and $1.9 million in the second quarter and first six months of fiscal 2003, respectively.

~~working~~ As ~~capital~~a ~~line~~result of ~~credit.~~the ~~The~~Company’s ~~maturity date~~modified ofagreement with Target Corporation, the ~~credit~~Company ~~facility~~closed ~~was~~25 ~~extended~~underperforming toTarget ~~February 1,~~Optical ~~2007~~stores ~~from~~on ~~May~~April 3110, ~~2006~~2004. ~~The~~Under ~~size~~the terms of the ~~facility~~modified ~~was~~agreement, ~~adjusted~~the toCompany ~~$60.0 million~~was ~~from~~required ~~$75.0 million.~~to Inpay ~~addition,~~Target ~~certain~~Corporation ~~financial~~a ~~covenants~~fee ~~were~~of ~~amended.~~up Asto of$30,000 ~~the~~for ~~end~~each ofclosed ~~the~~store. ~~second~~During the second quarter of fiscal ~~2003~~2004, ~~the~~Target ~~total~~Corporation ~~commitment~~informed ~~was~~the ~~$60.0 million~~Company ~~and~~that the ~~availability~~actual ~~under~~fee ~~the~~would ~~credit~~be ~~facility~~significantly ~~totaled $45~~lower.~~0 million~~ ~~after~~As ~~reduction for~~a ~~commitments~~result, ~~outstanding~~in ofthe ~~$15.0 million~~second ~~under~~quarter ~~letters~~ of ~~credit. There~~ ~~were~~fiscal no2004, ~~working capital borrowings outstanding at any time during~~ the ~~first~~Company ~~six months~~reversed ~~of fiscal 2003 or fiscal 2002~~$0.6 million

~~The credit facility requires the principal operating subsidiaries of Cole~~18 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.

TheTable 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. Contents

Noof ~~significant~~charges, ~~principal~~which ~~payment~~had ~~obligations~~been accrued ~~are~~in ~~due under~~ the ~~Company’s outstanding~~first ~~indebtedness~~quarter ~~until~~of ~~April~~fiscal 2004~~, when a $5~~.~~0 million~~ ~~principal payment~~Costs isrelating ~~due~~to ~~under~~the aclosure ~~5.0%~~of these ~~promissory~~stores ~~note~~were ~~and until 2007, when the~~ $~~125~~1.0 5 million ofin ~~8-5/8%~~the ~~senior~~first ~~subordinated~~six ~~debt~~months ~~is due. The ability~~ of ~~Cole National~~fiscal ~~Corporation and its subsidiaries to satisfy their obligations will be~~2004. ~~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~~In ~~for~~ the ~~first~~second ~~six~~quarter ~~months~~ of fiscal 2003, ~~used $0.8 million of cash compared with cash provided by operations of $20.8 million in~~ the ~~same period~~Company’s offormer ~~fiscal~~Chairman ~~2002. The change in operating cash was primarily attributable~~and toChief ~~lower~~Executive ~~operating~~Officer ~~results~~retired asand ~~described above in~~ the ~~Results~~Company offulfilled ~~Operations section~~its ~~of this report and from changes in operating assets and liabilities~~obligations, ~~which~~including ~~used~~certain ~~$4.2 million~~contingent ~~in the first six months of fiscal 2003~~obligations, ~~compared~~under ~~with $0.3 million~~his inemployment ~~the~~agreement ~~first six months of fiscal 2002. Changes in accounts~~and ~~receivable~~for retirement and ~~other~~life ~~assets~~insurance ~~resulted in a use of funds of $6~~benefits.~~5 million~~ inThese ~~the first~~obligations ~~six~~required ~~months of fiscal 2003, compared to~~ a ~~use of funds of $2.9 million in~~ ~~the~~one-time ~~same~~cash ~~period~~payment ~~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~~ $911.9 million ~~in the first six months, compared~~ with ~~$6.4 million~~a incharge ~~the prior year. The increase was primarily due~~ to ~~earlier~~operating ~~new~~expense ~~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~~second inquarter ~~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~~ $19.4 million ~~compared to $0~~.3 ~~million in the same period last year. The change was primarily due to lower tax~~ ~~payments.~~

~~Net~~Settlement ~~cash~~costs ~~from~~related ~~investing activities resulted in a use of funds of $21.4 million for the first six months of fiscal 2003 compared~~ to a ~~use~~class ofaction ~~funds totaling~~shareholder ~~$16.3 million in the same period of fiscal 2002. Capital expenditures~~lawsuit, ~~which~~ ~~accounted for most of the cash used for investing, were $15.5 million and~~that ~~$13.9 million~~alleged inclaims ~~the first six months~~ of ~~fiscal~~various ~~2003~~violations ~~and 2002, respectively. The majority~~ of ~~capital~~federal ~~expenditures~~securities ~~for~~laws ~~both~~related ~~periods~~to ~~were for store fixtures,~~the ~~equipment~~Company’s ~~and~~reported ~~leasehold~~revenues ~~improvements for new stores~~ and ~~remodeling~~earnings ~~of existing stores. Expenditures for systems development costs~~ totaled $~~4.3 million and $~~2.37 million ~~for~~in the first six months of fiscal 2003 ~~and 2002, respectively~~. ~~The~~ ~~Company~~Audit ~~used~~fees ~~$3.8 million~~attributable into the ~~first~~restatement ~~six~~and ~~months~~ reaudit of ~~fiscal 2003 for a contingent payment in connection with~~ the ~~prior acquisition of MetLife~~Company’s ~~managed~~ ~~vision~~financial ~~business.~~statements ~~The~~were ~~Company received a loan repayment from Pearle Europe totaling~~ $21.57 million in the first six months of fiscal 2003.

~~Net~~Unallocated ~~cash~~Corporate ~~used for financing activities totaled $2.7 million in the first~~Expenses ~~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.

19 Unallocated corporate expenses were $8.2 million and $16.9 million in the second quarter and first six months of fiscal 2004, respectively, compared to $14.3 million and $23.5 million for the second quarter and first six months of fiscal 2003, respectively. Included in unallocated corporate expense are all of the unusual items listed above except for the California litigation charges and the Target Optical store closure costs, which are recorded in the Cole Vision segment. The unusual items included in unallocated corporate expense totaled $5.7 million and $10.3 million in the second quarter of fiscal 2004 and fiscal 2003, respectively and $9.4 million and $16.4 million in the first six months of fiscal 2004 and fiscal 2003, respectively.

~~Table~~ For the second quarter of ~~Contents~~fiscal 2004, excluding the unusual items above, unallocated corporate expenses were $2.5 million compared to $4.0 million for the same period last year. The Company’s legal expenses were $0.7 million lower and professional costs were $0.6 million lower in the second quarter of fiscal 2004, due primarily to costs incurred in the second quarter of fiscal 2003 for management changes and other management initiatives, which were not repeated in the second quarter of fiscal 2004. The Company recorded lower expenses totaling $0.6 million related to restricted stock amortization and deferred compensation in the second quarter of fiscal 2004, than the same period last year. The Company recorded $0.4 million lower compensation expense for variable stock options having a feature permitting the use of vested options in payment of the exercise price. The lower amount relates to the exercise of variable stock options at a price lower than the amount recorded in the first quarter of fiscal 2004. Partially offsetting these expense reductions were incremental bonus costs of $0.5 million and higher audit costs of $0.3 million in the second quarter of fiscal 2004 compared to the same period last year.

~~The~~For ~~Company~~the ~~believes~~first ~~that~~six ~~funds~~months ~~provided~~of ~~from~~fiscal ~~operations~~2004, ~~including~~excluding ~~cash on~~the ~~hand~~unusual items above, ~~along~~unallocated ~~with~~corporate ~~funds~~expenses ~~available~~were ~~under~~$7.5 million compared to $7.1 million for the ~~credit~~same ~~facility~~period ~~will~~last ~~provide~~year. The Company incurred incremental ~~adequate~~management ~~sources~~bonus expense of ~~liquidity~~$1.0 million for the first six months of fiscal 2004, compared to ~~allow~~the ~~its~~same ~~operating~~period ~~subsidiaries~~last year. The Company incurred incremental audit and professional fees of $0.7 million compared to ~~continue~~the same period last year due to ~~expand~~higher audit costs and higher expenses incurred to comply with Section 404 of the ~~number~~Sarbanes-Oxley Act of ~~stores~~2002. ~~and~~Unallocated tocorporate ~~fund~~expenses included ~~capital~~compensation ~~expenditures~~expense of $0.5 million for variable stock options in the first six months of fiscal 2004 as discussed above. Partially offsetting these expense increases were lower professional fees of $1.1 million associated with management changes and ~~systems~~management initiatives taken in the ~~development~~first ~~costs~~six months of fiscal 2003. The Company also recorded lower restricted stock amortization of $0.8 million in the first six months of fiscal 2004, compared to the same period last year.

~~Off~~Cole ~~Balance~~Vision ~~Sheet Arrangements and Contractual Commitments~~Segment

~~The~~Operating ~~Company~~expenses ~~leases~~were a$130.1 million ~~substantial~~and ~~portion~~$269.2 million ofin ~~its~~the ~~equipment~~second quarter and ~~facilities including~~first ~~laboratories~~six months of fiscal 2004, ~~office~~respectively, compared to $132.8 million and ~~warehouse~~$265.5 million ~~space,~~for the second quarter and ~~retail~~first ~~locations~~six months of fiscal 2003, respectively. InOperating expense decreased by 2.0% and totaled ~~addition~~55.9% of net revenues in the second quarter of fiscal 2004, ~~Cole~~compared ~~Licensed~~to ~~Brands~~58.0% in ~~primarily~~the ~~operates~~same ~~departments~~period last year. Operating expenses in ~~various~~the ~~host~~first six months of ~~stores~~fiscal 2004 increased by 1.4% and ~~pays~~totaled ~~occupancy~~55.8% ~~costs~~of ~~solely~~net asrevenues, acompared ~~percentage~~with 57.4% offor ~~sales~~the same period last year. AIncluded ~~more~~in operating expenses are the ~~complete~~unusual ~~discussion~~items of California litigation charges described above which totaled $0.4 million and $1.3 million in the ~~Company’s~~second ~~lease~~quarter and ~~license~~first ~~commitments~~six ismonths ~~included~~of fiscal 2004, respectively, and $1.1 million and $1.9 million in ~~Note~~the second quarter and first six months of fiscal 2003, respectively, and the $0.6 million reversal of charges in the ~~Notes~~second toquarter ~~Condensed~~and ~~Consolidated~~$1.5 million ~~Financial~~charge ~~Statements~~for the first six months of fiscal 2004 for the closure of 25 Target Optical locations.

~~The Company guarantees future minimum lease payments for certain store~~19 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.

MaterialTable Changesof in Contingencies Contents

AsFor ~~described in~~ the ~~Company’s~~second ~~2002~~quarter ~~Annual Report on Form 10-K, agreements between HAL, the Company and members~~ of ~~Pearle~~fiscal ~~Europe~~2004 ~~management require~~compared ~~HAL~~to ~~and~~ the ~~Company~~same toperiod ~~periodically offer to purchase Pearle Europe~~last ~~shares~~year, ~~held~~store byadvertising ~~the~~and ~~members~~store ofpayroll ~~Pearle~~costs ~~Europe~~were ~~management~~$1.7 million ~~The~~and ~~obligations to fund~~$0.9 ~~the~~million ~~purchase~~lower ofin ~~any shares as to which~~ the ~~offer~~second isquarter ~~accepted~~of ~~are~~fiscal ~~pro~~2004, ~~rata~~compared to ~~HAL~~ ~~and to~~ the ~~Company~~same ~~based on their respective ownership interests on the~~period ~~date~~last ~~of the offer~~year. ~~Pursuant~~Management ~~to these~~bonus ~~agreements,~~expense onwas ~~September~~$1.2 3,million ~~2003,~~higher ~~HAL~~in ~~and~~ the ~~Company offered to purchase~~second aquarter ~~total~~ of ~~12,014~~fiscal ~~Pearle Europe shares from members of Pearle Europe management for a price of 5~~2004,~~412~~ ~~Euro~~compared ~~per~~to ~~share. If all of~~ the ~~Pearle~~same ~~Europe managers~~period ~~were~~last toyear. ~~sell all of their shares at that price, the~~Claims ~~resulting~~processing ~~obligation~~costs towere ~~the Company would have been approximately~~ $~~17 million~~0.3 million ~~Under~~higher ~~certain~~in ~~circumstances,~~ the ~~members of~~second ~~Pearle~~quarter ~~Europe management could request that the price~~ of ~~the shares~~fiscal ~~be evaluated by an independent expert. On September 12~~2004, ~~2003,~~ ~~following~~compared ~~the responses from Pearle Europe management~~ to the ~~offer price,~~same ~~HAL~~period ~~proposed~~last ~~to the Company that they increase the offer. In response to the Company's request~~year, ~~HAL~~primarily ~~agreed~~due to ~~assume~~increased ~~the Company's~~production ~~purchase obligation with respect to this offer~~ and ~~purchase~~distribution ~~100%~~expense ~~of the~~for ~~shares~~explanation ~~offered by Pearle Europe management. As a result~~ of ~~this assumption~~benefit statements, onsystem ~~a fully diluted basis the Company's 21% ownership interest in Pearle Europe~~support ~~will~~costs ~~remain unchanged,~~ and ~~HAL's~~systems ~~ownership interest in Pearle Europe may increase from 68% to up to approximately 79%~~amortization.

~~Significant~~ For ~~Accounting~~the ~~Policies~~first ~~and~~six ~~Critical~~months ~~Estimates~~of fiscal 2004, management bonus expense was $1.9 million higher compared to the same period last year. Claims processing costs were $1.2 million higher in the first six months of fiscal 2004, compared to the same period last year, primarily due to the reasons discussed above. In the first six months of fiscal 2004 compared to the same period last year, store payroll was $1.2 million higher to support the increase in net revenues. The first six months of fiscal 2003 included a $1.0 gain on the sale of five Company-owned Pearle Vision stores to a franchisee. There were no gains recorded in the first six months of fiscal 2004. Partially offsetting expense increases were lower store advertising costs. The Company recorded $2.3 million lower advertising costs in the first six months of fiscal 2004, compared to the same period last year primarily due to the timing of advertising spending.

~~The~~Things ~~Company’s~~Remembered ~~significant accounting policies are discussed in the Notes~~Segment ~~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~~ Operating ~~Looking~~expenses ~~Statements~~were $45.3 million and $88.4 million in the second quarter and first six months of fiscal 2004, respectively, compared to $46.2 million and $88.5 million for the second quarter and first six months of fiscal 2003, respectively. Compared to the same period the previous year, operating expenses in the second quarter of fiscal 2004 decreased by 2.0% and totaled 56.7% of net revenues, compared to 58.7% in the same period last year. Compared to the same period the previous year, operating expenses in the first six months of fiscal 2004 decreased by 0.1% and totaled 64.2% of net revenues.

~~The~~For ~~same-store~~the ~~sales~~second inquarter of fiscal 2004, management bonus expense was $0.7 million lower compared to the ~~Company’s~~same ~~vision~~period ~~segment~~last ~~increased~~year. Store payroll was $0.6 million lower in the second quarter of fiscal ~~2003~~2004, compared to the same period last year, ~~and~~due ~~the Company~~to ~~continues~~fewer tostores ~~see~~operating ~~that~~and ~~trend~~lower inworkers ~~August,~~compensation ~~with~~costs. Field ~~same-store~~management ~~sales~~wages ~~for~~and ~~the vision~~bonuses ~~segment~~were ~~increasing~~$0.4 million lower in the ~~mid~~second quarter ~~single~~than ~~digits.~~the ~~Things~~same ~~Remembered~~period ~~August’s same-store~~last ~~sales~~year ~~continued~~due ~~their~~to ~~trend~~open ~~from~~staff ~~the~~positions ~~first~~in ~~six~~the second ~~months~~quarter of fiscal ~~2003~~ 2004. ~~There~~Partially isoffsetting noexpense ~~assurance~~reductions ~~that~~were $0.5 million ~~these~~increased ~~same-store~~costs ~~sales~~of ~~trends~~advertising ~~will~~and ~~continue~~$0.3 million direct channel ~~for~~expenses ~~the~~in ~~remainder~~support of ~~the~~higher ~~third~~net ~~quarter~~revenues.

~~The~~For ~~Company~~the ~~expects~~first ~~that~~six ~~certain~~months ~~cost~~ of ~~revenues~~fiscal ~~and~~2004, Things Remembered recorded lower store payroll costs compared to the same period last year due to fewer stores operating ~~expense~~and lower workers compensation and fringe benefits costs. Store ~~trends~~payroll ~~experienced~~costs, as a percent of net revenues, were lower in the first ~~half~~six months of fiscal ~~2003~~2004, ~~such~~compared asto ~~higher~~the ~~managed care~~same ~~claims~~period ~~expense~~last year, ~~shrink~~due ~~expense~~to improvements in productivity. Home office expenses, ~~product~~including ~~cost~~recruiting, ~~workers compensation~~bonus and ~~occupancy~~ ~~costs~~legal fees, ~~are~~were ~~likely~~$0.4 million tolower ~~continue~~than ~~through~~ the ~~second~~same ~~half~~period ~~of fiscal~~last ~~2003~~year. ~~The~~Partially ~~Company~~offsetting ~~also~~these ~~expects~~lower expenses itwere ~~will~~increased ~~continue~~costs toof ~~incur~~store ~~legal~~advertising and direct channel, which ~~expenses~~were as$1.2 million ahigher ~~result~~than oflast ~~the~~year ~~previously~~in ~~disclosed~~support ~~SEC~~of ~~investigation and~~higher ~~California~~net ~~lawsuit~~revenues.

20Operating Income (Loss)

~~Table~~Consolidated ~~of Contents~~Operations

~~The~~Operating ~~Company’s~~income ~~expectations~~was $13.2 million and ~~beliefs~~$16.1 million ~~concerning the future contained~~ in ~~this~~ ~~document are forward looking statements within~~ the ~~meaning~~second ~~of the Private~~quarter ~~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~~first ~~condition~~six ~~such~~months ~~as risks associated with potential adverse consequences~~ of ~~the~~fiscal ~~restatement of the Company’s financial statements~~2004, ~~including those resulting from litigation or government investigations~~respectively, ~~and~~compared ~~including the court approval of the proposed settlement of a class action lawsuit related~~ to ~~the~~operating ~~restatement; restrictions~~losses ~~or curtailment~~ of ~~the~~$1.2 million ~~Company’s credit facility~~ and ~~other~~$3.7 million ~~credit situations, costs and other effects associated with the California litigation, the timing and achievement of improvements~~ in the ~~operations~~second ~~of the optical business, the results of Things Remembered, which is highly dependent on the fourth~~ quarter ~~holiday~~ ~~season, the nature~~ and ~~extent~~first ofsix ~~disruptions~~months of ~~the economy from~~ ~~terrorist~~fiscal ~~activities or major health concerns and from governmental and consumer responses to such situations~~2003, ~~the~~respectively. ~~actual~~The ~~utilization~~improvement ofwas ~~Cole~~due ~~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~~lower ~~and price merchandise attractive to customers, success of systems~~unallocated ~~development~~corporate ~~and~~expenses ~~integration, competition in the optical industry, integration of acquired businesses, economic~~ and ~~weather~~higher ~~factors affecting consumer spending,~~ operating ~~factors~~income ~~affecting~~at ~~customer~~Cole ~~satisfaction,~~Vision ~~including manufacturing quality of optical~~ and ~~engraved goods, the Company’s~~Things ~~relationships with host stores and franchisees~~Remembered, ~~the~~compared ~~mix~~to ~~of goods sold, pricing and other competitive factors and~~ the ~~seasonality~~same ofperiod ~~the~~last ~~Company’s business~~year.

~~Item 3. Quantitative~~Cole ~~and~~Vision ~~Qualitative Disclosures About Market Risk~~Segment

~~The~~Operating ~~Company’s~~income ~~major~~at ~~market~~Cole ~~risk~~Vision ~~exposure~~was is$9.6 million toand ~~changes~~$22.3 million in ~~foreign currency~~the ~~exchange~~second ~~rates~~quarter inand ~~Canada~~first six months of fiscal 2004, respectively, compared to $3.2 million and $12.5 million in ~~Euros,~~the ~~which~~second ~~could~~quarter ~~impact~~and ~~its~~first ~~results~~six months of ~~operations~~fiscal ~~and~~2003, ~~financial condition~~respectively. ~~Foreign~~The ~~exchange~~increase ~~risk~~in ~~arises~~operating ~~from~~income ~~the Company’s~~at ~~exposure~~Cole Vision compared to ~~fluctuations~~the insame ~~foreign~~period ~~currency~~last ~~exchange~~year ~~rates~~was ~~because~~due to higher net revenues at Cole ~~the~~Licensed ~~Company’s~~Brands ~~reporting~~and ~~currency~~revenue isincreases ~~the~~from ~~United~~managed ~~States~~vision ~~dollar.~~care ~~Management~~programs ~~seeks~~as well toas ~~minimize~~improvements in the ~~exposure~~gross tomargin ~~foreign~~rate ~~currency~~and ~~fluctuations~~lower ~~through~~operating ~~natural~~expenses as a ~~internal~~percent ~~offsets~~of net revenues. These improvements were partially offset by higher management bonus, costs related to ~~the~~store ~~fullest~~closure ~~extent~~at ~~possible~~Target Optical, and higher claims processing costs.

~~In addition, the Company is exposed to changes in the fair value of its~~20 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.

ATable 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. Contents

~~The~~Things ~~Company~~Remembered ~~does not enter into financial instruments for trading~~Segment ~~purposes.~~

~~Item~~ Operating income at Things Remembered was $11.8 4million and $10. ~~Controls~~7 million in the second quarter and ~~Procedures~~first six months of fiscal 2004, respectively, compared to $9.9 million and $7.3 million in the second quarter and first six months of fiscal 2003, respectively. The improvement in operating results at Things Remembered was due to higher net revenues, improvements in the gross margin rate and lower operating costs as a percent of net revenues.

~~(a) Attached~~Interest ~~as Exhibits 31.1~~ and ~~31.2~~Other ~~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”~~Income). ~~This portion of our Quarterly Report~~Expense ~~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~~Interest ~~Company~~and ~~carried~~other ~~out~~(income) expense, ~~an evaluation~~net, ~~under~~was ~~the~~$5.8 million ~~supervision~~ and ~~with~~$12.1 million in the ~~participation~~ ofsecond ~~its~~quarter ~~Chief~~and ~~Executive~~first ~~Officer~~six ~~and~~months ~~Chief~~of ~~Financial~~fiscal ~~Officer~~2004, ~~pursuant~~respectively, compared to ~~Rule~~$4.4 ~~13a-15~~million ~~promulgated~~and ~~under~~$9.8 million in the ~~Securities~~second ~~Exchange~~quarter and ~~Act~~first six months of ~~1934~~fiscal 2003, respectively. The Company recorded (interest expense of $6.4 million and $6.3 million in the ~~“Exchange~~second ~~Act”),~~quarter asof fiscal ~~amended~~2004 and fiscal 2003, ofrespectively and $12.7 million in the ~~effectiveness~~first six months of ~~the~~fiscal ~~Company’s~~2004 ~~design~~and fiscal 2003, respectively. Interest and other ~~operation~~(income) was ($0.6) million in the second quarter and ~~effectiveness~~first six months of fiscal ~~its~~2004 ~~disclosure~~and ~~controls~~($1.9) million and ~~procedures~~($2.9) ~~The Company’s~~million ~~Chief~~in ~~Executive~~the ~~Officer~~second quarter and first ~~Chief~~six ~~Financial~~months ~~Officer~~of ~~concluded~~fiscal ~~that based~~2003, onrespectively. ~~such~~Included ~~evaluation~~in these amounts, asthe Company recorded a foreign currency gain (loss) of ~~August~~$0.1 2,million ~~2003,~~and ($0.3) million in the ~~Company’s~~second ~~disclosure~~quarter and first six months of fiscal 2004, ~~controls~~respectively, and ~~procedures~~$1.0 million ~~were~~and ~~reasonably~~$1.1 million ~~designed~~in tothe ~~ensure~~second ~~that~~quarter ~~information~~and first ~~required~~six months of fiscal 2003, respectively, primarily related to beits ~~disclosed~~investment byin notes ~~the~~and interest receivable from Pearle Europe. Interest income from the Company’s investment in ~~the~~notes ~~reports~~receivable itfrom ~~files~~Pearle orEurope, ~~submits~~totaled $0.1 ~~under~~million and $0.2 million in the ~~Exchange~~second ~~Act~~quarter isand ~~recorded~~first six months of fiscal 2004, ~~processed~~respectively, ~~summarized~~and $0.5 million and ~~reported~~$1.0 million ~~within~~in the second quarter and first six months of fiscal 2003, respectively. During fiscal 2003 the ~~time~~Company received ~~periods~~repayment ~~specified~~of principal from Pearle Europe which reduced notes and interest receivables. Interest income, primarily from temporary investments and franchise interest income, totaled $0.3 million and $0.6 million in the ~~rules~~second quarter and ~~forms~~first six months of ~~the~~fiscal ~~Securities~~2004, respectively, and $0.5 million and ~~Exchange~~$0.8 million ~~Commission~~in the second quarter and first six months of fiscal 2003, respectively.

~~(b) There~~Income ~~have~~Tax ~~not been any changes in the internal controls or in other~~Rate ~~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 The effective income tax rate was 88.0% for the first six months of fiscal 2004 compared to 12.0% for the first six months of fiscal 2003. The higher effective tax rate in fiscal 2004, compared to fiscal 2003 was primarily due to the expected full year results and the non-deductibility of certain expenses. In accordance with Federal Regulation 1.263(a)-5, which was effective December 31, 2003, the Company has estimated that certain transaction costs incurred in connection with the Luxottica merger are not deductible. Further determination of the deductibility of these transaction costs could result in a future change in the estimated effective income tax rate.

~~Table~~Reconciliation of ~~Contents~~Same Store Sales Growth

~~PART~~ Same IIstore —sales ~~OTHER~~growth ~~INFORMATION~~is a non-GAAP financial measure, which includes deferred warranty sales on a cash basis and undelivered customer orders, and does not reflect provisions for returns, 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 performance is important to investors and management 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:

~~Item 1. Legal Proceedings~~21

AsTable 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. Contents

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


	2004
	Second Quarter			First Six Months
	(Dollars in thousands)
Current year same store sales	$	267,917		$	534,450
Prior year same store sales		269,137			520,832
Percent change		(0.5	)%		2.6	%
Current year same store sales	$	267,917		$	534,450
Adjustment for:
Sales at new and closed stores		2,184			4,822
Deferred revenue		211			(1,468	)
Order vs. customer receipt		(1,098	)		(2,886	)
Returns, remakes and refunds		268			13
Other		285			60

Store sales		269,767			534,991
Nonstore revenues		50,602			102,279
Intercompany eliminations		(7,602	)		(16,851	)

GAAP Basis Net revenue	$	312,767		$	620,419

OnLiquidity ~~June 25,~~and ~~2003~~Capital ~~the Company held its annual meeting of stockholders. At~~Resources ~~that meeting, the stockholders elected nine directors to serve until the next~~ ~~annual meeting of stockholders.~~

OfThe ~~the~~Company’s ~~total~~primary ~~eligible~~source ~~votes~~of ~~16,226,562~~liquidity ~~stockholders~~is ~~cast~~funds ~~votes~~provided from operations of its operating subsidiaries. In addition, its wholly owned 13subsidiary,~~909~~ Cole National Group,~~702~~ orInc., 85and its operating subsidiaries have a working capital line of credit.7% As of the end of the second quarter of fiscal 2004, the total ~~eligible~~commitment ~~votes~~was $60.0 million ~~The~~and ~~votes~~availability ~~cast~~under ~~for~~ the credit ~~election~~facility totaled $43.7 million after reduction for $16.3 million under letters of ~~directors~~credit. There were asno ~~follows:~~working capital borrowings outstanding at any time during the first six months of fiscal 2004 or fiscal 2003.

	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

The credit facility, which is guaranteed by the Company and Cole National Group, requires Cole National Group and its principal operating subsidiaries 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 Cole National Group to comply with certain financial covenants, including covenants regarding minimum interest coverage and maximum leverage. As of July 31, 2004, Cole National Group was in compliance with the covenants in the credit agreement.

~~Item~~ On November 63, 2003, the Company entered into an agreement with a bank to provide documentary letters of credit for import inventory purchases not to exceed $7. ~~Exhibits~~0 million. ~~and~~The ~~Reports~~letters onof ~~Form~~credit are secured by the inventory purchased. As of July 31, 2004, the Company has $3.8-K million outstanding under this facility.

~~(a) Exhibits~~ 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 the Company. The ~~following~~indentures ~~Exhibits~~also ~~are~~permit ~~filed~~payments ~~herewith~~to the Company for certain tax obligations and ~~made~~for administrative expenses not to exceed 0.25% of net sales. See Note 3 of the Notes to Condensed Consolidated Financial Statements. Following the consummation of the Luxottica merger, the holders of the 8-5/8% notes and the 8-7/8% notes will have the right to put the notes to Cole National Group at a ~~part~~price of 101% of par plus accrued interest. ~~hereof:~~If the holders exercise such right, Cole National Group may be required to obtain financing from its parent or a third party to satisfy such obligation.

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.

No significant principal payment obligations are due under the Company’s outstanding indebtedness until April 2005, when a $1.0 million principal payment is due under a 5.0% promissory note, with annual $1.0 million principal payments due on the anniversary date of the note in each successive year through 2009. The 8-5/8% senior subordinated note of $125.0 million is due in 2007. The ability of the Company and its subsidiaries to satisfy their obligations will be primarily dependent upon the future

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.

financial and operating performance of the subsidiaries and upon the Company’s ability to renew or refinance borrowings or raise additional capital through equity financing or sales of assets.

~~(b) Reports~~ In July 2004, the Company received a request from Pearle Europe to permit the early repayment in full of principal and interest on ~~Form 8~~the one remaining note receivable due 2009. The Company agreed to the early repayment and it is expected to be received in the third quarter of fiscal 2004. The $5.6 million note and interest receivable, which had been included in long-Kterm notes receivable, were included in current portion of notes receivables in the accompanying balance sheet as of July 31, 2004.

~~The~~Cash ~~Company~~Flows 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 aOperating ~~network of doctors associated with Cole National’s stores, including Pearle Vision, Sears Optical and Target Optical.~~Activities

23 Cash and cash equivalents were $64.0 million at July 31, 2004 compared to $17.1 million at August 2, 2003. Operations generated net cash of $13.6 million in the first six months of fiscal 2004 and used $5.3 million in the first six months of fiscal 2003. The Company realized net income in the first six months of fiscal 2004 and incurred a net loss in the first six months of fiscal 2003, which is described above in the Results of Operations section of this report. Depreciation and amortization was $19.1 million and $19.6 million in the first six months of fiscal 2004 and fiscal 2003, respectively. The decrease in the first six months of fiscal 2004, compared to the first six months of fiscal 2003, was primarily due to lower fixed asset depreciation attributable to lower capital spending. Non-cash charges related to store closing and impairment losses were $1.0 million in the first six months of fiscal 2004 for the write-off of assets and fixtures for the Target Optical stores closed in the first quarter of fiscal 2004. Currency (gain) loss was $0.2 million and ($1.1) million in the first six months of fiscal 2004 and 2003, respectively. The change was attributable to currency fluctuations on the Company’s holdings of Pearle Europe notes and a higher notes receivable balance in the first six months of fiscal 2003. During fiscal 2003, the Company received $17.1 million in repayment of interest and principal, net of foreign withholding taxes of $1.0 million, from Pearle Europe, which reduced notes and interest receivables to $5.7 million at the end of fiscal 2003 from $19.6 million at the end of fiscal 2002. Changes in deferred income tax provision (benefit) were $3.0 million and ($4.6) million in the first six months of fiscal 2004 and fiscal 2003, respectively. The change was primarily due to the tax provision generated from the Company’s operating results and the non-deductibility of transaction costs related to the Luxottica merger agreement. Non-cash compensation was $0.6 million and $1.4 million in the first six months of fiscal 2004 and fiscal 2003, respectively. The decrease was primarily due to higher restricted stock amortization recorded in the first six months of fiscal 2003. Non-cash interest and other was $0.5 million in the first six months of fiscal 2004, compared to ($0.7) million in the same period last year. The change was due primarily to a $1.0 million gain on the sale of five Company-owned stores to a Pearle franchisee recorded in the first six months of fiscal 2003.

~~Table~~ Changes in working capital resulted in a use of ~~Contents~~funds totaling $11.4 million in the first six months of fiscal 2004, compared to $8.0 million in the first six months of fiscal 2003. Changes in accounts and notes receivable resulted in a use of funds totaling $5.5 million in the first six months of fiscal 2004 compared to $6.0 million in the same period last year. The change in the first six months of fiscal 2004 was primarily due to increases in revenues at Cole Licensed Brands, partially offset by receipt of insurance reimbursements related to the restatement of the Company’s financial statements. The change in the first six months of fiscal 2003 was due to increased revenues at both Cole Licensed Brands and Cole Managed Vision. Inventories provided $1.0 million and used $9.9 million in the first six months of fiscal 2004 and fiscal 2003, respectively. The inventory decrease in the first six months of fiscal 2004 was primarily due to lower inventory at both Pearle Vision and Things Remembered due to a lower number of stores open, partially offset by an inventory increase at Cole Licensed Brands. The increase in the first six months of fiscal 2003 was due to earlier new product introductions at Cole Licensed Brands and Things Remembered, an increased mix of premium products and additional inventory needed to support the increase in store count at Cole Licensed Brands. Changes in accounts payable and other liabilities resulted in a use of funds totaling $5.6 million and a source of funds totaling $6.6 million in the first six months of fiscal 2004 and fiscal 2003, respectively. The change in fiscal 2004 was primarily due to the timing of purchases and the change in fiscal 2003 was due to the timing of purchases and payments, increases in liabilities for legal and audit costs related to the restatement of the Company’s financial statements, increases in liabilities for the settlement of the class action lawsuit, increases in advertising, fringe benefits, workers compensation and deferred revenues. Changes in accrued and refundable income taxes used $1.0 million and provided $1.5 million in the first six months of fiscal 2004 and fiscal 2003, respectively. The change was primarily due to the provision for current taxes in the first six months of fiscal 2004, compared to a tax benefit in the first six months of fiscal 2003 resulting from the non-deductibility of certain expenses associated with the merger agreement with Luxottica.

~~SIGNATURES~~Cash Flows from Investing Activities

~~Pursuant~~Net tocash from investing activities resulted in a use of funds of $12.2 million in the ~~requirements~~first six months of fiscal 2004, compared to $20.6 million in the ~~Securities~~first ~~Exchange~~six ~~Act~~months of ~~1934~~fiscal 2003. Capital expenditures, which accounted for most of the cash used for investing activities, were $11.0 million and $15.4 ~~registrant~~million ~~has~~in ~~duly~~the ~~caused~~first ~~this~~six ~~report~~months of fiscal 2004 and fiscal 2003, respectively. The majority of capital expenditures were for remodeling of existing stores and store fixtures, equipment and leasehold improvements for new stores in both years. The reduction in capital expenditures was primarily due to belower ~~signed~~capital spending onfor ~~its~~remodeling ~~behalf~~at byThings Remembered and lower spending at Cole Licensed Brands. The Company paid $1.2 million and $4.3 million for systems development costs in the first six months of fiscal 2004 and fiscal 2003, ~~undersigned~~respectively. ~~thereunto~~Systems ~~duly~~development ~~authorized~~in the first six months of fiscal 2003 was primarily for the Company’s Patriot Claims System. The Company used $3.7 million in the first six months of

	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

24 Table of Contents

~~Table~~fiscal 2003 for a contingent payment in connection with the prior acquisition of ~~Contents~~MetLife’s managed vision business. The Company received a loan repayment from Pearle Europe totaling $3.1 million in the first six months of fiscal 2003.

~~COLE~~Cash ~~NATIONAL~~Flows ~~CORPORATION FORM~~from ~~10-Q QUARTER~~Financing ~~ENDED AUGUST 2, 2003~~Activities

~~EXHIBIT~~ Net ~~INDEX~~cash provided by financing activities totaled $3.5 million in the first six months of fiscal 2004 compared to $1.0 million in the first six months of fiscal 2003. The Company made a $5.0 million principal payment due under a 5.0% promissory note in the first six months of fiscal 2004. Changes in overdraft balances provided $3.6 million in the first six months of fiscal 2004 compared to $0.8 million in the first six months of fiscal 2003. The change in overdraft balances was due to the timing of payments. Net proceeds from the exercise of stock options totaled $4.9 million and $0.4 million in the first six months of fiscal 2004 and fiscal 2003, respectively.

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.

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 ~~Filed~~Sheet ~~herewith.~~Arrangements and Contractual Obligations

25 The Company leases a substantial portion of its equipment and facilities including laboratories, office and warehouse space, and retail locations. In addition, Cole Vision operates departments in various host stores and pays occupancy costs solely as a percentage of revenues. A more complete discussion of the Company’s lease and license commitments is included in Note 7 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 and 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 7 of the Notes to Condensed Consolidated Financial Statements.

In fiscal 2003, the Company entered into an agreement to guarantee a portion of the amount owed to a bank by a franchisee as a result of a loan granted in connection with the purchase of five stores. The guaranteed amount equals the cumulative value of the store assets. The Company is released from its obligation once the landlords of the store locations execute subordination agreements or the bank is granted access to the store assets in the event of the default by the franchisee. The Company received four executed subordination agreements as of July 31, 2004. The maximum exposure under the agreement is $47,000 as of July 31, 2004.

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. These offers are required to be made in May 2005 and 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 July 31, 2004, on a fully diluted basis, the Company’s ownership interest in Pearle Europe is 21.1%, HAL’s ownership interest in Pearle Europe is approximately 78.3% and the Pearle Europe management team owns the remaining 0.6% interest or 590 shares.

Significant Accounting Policies

The Company’s significant accounting policies are discussed in the Notes to the Consolidated Financial Statements that are included in the Company’s 2003 Annual Report on Form 10-K/A 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 2003 Annual Report on Form 10-K/A.

Certain Operating and Expense Trends

As discussed in this report, consolidated same store sales in the Company’s vision segment declined in the second quarter of 2004, although there was variability within the Company’s brands, ranging from single-digit increases at Target Optical and low double-digit increases at BJ’s Optical to low single digit decreases at Sears Optical and Pearle Vision. During August, the first month of the third quarter of fiscal 2004, consolidated same store sales in the Company’s vision segment increased in the low double-digits. While there was growth in all brands, sales performance in August was driven primarily by a successful promotion at Sears Optical. Things Remembered experienced a same store sales decline in August of less than one percent. There can be no assurance that these same store sales trends will continue for the remainder of the third quarter of 2004, or for the remainder of the fiscal year.

Costs associated with the California litigation, the merger agreement with Luxottica and compliance with the FTC’s request for additional information and documentary material with respect to the Luxottica merger, and the SEC investigation are expected to continue in fiscal 2004. However, many of the unusual expenses, such as the costs related to the settlement of the stockholder litigation and audit fees related to the restatement, are not expected to recur. Although there can be no assurances regarding the level of same store sales, the Company believes its profit performance will improve in fiscal 2004 as a result of revenue growth, expense controls and the non-recurrence of the aforementioned unusual expenses.

Forward Looking Statements

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. Such statements involve risks, uncertainties and other factors that could cause actual results to differ materially from those which are anticipated. Such risks and uncertainties include, but are not limited to, risks that the Luxottica merger will not be completed, legislative or regulatory developments that could have the effect of delaying or preventing the Luxottica merger, fluctuations in exchange rates, 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, 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, costs and other effects associated with litigation, 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, franchisees, and managed care clients, the mix of goods and services 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 from operations and financial condition. Foreign exchange risk arises from the Company’s exposure to fluctuation 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 swap agreements to manage its exposure. 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 in February and August of each year. For the second quarter of fiscal 2004, the market rate for six month LIBOR was 1.98%, which resulted in a rate of 6.5175% applied from February 17, 2004 through July 31, 2004.

A change in the six-month LIBOR would affect the interest cost associated with the $50.0 million notional value of the swap agreements. A 50% change (approximately 99 basis points) in the market rates of interest for six month LIBOR as compared to the 6.5175% rate in effect for the second quarter of fiscal 2004 would increase the Company’s annual interest cost by $0.5 million.

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

Item 4. Controls and Procedures

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 Certification”). This portion of the Company’s Quarterly Report on Form 10-Q is the disclosure of the results of the control evaluation referred to in paragraphs (4) and (5) of the Section 302 Certification and should be read in conjunction with the Section 302 Certification for a more complete understanding of the topics presented.

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 design, operation and effectiveness of the Company’s disclosure controls and procedures. The Company’s Chief Executive Officer and Chief Financial Officer concluded that based on such evaluation, as of July 31, 2004, the Company’s disclosure controls and procedures were effective and 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.

There have not been any changes in the Company’s internal control over financial reporting or in other factors during the quarter ended July 31, 2004 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

On July 14, 2004, a Company shareholder filed a shareholders’ class action complaint against the Company, its directors, and Luxottica in the Delaware Chancery Court, known as Pfeiffer v. Cole National Corp., et al., Civil Action No. 569-N. The complaint alleges, among other things, that the individual defendants breached their fiduciary duties as directors and/or officers to the Company by causing the Company to enter into an agreement to be acquired by Luxottica for $22.50 per share “without having exposed the Company to the marketplace through fair and open negotiations with all potential bidders and/or an active market check or open auction for sale of the company.” The complaint seeks preliminary and permanent injunctive relief against the merger, rescission of the merger if it is consummated, and/or damages and other associated relief. The Company believes that the action is without merit.

Cole National Group has been named as a defendant along with numerous other retailers, in patent infringement litigation challenging the defendants’ use of bar code technology in the United States District Court of Arizona, known as Lemelson Medical, Education & Research Foundation, Limited Partnerships v. CompUSA, Inc. et. al., No. Civ. 00-0663. A stay of the proceeding has been sought and was granted, in deference to prior pending declaratory judgment suits brought by the manufacturers and suppliers of the implicated technology seeking to declare the patents in suit invalid, unenforceable and not infringed. On January 23, 2004, a court in Nevada entered a memorandum of decision in favor of the manufacturers declaring the Lemelson patents unenforceable and not infringed. This judgment has been appealed by the Lemelson Partnership, and the Arizona infringement litigation against Cole National Group will remain stayed pending the final resolution of the appeal; however, this trial court decision favors the Company and its defenses. Cole National Group believes it has available defenses and does not expect any liability. However, if Cole National Group were to be found liable for an infringement, it might have a material adverse effect on the Company’s operating results and cash flow in the period incurred.

See Note 8 of Notes to Consolidated Financial Statements for further discussion of these legal proceedings.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds


Issuer Purchases of Equity Securities
						Total Number of		Maximum Number
	Total					Shares Purchased		of Shares that May
	Number			Average		as Part of Publicly		Yet Be Purchased
	of Shares			Price Paid		Announced Plan		Under the Plan
Period	Purchased			per Share		or Programs⁽¹⁾		or Programs⁽¹⁾
May 2, 2004 May 29, 2004		-0-			-0-		-0-		682,000
May 30, 2004 June 26, 2004		181,822	⁽²⁾	$	23.45		-0-		682,000
June 27, 2004 July 31, 2004		-0-			-0-		-0-		682,000
Total		181,822		$	23.45		-0-		682,000

⁽¹⁾The Board of Directors authorized the purchase of up to 500,000 shares of common stock in November 1997 and an additional 500,000 shares in November 1998 from time to time through open market or block transactions. The Company purchased from January 1998 through June 1999 a total of 318,000 shares for $6.6 million at an average price paid per share of approximately $20.90.

⁽²⁾Previously owned shares received in stock-for-stock option exercises.

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

On July 20, 2004 the Company held its annual meeting of stockholders. At that meeting, the stockholders elected eight directors to serve until the next annual meeting of stockholders.

Of the total number of shares entitled to vote, 16,718,993, stockholders cast 12,886,788 votes or 77.1% of the total. The votes cast for the election of directors were as follows:


					Abstentions
					and/or Broker
	For		Withheld		Non-votes
Larry Pollock		12,781,074		105,714		0
Jeffrey A. Cole		11,955,104		931,684		0
Ronald E. Eilers		12,841,887		44,901		0
Timothy F. Finley		12,543,861		342,927		0
Irwin W. Gold		12,785,938		100,850		0
Peter V. Handal		12,574,066		312,722		0
Charles A. Ratner		12,573,344		313,444		0
Walter J. Salmon		12,786,938		99,850		0

On July 22, 2004, the Company reconvened its annual meeting of stockholders. At that time, the stockholders voted to approve the merger, as amended, with Luxottica. Of the total number of shares entitled to vote, 16,718,993, stockholders cast 13,076,895 votes, or 78.2% of the total. The votes cast for the Luxottica merger agreements, as amended were as follows:


			Abstentions and/or
For	Against		Broker Non-Votes
13,017,336		55,626		3,933

Item 6. Exhibits

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

31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act.

31.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act.

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.

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 7, 2004

COLE NATIONAL CORPORATION
FORM 10-Q
QUARTER ENDED JULY 31, 2004

EXHIBIT INDEX


Exhibit
Number		Description
31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act.

31.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act.

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.

Filing Compare · COLE NATIONAL CORP /DE/