UNITED STATES SECURITIES AND EXCHANGE COMMISSION

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

~~[X]~~þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ~~For the quarterly period ended August 2, 2003,~~


		For the quarterly period ended July 31, 2004,

[o ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ~~For the transition period from ______to ______.~~


		For the transition period from ________ to ________.

Commission file number 33-66342

COLE NATIONAL GROUP, INC. ~~(Exact Name of Registrant as Specified in Its Charter)~~

DELAWARE		34-1744334
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)
1925 ENTERPRISE PARKWAY		44087
TWINSBURG, OHIO (Address of principal executive offices)		(Zip Code)

(Exact Name of Registrant as Specified in Its Charter)


DELAWARE		34-1744334
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

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

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

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

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

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

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

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

As of August 2927, ~~2003~~2004, 1,100 shares of the registrant’s common stock, $.01 par value were outstanding.

COLE NATIONAL GROUP, INC. AND SUBSIDIARIES FORM 10-Q QUARTER ENDED ~~AUGUST~~JULY 231, ~~2003~~2004 INDEX

		Page No.		~~Page No.~~
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)	~~Item 1. Financial Statements (unaudited)~~
		Condensed Consolidated Balance Sheets as of August 2, 2003, August 3, 2002 and February 1, 2003			1
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 August 2, 2003 and August 3, 2002			2
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 periods ended August 2, 2003 and August 3, 2002			3
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		~~Notes to Condensed Consolidated Financial Statements~~	4		4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations~~		12		11
Item 3. Quantitative and Qualitative Disclosures about Market Risk	~~Item 3. Quantitative and Qualitative Disclosures about Market Risk~~		23		20
Item 4. Controls and Procedures	~~Item 4. Controls and Procedures~~		24		21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	~~Item 1. Legal Proceedings~~		24		21
	Item 6. Exhibits and Reports on Form 8-K				21
Item 6. Exhibits			25
Signatures	~~Signatures~~		26		23
Exhibit Index	~~Exhibit Index~~		27		24
EX-31.1
EX-31.2
EX-32

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II — OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
EX-3.2 (ii) Amended and Restated By-Laws
EX-10.1 Amended & Extended Credit Agreement
EX-10.2 Separation Agreement
EX-10.3 Assignment of Life Insurance Policy
EX-31.1 CEO Section 302 Certification
EX-31.2 CFO Section 302 Certification
EX-32 Section 906 Certification

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

					August 2,			August 3,			February 1,
					2003			2002			2003
Assets
Current assets:
	Cash and cash equivalents				$	17,074		$	48,926		$	42,001
	Accounts receivable, less allowances of $3,455, $3,378 and $3,063, respectively					57,306			44,997			51,006
	Current portion of notes receivable					2,555			2,795			4,517
	Inventories					130,727			127,911			120,645
	Prepaid expenses and other					23,238			26,205			24,155
	Deferred income tax benefits					32,176			27,236			32,116
			Total current assets			263,076			278,070			274,440
Property and equipment, at cost						324,415			308,480			312,413
	Less — accumulated depreciation and amortization					(203,931	)		(189,736	)		(192,805	)
			Total property and equipment, net			120,484			118,744			119,608
Notes receivable, excluding current portion, less allowances of $2,802, $4,239 and $3,010, respectively						5,607			3,510			2,180
Deferred income taxes						30,820			23,155			26,026
Other assets						45,190			46,357			45,449
Other intangibles, net						50,425			45,788			50,903
Goodwill, net						85,713			85,542			85,557
			Total assets		$	601,315		$	601,166		$	604,163
Liabilities and Stockholder’s Equity
Current liabilities:
	Current portion of long-term debt				$	250		$	256		$	232
	Accounts payable					68,687			59,272			67,581
	Payable to affiliates, net					82,242			84,011			78,557
	Accrued interest					7,847			7,533			7,805
	Accrued liabilities					93,415			95,883			92,289
	Accrued income taxes					1,213			3,520			516
	Deferred revenue					39,855			36,981			38,014
				Total current liabilities		293,509			287,456			284,994
Long-term debt, net of discount and current portion						275,992			275,546			276,553
Other long-term liabilities						35,525			19,224			36,498
Deferred revenue, long-term						12,567			11,696			11,559
Stockholder’s equity						(16,278	)		7,244			(5,441	)
		Total liabilities and stockholder’s equity			$	601,315		$	601,166		$	604,163

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

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


	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			57,254			55,238
Current portion of notes receivable, less allowances of $852, $427 and $571, respectively		2,905			2,137			1,930
Inventories		119,932			130,727			120,927
Prepaid expenses and other		23,663			23,291			25,610
Deferred income taxes		31,713			32,196			31,612

Total current assets		304,195			262,679			294,501
Property and equipment, at cost		323,610			324,415			311,890
Less — accumulated depreciation and amortization		(207,555	)		(203,931	)		(194,886	)

Total property and equipment, net		116,055			120,484			117,004
Notes receivable, excluding current portion, less allowances of $829, $2,384 and $2,287, respectively		4,707			6,025			5,499
Deferred income taxes		27,007			30,836			31,375
Other assets		32,547			45,190			36,959
Other intangibles, net		49,121			50,425			49,773
Goodwill, net		85,734			85,713			85,734

Total assets	$	619,366		$	601,352		$	620,845

Liabilities and Stockholder’s Equity
Current liabilities:
Current portion of long-term debt	$	614		$	250		$	608
Accounts payable		65,351			68,687			61,180
Payable to affiliates, net		81,369			79,415			97,512
Accrued interest		7,679			7,847			7,715
Accrued liabilities		95,182			93,450			95,041
Accrued income taxes		3,165			4,099			2,789
Deferred revenue		42,161			39,855			41,122

Total current liabilities		295,521			293,603			305,967
Long-term debt, net of current portion		278,214			275,992			279,229
Other long-term liabilities		34,376			35,525			32,726
Deferred revenue, long-term		12,558			12,567			12,129
Stockholder’s equity (deficit)		(1,303	)		(16,335	)		(9,206	)

Total liabilities and stockholder’s equity	$	619,366		$	601,352		$	620,845

1The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.

~~Table of Contents~~1

COLETable NATIONALof GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands) Contents

			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			193,426			179,178			377,920			355,651
		Total costs and expenses		308,265			282,198			598,672			558,678
Operating income (loss)				(606	)		10,192			(2,764	)		19,153
Interest and other (income) expense, net:
	Interest expense			6,201			6,651			12,461			13,615
	Interest and other (income), net			(506	)		(258	)		(689	)		(767	)
	Loss on early extinguishment of debt			—			11,141			—			11,141
		Total interest and other (income) expense, net		5,695			17,534			11,772			23,989
Income (loss) before income taxes				(6,301	)		(7,342	)		(14,536	)		(4,836	)
Income tax provision (benefit)				(1,551	)		16			(3,198	)		2,601
Net income (loss)			$	(4,750	)	$	(7,358	)	$	(11,338	)	$	(7,437	)

COLE NATIONAL GROUP, INC. AND SUBSIDIARIES

~~The~~CONDENSED ~~accompanying~~CONSOLIDATED ~~notes~~STATEMENTS toOF ~~condensed consolidated financial statements are an integral part of these~~OPERATIONS ~~condensed~~(Unaudited) (Dollars ~~consolidated~~in ~~financial statements.~~ thousands)


	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		178,694			192,750			366,073			376,565

Total costs and expenses		294,624			308,265			595,869			598,672

Operating income (loss)		18,143			(606	)		24,550			(2,764	)
Interest and other (income) expense:
Interest expense		6,318			6,201			12,524			12,461
Interest and other (income), expense net		(448	)		(506	)		(524	)		(689	)

Total interest and other (income) expense, net		5,870			5,695			12,000			11,772

Income (loss) before income taxes		12,273			(6,301	)		12,550			(14,536	)
Income tax provision (benefit)		5,267			(1,551	)		5,397			(3,198	)

Net income (loss)	$	7,006		$	(4,750	)	$	7,153		$	(11,338	)

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

~~COLE NATIONAL GROUP, INC. AND SUBSIDIARIES~~2 ~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)~~

					Twenty-Six Week Periods Ended
					August 2,			August 3,
					2003			2002
Cash flows from operating activities:
	Net income (loss)				$	(11,338	)	$	(7,437	)
	Adjustments to reconcile net income (loss) to net cash provided by operating activities:
		Depreciation and amortization				19,630			17,790
		Loss on early extinguishment of debt				—			11,141
		Deferred income tax benefit				(4,797	)		(947	)
		Noncash interest, foreign currency exchange (gains) losses and other, net				(327	)		435
		Increases (decreases) in cash resulting from changes in operating assets and liabilities:
			Accounts and notes receivable, prepaid expenses and other assets			(6,550	)		(2,788	)
			Inventories			(9,889	)		(6,440	)
			Accounts payable, accrued liabilities and other liabilities			10,942			7,187
			Accrued interest			42			1,193
			Accrued and refundable income taxes			615			3,021
				Net cash (used for) provided by operating activities		(1,672	)		23,155
Cash flows from investing activities:
	Purchases of property and equipment					(15,503	)		(13,944	)
	Systems development costs					(4,308	)		(2,329	)
	Contingent payments for and acquisition of businesses					(4,056	)		—
				Net cash used for investing activities		(23,867	)		(16,273	)
Cash flows from financing activities:
	Repayment of long-term debt					(51	)		(158,146	)
	Proceeds from issuance of long-term debt					—			150,000
	Decrease in overdraft balances					(3,471	)		(5,896	)
	Advances from (to) affiliates, net					3,684			(1,237	)
	Payment of deferred financing fees					(238	)		(5,921	)
	Other, net					688			(55	)
				Net cash provided by (used for) financing activities		612			(21,255	)
Cash and cash equivalents:
	Net decrease during the period					(24,927	)		(14,373	)
	Balance, beginning of period					42,001			63,299
	Balance, end of period				$	17,074		$	48,926

~~The~~COLE ~~accompanying~~NATIONAL ~~notes~~GROUP, toINC. ~~condensed~~AND ~~consolidated financial statements are an integral part of these~~SUBSIDIARIES ~~condensed consolidated financial statements.~~

3CONDENSED 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)	$	7,153		$	(11,338	)
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			—
Deferred income tax provision (benefit)		4,267			(4,797	)
Noncash compensation		500			232
Noncash interest and other, net		497			(559	)
Increases (decreases) in cash resulting from changes in operating assets and liabilities:
Accounts and notes receivable, prepaid expenses and other assets		(5,331	)		(6,004	)
Inventories		997			(9,892	)
Accounts payable, accrued liabilities and other liabilities		1,111			6,544
Accrued interest		(36	)		42
Accrued and refundable income taxes		377			777

Net cash provided by (used for) operating activities		29,629			(5,378	)

Cash flows from investing activities:
Purchases of property and equipment		(11,024	)		(15,424	)
Systems development costs		(1,198	)		(4,308	)
Acquisitions of businesses		—			(4,056	)

Net cash used for investing activities		(12,222	)		(23,788	)

Cash flows from financing activities:
Repayment of long-term debt		(295	)		(119	)
Increase in overdraft balances		3,605			824
Advances from (to) parent, net		(16,134	)		3,625
Payment of deferred financing fees		—			(238	)
Other, net		208			147

Net cash provided by (used for) financing activities		(12,616	)		4,239

Cash and cash equivalents:
Net increase (decrease) during the period		4,791			(24,927	)
Balance, beginning of period		59,184			42,001

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

~~COLE~~The ~~NATIONAL~~accompanying ~~GROUP,~~notes ~~INC.~~to ~~AND~~condensed ~~SUBSIDIARIES~~consolidated financial statements are an ~~NOTES~~integral TOpart ~~CONDENSED~~of ~~CONSOLIDATED~~these ~~FINANCIAL~~condensed ~~STATEMENTS~~consolidated financial statements. ~~(Unaudited)~~

~~(1) Summary of Significant Accounting Policies~~3

BasisTable of Presentation Contents

~~Cole~~COLE ~~National~~NATIONAL ~~Group~~GROUP, ~~Inc~~INC. isAND ~~a wholly owned subsidiary of Cole National~~SUBSIDIARIES ~~Corporation. The condensed consolidated financial statements include the~~ ~~accounts of Cole National Group and its wholly owned subsidiaries~~ ~~(collectively, the “Company”). All significant intercompany transactions have been eliminated in consolidation.~~

~~Fiscal~~NOTES ~~years~~TO ~~end~~CONDENSED onCONSOLIDATED ~~the~~FINANCIAL ~~Saturday closest to January 31 and are identified~~STATEMENTS according to the calendar year in which they begin. For example, the fiscal year ended February 1, 2003 is referred to as “fiscal 2002.” The current fiscal year, which ends January 31, 2004, is referred to as “fiscal 2003.” Fiscal 2003 and fiscal 2002 each consist of 52 weeks. (Unaudited)

The accompanying condensed consolidated financial statements have been prepared without audit and certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles 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(1) ~~10-K. Results~~Summary ~~for interim periods are not necessarily indicative~~ of ~~the~~Significant ~~results~~Accounting ~~to be~~Policies ~~expected for the full year.~~

~~Nature~~Basis of ~~Operations~~ Presentation

~~The~~Cole ~~Company~~National ~~is a specialty service retailer operating in both host and nonhost environments~~Group, ~~whose primary lines of business are optical products and services and personalized gifts~~Inc. ~~The~~is ~~Company~~a ~~sells~~wholly ~~its products through 2,472 company-~~owned ~~retail~~subsidiary ~~locations~~of ~~and~~Cole ~~463 franchised locations in 50 states,~~National ~~Canada,~~Corporation ~~and~~ (the ~~Caribbean~~“Parent”). InThe ~~connection~~condensed ~~with~~consolidated ~~its~~financial ~~optical~~statements include ~~business,~~ the ~~Company is~~accounts aof ~~managed~~Cole ~~vision~~National ~~care~~Group ~~benefits provider~~ and ~~claims~~its ~~payment~~wholly ~~administrator whose~~owned ~~programs provide comprehensive eyecare benefits primarily marketed~~subsidiaries ~~directly to large employers~~(collectively, ~~health~~the ~~maintenance organizations (HMO~~“Company”) ~~and other organizations~~. ~~The~~All ~~Company~~significant ~~has~~intercompany ~~two~~transactions ~~reportable segments: Cole Vision and Things~~have ~~Remembered~~been ~~(see~~eliminated ~~Note~~in 5)consolidation.

~~Use~~ Fiscal ofyears ~~Estimates~~end on the Saturday closest to January 31 and are identified according to the calendar year in which they begin. For example, the fiscal year ended January 31, 2004 is referred to as “fiscal 2003.” The current fiscal year, which ends January 29, 2005, is referred to as “fiscal 2004.” Fiscal 2004 and fiscal 2003 each consists of 52 weeks.

The ~~preparation~~accompanying ofcondensed consolidated financial statements, have been prepared without audit and certain information and footnote disclosures normally included in ~~conformity~~financial ~~with~~statements ~~accounting~~prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted, ~~requires~~although management tobelieves ~~make estimates~~that ~~and~~the ~~assumptions~~disclosures ~~that~~herein are ~~affect~~adequate ~~the~~to ~~reported~~make ~~amounts~~the ofinformation ~~assets~~not ~~and liabilities~~misleading. ~~and~~The ~~disclosure~~condensed ofconsolidated financial ~~contingent~~statements ~~assets~~should ~~and~~be ~~liabilities~~read atin ~~the~~conjunction ~~date~~with of the consolidated financial statements, and ~~the~~notes ~~reported~~thereto ~~amounts~~included ofin ~~revenues~~the ~~and~~Company’s ~~expenses~~2003 Annual ~~during~~Report ~~the~~on ~~reporting~~Form ~~period~~10-K/A. ~~Actual~~Results for interim periods are not necessarily indicative of the results ~~could~~to ~~differ~~be ~~from~~expected ~~those~~for ~~estimates~~the full year.

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

~~Reclassifications~~ The Company is a specialty service retailer operating in both host and nonhost environments, whose primary lines of business are optical products and services and personalized gifts. The Company sells its products through 2,417 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).

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

~~Managed~~The ~~care~~preparation ~~claims~~of ~~expense~~financial ~~has~~statements, ~~been~~in ~~reclassified~~conformity with accounting principles generally accepted in the United States, requires management to ~~cost~~make estimates and assumptions that affect the reported amounts of ~~revenues~~assets ~~from~~and ~~operating~~liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during tothe ~~provide~~reporting ~~improved~~period. ~~transparency~~Actual toresults ~~gross~~could ~~margin~~differ from those estimates.

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

~~The Company sells separately priced extended warranty contracts with terms~~Reclassifications ~~of coverage of 12 and 24 months. Revenues from the sale of these contracts are~~ ~~deferred and amortized over the lives of the contracts, while the costs to~~ ~~service the warranty claims are~~

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

~~Table~~Deferred ~~of Contents~~Revenue

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

~~A reconciliation of the changes in deferred revenue from the sale of~~4 ~~warranty contracts and other deferred items follows (dollars in thousands):~~

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

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

Net cash flows from operating activities reflect net cash payments for income taxes and payments for interest of $890,000 and $11,839,000, respectively, for the 26 week period ended August 2, 2003, and $459,000 and $12,075,000, respectively, for the 26 week period ended August 3, 2002.


	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

~~Overdrafts~~Cash ~~resulting from outstanding checks at the end of each reporting~~Flows ~~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.

~~Total~~ Net ~~Other~~cash ~~Comprehensive~~flows ~~Income~~from ~~(Loss)~~operating activities reflect cash payments for income taxes and interest of $0.8 million and $12.0 million, respectively, for the 26 week period ended July 31, 2004 and $0.9 million and $11.8 million, respectively, for the 26 week period ending August 2, 2003.

~~Total~~Overdrafts ~~other~~resulting ~~comprehensive~~from ~~income~~outstanding ~~(loss) for~~checks at the 13end 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 26$21.1 ~~week~~million ~~periods ended~~at July 31, 2004, August 2, 2003 and ~~August~~ January 31, 2004, respectively, and to accrued expenses amounted to $3.6 million, ~~2002~~$3.3 million isand as$3.8 million ~~follows~~at ~~(dollars~~July 31, in2004, ~~thousands):~~August 2, 2003 and January 31, 2004, respectively.

	Thirteen Week Periods Ended						Twenty-Six Week Periods Ended
	August 2,			August 3,			August 2,			August 3,
	2003			2002			2003			2002
Net income (loss)	$	(4,750	)	$	(7,358	)	$	(11,338	)	$	(7,437	)
Cumulative translation income (loss)		12			(117	)		501			(10	)
Total other comprehensive income (loss)	$	(4,738	)	$	(7,475	)	$	(10,837	)	$	(7,447	)

Total Comprehensive Income (Loss)

~~Stock-~~ Total ~~Based~~comprehensive ~~Compensation~~income (loss) for the 13 and 26 week periods ended July 31, 2004 and August 2, 2003 is as follows (dollars in thousands):

At August 2, 2003, the Company has various stock-based employee compensation plans which are described more fully in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 2002 Annual Report on Form 10-K. The Company accounts for those plans in accordance with Accounting Principles Board Opinion No. 25, “Accounting For Stock Issued to Employees”, and related Interpretations. No stock-based employee compensation cost for the Company’s various stock option plans is reflected in net income, as no options granted under those plans had an exercise price less than the market value of the underlying common stock on the date of grant.


	Thirteen Week Period Ended					Twenty-Six Week Period Ended
	July 31,		August 2,			July 31,		August 2,
	2004		2003			2004		2003
Net income (loss)	$	7,006	$	(4,750	)	$	7,153	$	(11,338	)
Translation income (loss)		40		(26	)		14		444

Total comprehensive income (loss)	$	7,046	$	(4,776	)	$	7,167	$	(10,894	)

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”.

At July 31, 2004, the Company has various stock-based employee compensation plans which are described more fully in Note 1 of 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 periods 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 periods ended August 2, 2003.

~~Table~~ The following table illustrates the pro forma effect on net income of ~~Contents~~the Company had the Company applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation”.

	Thirteen Week Periods Ended						Twenty-Six Week Periods Ended
	August 2,			August 3,			August 2,			August 3,
(Dollars in thousands)	2003			2002			2003			2002
Net income (loss), as reported	$	(4,750	)	$	(7,358	)	$	(11,338	)	$	(7,437	)
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	$	(4,987	)	$	(7,906	)	$	(12,021	)	$	(8,486	)

RecentlyTable Issuedof Accounting Standards Contents

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


	Thirteen Week Period Ended						Twenty-Six Week Period Ended
	July 31,			August 2,			July 31,			August 2,
(In thousands)	2004			2003			2004			2003
Net income (loss), as reported	$	7,006		$	(4,750	)	$	7,153		$	(11,338	)
Additions for stock-based employee compensation expense included in reported net income (loss), net of related taxes		(259	)		—			345			—
Deductions for total stock-based employee compensation expense determined under fair value based method for all awards, net of related taxes		(379	)		(236	)		(700	)		(682	)

Net income (loss), pro forma	$	6,368		$	(4,986	)	$	6,798		$	(12,020	)

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

InThe ~~January~~Financial ~~2003,~~Accounting ~~the~~Standards ~~FASB~~Board (FASB) issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46). in January 2003 and revised FIN 46 ~~requires~~(FIN ~~certain~~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~~ financial interest or do not have sufficient equity at risk. ~~FIN~~The Interpretations 46 immediately ~~applies~~ applied to entities created after January 31, 2003, was ~~and~~effective at the ~~beginning~~end of the ~~Company’s~~ ~~2003~~fourth ~~third~~ quarter ~~for~~of ~~existing~~fiscal ~~variable~~2003 ~~interest~~for ~~entities.~~certain ~~Management~~special ispurpose ~~still~~entities ~~assessing~~and ~~the~~was ~~impacts~~effective offor ~~FIN~~the 46first onquarter ~~its~~of ~~condensed~~fiscal 2004 ~~consolidated~~for ~~financial~~other ~~statements~~existing VIE. ~~However,~~The ~~it is reasonably possible that the~~ synthetic operating lease for the Highland Heights, Ohio facility ~~will~~required ~~require~~ consolidation under ~~FIN~~this 46Interpretation. The consolidation ~~will~~resulted ~~require~~in an additional $2.4 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 remaining portion of FIN 46R was adopted in the first quarter of fiscal 2004. In ~~November~~adopting ~~2002~~FIN 46R, the ~~Emerging~~Company ~~Issues~~considered ~~Task~~its ~~Force~~financial relationships ofwith ~~the~~Pearle ~~FASB~~Vision ~~(“EITF”)~~franchisees, and concluded that it is not ~~reached~~required ato ~~consensus~~consolidate onany ~~Issue~~franchise ~~02-16~~entities. The Company has no equity interest in any of its franchisees, has no “~~Accounting~~off-balance bysheet” aexposure relative ~~Reseller~~to any of its franchisees except for ~~Cash~~certain lease and other ~~Consideration~~guarantees, ~~Received~~and ~~from~~generally does not provide financial support to franchise entities in a ~~Vendor”~~typical ~~(Issue~~franchise ~~02-16)~~relationship. ~~Certain~~Creditors ~~aspects~~ of ~~Issue~~the franchise ~~02-16~~entities ~~were~~have ~~effective~~no inrecourse ~~fiscal~~to ~~2002,~~the Company. There are certain franchise entities for which ~~were~~the ~~adopted~~Company has provided financial support and ~~did~~are considered to be VIE. However, the Company is not ~~have~~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 ~~significant~~activities, ~~impact~~nor onis ~~operations~~it entitled to receive a majority of the VIE’s residual returns. The ~~remaining~~Company ~~portion~~did ofnot ~~Issue~~consolidate ~~02-16~~any ~~has~~franchise ~~been~~entities and the ~~adopted~~adoption inof ~~fiscal~~the ~~2003~~remaining ~~and~~portion ~~does~~of ~~not~~FIN ~~have~~46R ahad ~~material~~no effect on the Company’s financial position or results of operations.

In December 2003, the FASB issued SFAS No. 132 (2Revised 2003) ~~Goodwill~~, “Employers’ Disclosures about Pensions and Other ~~Intangible~~Postretirement ~~Assets~~Benefits” (SFAS 132). This statement revises employers’ disclosures about pension plans and other postretirement benefit plans to require more information about the economic resources and obligations of such plans. Certain disclosure provisions were effective for fiscal 2003 and were adopted. The remaining disclosure provisions of SFAS 132 have been adopted in fiscal 2004.

~~Goodwill~~On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization ~~tradenames~~Act ~~are~~of ~~tested~~2003 at(“the ~~least~~Act”) ~~annually~~was ~~for~~signed ~~impairment~~into ~~and~~law. In accordance with ~~are~~FASB ~~not~~Staff ~~amortized.~~Position ~~All~~106-1 ~~other~~(FSP ~~intangible~~FAS ~~assets~~106-1), ~~with~~the ~~finite~~Company’s ~~lives~~measurement ~~are~~of ~~amortized~~the ~~over~~accumulated ~~their~~postretirement ~~estimated~~benefit ~~useful~~obligation ~~economic~~and ~~lives~~net ~~based~~periodic benefit cost in the consolidated financial statements do not reflect the effects of the Act on the ~~management~~Company’s ~~estimates~~postretirement of benefit plan because the ~~period~~Company ~~that~~has not concluded whether the ~~assets~~benefits ~~will~~provided ~~generate~~by ~~revenue~~the plan are actuarially equivalent to Medicare Part D under the act. ~~Other~~The ~~intangible~~FASB ~~assets~~has since issued FSP FAS 106-2, ~~consist~~which ofsupersedes ~~(dollars~~FSP inFAS ~~thousands):~~106-1, and is effective for the Company’s third quarter beginning August 1, 2004. The Company has not yet determined whether it will be using retroactive or prospective adoption.

6(2) Goodwill and Other Intangible Assets

~~Table~~ 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 ~~Contents~~period that the assets will generate revenue. Other intangible assets consist of (dollars in thousands):

	August 2,			August 3,			February 1,
	2003			2002			2003
Tradename	$	49,460		$	49,460		$	49,460
Noncompete agreements		320			240			240
Contracts		8,947			3,460			8,847
Customer records		9			—			—
		58,736			53,160			58,547
Accumulated amortization		(8,311	)		(7,372	)		(7,644	)
Other intangibles, net	$	50,425		$	45,788		$	50,903

DuringTable 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 change in the carrying amount of contracts for the six months ended August 2, 2003 resulted primarily from a contingent payment for a previously acquired provider network. The additional change in the carrying amount of goodwill was due to foreign currency translation at Cole Vision. The net carrying amount of goodwill at August 2, 2003, by business segment, was $64.3 million at Cole Vision and $21.4 million at Things Remembered. Contents

(3) Long-Term Debt


	July 31,			August 2,			January 31,
	2004			2003			2004
Non-amortizable:
Tradename	$	49,460		$	49,460		$	49,460

Amortizable:
Noncompete agreements		320			320			320
Contracts		8,947			8,947			8,947
Customer records		9			9			9

Total amortizable		9,276			9,276			9,276

Accumulated amortization		(9,615	)		(8,311	)		(8,963	)

Other intangibles, net	$	49,121		$	50,425		$	49,773

OnDuring ~~May 22,~~the ~~2002~~first quarter of fiscal 2003, the Company ~~issued~~purchased ~~$150.0 million~~the operations of ~~8-7/8%~~three ~~Senior Subordinated~~Sears ~~Notes~~Optical ~~that~~departments ~~mature~~in onCalifornia ~~May 15,~~for ~~2012~~a total purchase price of $242,500. ~~Interest~~The onamount allocated to the ~~notes~~tangible isfixed assets ~~payable~~acquired ~~semi-annually~~including onexam ~~each~~equipment ~~May 15~~ and ~~November 15,~~inventory ~~commencing~~was ~~November 15~~$29, ~~2002~~500. ~~Net~~The ~~proceeds~~remainder ~~from~~ of the ~~8-7/8%~~purchase ~~note~~price ~~offering,~~was ~~together~~allocated ~~with~~to ~~cash~~intangible onassets ~~hand, were~~under ~~used~~the toprovisions ~~retire~~of Statement ~~the~~of ~~Company’s~~Financial ~~$150~~Accounting Standards No.0 ~~million~~141, of“Business ~~9-7/8% Senior Subordinated~~Combinations”. ~~Notes~~Goodwill ~~due~~related ~~2006~~to ~~and~~this ~~pay~~transaction ~~premiums~~was $124,000 and ~~other~~noncompete ~~costs~~agreements ~~associated~~and customer ~~with~~records ~~retiring~~totaled ~~those notes~~$89,000. The ~~Company’s~~additional ~~results~~changes ~~for~~in ~~fiscal~~the ~~2002~~carrying ~~included~~amount of agoodwill ~~loss~~were ondue ~~early extinguishment~~to offoreign ~~debt~~currency oftranslation ~~$11.1 million~~at ~~representing~~Cole ~~the~~Vision. ~~payment~~The ~~of premiums~~net ~~and~~carrying ~~other~~amount ~~costs~~ of ~~retiring~~goodwill ~~the~~at ~~notes~~July 31, ~~and~~2004, ~~the~~by ~~write~~business ~~offs~~segment ofwas ~~unamortized~~$64.3 ~~discount~~million at Cole Vision and ~~deferred~~$21.4 million ~~financing~~at ~~fees~~Things Remembered.

~~On August~~(3) ~~22, 1997, the Company issued $125.0 million of 8~~Long-~~5/8%~~Term ~~Senior~~Debt ~~Subordinated Notes that mature in 2007 with no earlier scheduled redemption or~~ ~~sinking fund payments. Interest on the 8-5/8% notes is payable semi-annually on~~ ~~February 15 and August 15.~~

~~The~~On ~~8-5/8%~~August 15, ~~notes~~2003, ~~and~~ the Company retired $385,000 of 8-75/8% ~~notes~~Senior Subordinated ~~are~~Notes ~~general~~due ~~unsecured obligations of the Company~~December 31, ~~subordinated~~2006. inThe ~~right~~notes ofwere ~~payment~~contributed to ~~senior indebtedness of~~ the Company ~~and~~by ~~senior~~its inparent, ~~right~~Cole ofNational ~~payment~~Corporation, toafter ~~any~~receiving ~~current~~them oras ~~future subordinated~~part ~~indebtedness~~ of the ~~Company.~~full ~~The~~payment ~~indentures~~for ~~pursuant~~a tonote ~~which~~receivable ~~the~~from ~~8-5/8% notes and~~ the ~~8-7/8% notes were issued restrict dividend payments to the~~ Company’s former Chairman. A ~~parent~~$15,400 ~~Cole~~gain ~~National~~on ~~Corporation.~~early ~~The~~extinguishment ~~indentures~~of ~~also~~debt ~~contain~~and ~~certain~~$15,400 ~~optional~~of compensation ~~and~~expense ~~mandatory~~were ~~redemption~~recorded ~~features~~in ~~and~~connection ~~other~~with ~~financial~~the ~~covenants~~transaction.

~~The~~On ~~Company~~May 22, ~~has no significant principal payment obligations under its outstanding indebtedness until 2007~~2002, ~~when~~ the Company issued $~~125~~150.0 million of 8-57/8% Senior Subordinated Notes ~~become~~that ~~due~~mature in 2012. Interest on the notes is payable semi-annually on each May 15 and November 15.

~~During~~On ~~the~~August 22, ~~third quarter of fiscal 2002~~1997, the Company ~~entered~~issued into interest rate swap agreements to take advantage of favorable market interest rates. These agreements require the Company to pay an average floating interest rate based on six-month LIBOR plus 4.5375% to a counter party while receiving a fixed interest rate on a portion of the Company’s $125.0 million of 8-5/8% Senior Subordinated Notes ~~due~~that ~~2007. The counter party is a major commercial bank. The agreements~~ mature ~~August 15,~~in 2007 ~~and~~with ~~qualify~~no asearlier ~~fair~~scheduled ~~value~~redemption ~~hedges. The~~or ~~aggregate~~sinking ~~notional~~fund ~~amount of the interest rate swap agreements is $50~~payments.~~0 million.~~ AtInterest ~~August 2,~~on ~~2003,~~ the ~~floating rate of swaps was approximately~~ 8-5.7/8% ~~and~~notes ~~the~~is ~~fair~~payable ~~value~~semi-annually ~~of the swap~~on ~~agreements~~February 15 ~~was~~and ~~an unrealized gain of approximately $0.3~~August ~~million~~15. ~~There was no~~ ~~impact to earnings in the first six months of fiscal 2003 due to hedge~~ ~~ineffectiveness.~~

~~(4) Credit~~ The ~~Facility~~8-5/8% notes and the 8-7/8% notes are general unsecured obligations of the Company, subordinated in right of payment to senior indebtedness of the Company and senior in right of payment to any current or future subordinated indebtedness of the Company. The indentures pursuant to which the 8-5/8% notes and the 8-7/8% notes were issued restrict dividend payments to the Company’s parent, Cole National Corporation. The indentures also contain certain optional and mandatory redemption features and other financial covenants.

OnThe ~~June 27,~~Company ~~2003,~~has ~~the~~no ~~operating~~significant ~~subsidiaries~~principal ofpayment ~~the~~obligations ~~Company~~under ~~amended,~~its ~~restated~~outstanding ~~and~~indebtedness ~~extended~~until ~~its~~2007, ~~working~~when ~~capital~~the ~~credit~~$125.0 million ~~facility~~of ~~with~~8-5/8% ~~its bank~~Senior ~~lenders.~~Subordinated ~~The~~Notes ~~maturity~~become ~~date~~due. ofFollowing the ~~credit~~consummation ~~facility~~of ~~was~~the ~~extended~~merger toof ~~February 1,~~the ~~2007~~Parent ~~from~~and ~~May 31,~~Luxottica ~~2006~~Group S.p.A. ~~The~~(see ~~size~~Note 9 of the ~~facility~~Notes ~~was adjusted~~ to ~~$60.0 million~~Condensed ~~from~~Consolidated ~~$75.0 million.~~Financial ~~In addition~~Statements), ~~certain~~the ~~financial~~holders ~~covenants~~of ~~were~~the ~~amended. Borrowings~~8-5/8% ~~under~~notes and the 8-7/8% ~~credit~~notes ~~facility~~will ~~presently~~have ~~bear~~the ~~interest~~right ~~based~~to onput ~~leverage ratios~~the ofnotes to the Company at a ~~rate~~price ~~equal~~of 101% toplus ~~either~~accrued ~~(a) the Eurodollar Rate plus~~interest.

7 During the third quarter of fiscal 2002, the Company entered into interest rate swap agreements to take advantage of favorable market interest rates. These agreements require the Company to pay an average floating interest rate based on six-month LIBOR plus 4.5375% to a counter party while receiving a fixed interest rate on a portion of the Company’s $125.0 million 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.

~~Table~~ The Company leases an office and general operating facility in Highland Heights, Ohio from a special purpose entity (the “Trust”), which was created in 1997 specifically for the purpose of ~~Contents~~structuring a four-year operating lease with annual renewal options

~~2.50% or (b) 1.50% plus the highest of (i) the CIBC prime rate, (ii) the~~7 three-week moving average of the secondary market rates for three-month certificates of deposit plus 1.0% or (iii) the federal funds rate plus 0.5%. The Company pays a commitment fee of 0.75% per annum on the total unused portion of the facility based on the percentage of revolving credit commitments used. Cole National Corporation and the Company guarantee this credit facility. The credit facility is secured by the assets of the operating subsidiaries of the Company.

TheTable credit facility, which is guaranteed by Cole National Corporation and the Company, requires the Company 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 the Company 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. Contents

~~The~~up ~~credit~~to ~~facility~~six ~~restricts~~years. ~~dividend~~The lease provides for regular payments tobased ~~the~~on LIBOR plus 1.50%. In accordance with this agreement, the Company ~~from~~must ~~its~~maintain compliance with a minimum net worth covenant. At the end ~~subsidiaries~~of tothis ~~amounts~~lease ~~needed~~in 2007, the Company has the option to ~~pay~~purchase ~~interest~~the onproperty or arrange for the ~~8-7/8%~~sale ~~notes~~of ~~and~~the property. If the Company does not exercise its ~~8-5/8%~~purchase ~~notes,~~option ~~and~~at ~~certain~~the ~~amounts~~end ~~related~~of tothe ~~taxes~~lease, ~~along~~it ~~with~~is contingently liable to the Trust for up to 0$1.~~25%~~7 million. ~~of the~~The Company’s ~~consolidated~~does ~~net~~not ~~revenue~~believe ~~annually~~it ~~for~~will ~~other~~have ~~direct~~any ~~expenses of~~payment ~~Cole~~obligation ~~National~~at ~~Corporation~~the orend of the ~~Company.~~lease Ifbecause ~~certain~~either ~~maximum~~the ~~leverage~~Company ~~targets~~will exercise the ~~are~~purchase ~~met~~option, or the ~~credit~~net ~~facility~~proceeds ~~restricts~~from ~~dividend~~the ~~payments~~sale toof the ~~Company~~property inwill anexceed ~~aggregate~~the amount ~~not~~payable to ~~exceed~~the ~~$50~~Trust.~~0 million~~ toThe ~~allow~~Trust ~~for~~assets and liabilities have been consolidated into the ~~repurchase~~financial statements of the Company as of January 31, ~~Senior~~2004 ~~Subordinated~~and ~~Notes~~operating results beginning February 1, 2004.

~~As of August~~(4) 2,Credit ~~2003, the total availability under the credit facility~~Facility ~~totaled $45.0 million after reduction for commitments outstanding of $15.0~~ ~~million under letters of credit. There were no working capital borrowings under~~ ~~the credit facility outstanding as of August 2, 2003 and August 3, 2002, and~~ ~~there were no borrowings during the second quarter of fiscal 2003 and fiscal 2002.~~

The operating subsidiaries of the Company have a working capital credit facility of $60.0 million with their bank lenders that extends to February 1, 2007. Borrowings under the credit facility presently bear interest based on leverage ratios of the Company at a rate equal to either (5a) ~~Segment~~the ~~Information~~Eurodollar Rate plus 2.50% or (b) 1.50% plus the highest of (i) the CIBC prime rate, (ii) the three-week moving average of the secondary market rates for three-month certificates of deposit plus 1.0% or (iii) the federal funds rate plus 0.5%. The Company pays a commitment fee of 0.75% per annum on the total unused portion of the facility based on the percentage of revolving credit commitments used. Cole National Corporation and the Company guarantee this credit facility. The credit facility is secured by the assets of the operating subsidiaries of the Company. The credit facility permits indebtedness of up to $10.0 million of documentary letters of credit from sources other than the lenders and liens on inventory pursuant to documentary letters of credit issued under such financing.

~~Information~~The oncredit facility requires the principal operating subsidiaries of the Company’s ~~reportable~~to ~~segments~~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 Company to comply with certain financial covenants, including covenants regarding interest coverage and maximum leverage. The Company is asin compliance ~~follows~~with ~~(dollars~~the covenants in the credit agreement as of July 31, 2004. ~~thousands):~~

			Thirteen Week Periods Ended						Twenty-Six Week Periods Ended
			August 2,			August 3,			August 2,			August 3,
			2003			2002			2003			2002
Net revenue:
	Cole Vision		$	228,832		$	218,079		$	462,373		$	451,049
	Things Remembered			78,827			74,311			133,535			126,782
		Total net revenue	$	307,659		$	292,390		$	595,908		$	577,831
Operating income (loss):
	Cole Vision		$	3,186		$	2,906		$	12,462		$	16,197
	Things Remembered			9,940			9,795			7,360			7,956
		Total segment operating income		13,126			12,701			19,822			24,153
	Unallocated amounts:
		Corporate expenses		13,732			2,509			22,586			5,000
	Total operating income (loss)			(606	)		10,192			(2,764	)		19,153
	Interest and other (income) expense, net			5,695			17,534			11,772			23,989
	Income (loss) before income taxes		$	(6,301	)	$	(7,342	)	$	(14,536	)	$	(4,836	)

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

~~(6)~~ As of July ~~Commitments~~31, 2004, the total availability under the 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 of July 31, 2004 and ~~Contingencies~~August 2, 2003 and there were no borrowings during the first six months of fiscal 2004 and fiscal 2003.

The Company ~~leases~~has aan ~~substantial~~agreement ~~portion~~with ofa ~~its~~bank ~~computers,~~to ~~equipment~~provide ~~and facilities~~documentary ~~including~~letters ~~laboratories, office and warehouse space, and retail store~~of ~~locations.~~credit ~~These~~for ~~leases~~import ~~generally~~inventory ~~have~~purchases ~~initial~~not ~~terms of up~~ to ~~10 years~~exceed ~~and often contain renewal or purchase options~~$7. ~~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~~0 million. InThe ~~addition, Cole Vision operates departments in various host stores~~letters ~~paying occupancy costs solely as a percentage~~ of ~~sales~~credit ~~under~~are ~~agreements containing~~secured ~~short-term~~by ~~cancellation clauses. Generally,~~ the ~~Company~~inventory ispurchased. ~~required to~~As ~~pay taxes and normal expenses~~ of ~~operating~~July 31, ~~the premises for laboratory~~2004, ~~office,~~ ~~warehouse and retail store leases;~~ the ~~host stores pay these expenses~~ ~~for~~Company ~~departments~~had ~~operated~~$3.8 million onoutstanding aunder ~~percentage-of-sales~~this ~~basis~~facility.

8(5) Retirement Plans

~~Table~~ The ofCompany ~~Contents~~uses a December 31 measurement date for its plans. Net pension expense and postretirement expense for the 13 and 26 week periods ended July 31, 2004 and August 2, 2003 are as follows (dollars in thousands):

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. 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

~~The Company’s former Chairman and Chief Executive Officer retired at the~~8 annual meeting of shareholders of Cole National Corporation on June 25, 2003. The Company fulfilled its obligations, including certain contingent obligations, to its former Chairman and Chief Executive Officer under his employment agreement and for retirement and life insurance benefits. These obligations required a one-time cash payment of $11.9 million with a charge to operating expenses in the second quarter of fiscal 2003 of $9.4 million.

(7) LegalTable Proceedings of Contents

The Company ~~and~~previously ~~its~~disclosed ~~optical~~in ~~subsidiaries~~its ~~have~~financial ~~been~~statements ~~sued~~for by the ~~State of~~year ~~California~~ended January 31, ~~which~~2004, ~~alleges~~that ~~claims~~it ~~for~~expected ~~various~~to ~~statutory~~contribute ~~violations~~$7.5 million ~~related~~ to its ~~the~~pension ~~operation~~plan ~~of 24 Pearle Vision Centers~~ in ~~California~~2004. ~~The~~As ~~claims include untrue or misleading advertising, illegal dilation fees, unlawful advertising~~ of ~~eye exams~~July 31, ~~maintaining an optometrist on or near the premises of a registered dispensing optician~~2004, ~~unlawful~~$1.8 million ~~advertising~~ of ancontributions ~~optometrist,~~have ~~unlicensed~~been ~~practice of optometry, and illegal relationships between dispensing opticians, optical retailers and optometrists~~made. The ~~action~~Company ~~seeks~~presently ~~unspecified damages,~~anticipates ~~restitution~~contributing ~~and~~an ~~injunctive~~additional ~~relief~~$3. ~~Although the State of California~~7 ~~obtained~~million ~~a preliminary injunction~~ to ~~enjoin~~fund ~~certain~~its ~~advertising~~pension ~~practices~~plan ~~and from charging dilation fees~~ in ~~July~~2004 ~~2002,~~for ~~the~~a ~~terms~~total of ~~the injunction have not had and are not expected to have any material effect on the Company’s operations~~$5. ~~In addition, both the State and the Company have appealed the preliminary injunction~~5 million. ~~Although the Company believes it is in compliance with~~The ~~California~~decrease ~~law and intends to continue to defend the issues raised~~ in ~~the~~expected ~~case vigorously,~~funding itfor ~~may~~fiscal be2004 ~~required~~is todue ~~further modify its activities or might be required~~ to ~~pay~~passage ~~damages and or restitution in a currently undeterminable amount if it is not successful, the cost~~ of ~~which, as well as continuing defense~~further ~~costs,~~pension ~~might~~relief ~~have~~by ~~a material adverse effect on the Company’s operating results and cash flow in one or more periods~~Congress.

~~Things Remembered, Inc. settled a class action complaint in California alleging that the putative class~~ (~~alleged to include 200 members~~6) were improperly denied overtime compensation in violation of California law. The action sought unspecified damages, interest, restitution, as well as declaratory and injunctive relief and attorneys’ fees. On February 3,Segment ~~2003,~~Information ~~Things Remembered and the plaintiffs reached an agreement to resolve the~~ ~~lawsuit for $562,500. The settlement is subject to court approval. A liability~~ ~~of $562,500 was recorded in the fourth quarter of fiscal 2002.~~

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

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


	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	$	3,186		$	22,315	$	12,462
Things Remembered		11,790		9,940			10,725		7,360

Total segment operating income		21,420		13,126			33,040		19,822
Unallocated corporate expenses		3,277		13,732			8,490		22,586

Total operating income (loss)		18,143		(606	)		24,550		(2,764	)
Interest and other (income) expense, net		5,870		5,695			12,000		11,772

Income (loss) before income taxes	$	12,273	$	(6,301	)	$	12,550	$	(14,536	)

~~The~~(7) Commitments Company has been named as a defendant along with numerous other retailers, in patent infringement litigation challenging the defendants’ use of bar code technology. The Company believes it has available defenses and ~~does~~Contingencies ~~not expect any liability. However, if the Company 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.~~

9 The Company leases a substantial portion of its computers, equipment and facilities including laboratories, office and warehouse space, and retail store locations. These leases generally have initial terms of up to 10 years and often contain renewal or purchase options. Operating and capital lease obligations are based upon contractual minimum rates and, in most leases covering retail store locations, additional rents are payable based on store sales. In addition, Cole Vision operates departments in various host stores paying occupancy costs solely as a percentage of sales. 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.

~~Table~~ The Company guarantees future minimum lease payments for certain store locations leased directly by franchisees. These guarantees totaled approximately $12.2 million, $13.3 million and $13.4 million as of ~~Contents~~July 31, 2004, August 2, 2003 and January 31, 2004, 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.

In fiscal 2003, the ~~ordinary~~Company ~~course~~entered ofinto ~~business,~~an agreement to guarantee a portion of the ~~Company~~amount isowed ~~involved~~to a bank by a franchisee as a result of a loan granted in ~~various~~connection with the purchase of five stores. The guaranteed amount ~~other~~equals ~~legal~~the ~~proceedings~~cumulative value of the store assets. The Company is ofreleased from its obligation once the ~~opinion~~landlords ~~that~~of the ~~ultimate~~store locations execute subordination ~~resolution~~agreements ofor ~~these~~the ~~matters~~bank ~~will~~is ~~not~~granted ~~have~~access ato ~~material~~the ~~adverse~~store ~~effect~~assets onin the event of ~~results~~the default by the franchisee. The Company received four executed subordination agreements as of ~~operations~~July 31, ~~liquidity~~2004. orThe ~~financial~~maximum ~~position~~exposure ofunder the ~~Company~~agreement is $47,000.

10(8) Legal Proceedings

~~Table~~ On July 14, 2004, a Cole National Corporation shareholder filed a shareholders’ class action complaint against the Parent, its directors, and Luxottica Group S.p.A. (“Luxottica”). The complaint alleges, among other things, that the individual defendants breached their fiduciary duties as directors and/or officers to the Parent by causing the Parent to enter into an agreement to be acquired by Luxottica for $22.50 per share “without having exposed the Parent 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 ~~Contents~~company.” The complaint seeks preliminary and

~~Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations~~9

OverviewTable of Contents

~~Cole~~permanent ~~National~~injunctive ~~Group,~~relief against ~~Inc.~~the merger, arescission ~~wholly~~of ~~owned~~the ~~subsidiary~~merger ofif ~~Cole~~it ~~National Corporation,~~ is aconsummated, ~~leading~~and/or damages ~~provider of optical products~~ and ~~services~~other ~~and personalized~~associated ~~gifts~~relief. The ~~Company~~Parent ~~sells~~believes ~~its~~that ~~products~~the ~~and~~action ~~services through 2,472~~is ~~company-owned~~without ~~retail locations and 463 franchised locations in 50 states, Canada and the Caribbean~~merit.

~~Fiscal~~The ~~years~~Company ~~end~~and onits optical subsidiaries have been sued by the ~~Saturday~~State ~~closest~~of California, which alleges claims for various statutory violations related to the ~~January 31~~operation ~~and~~of ~~are~~23 ~~identified~~Pearle Vision Centers in California. The claims include ~~according~~untrue toor misleading advertising, illegal dilation fees, unlawful advertising of eye exams, maintaining an optometrist on or near the ~~calendar~~premises ~~year~~of ina registered ~~which~~dispensing ~~they~~optician, ~~begin~~unlawful advertising of an optometrist, unlicensed practice of optometry, and illegal relationships between dispensing opticians, optical retailers and optometrists. ~~For~~The ~~example~~action seeks unspecified damages, restitution and injunctive relief. In July 2002, the ~~fiscal~~State of ~~year~~California ~~ended~~obtained ~~February~~a preliminary injunction to enjoin certain advertising practices and from charging dilation fees. The trial court’s decision was appealed by both the Company and the State. On November 126, 2003, isthe ~~referred~~appellate court ruled on the appeal in a manner adverse to asthe ~~“fiscal~~Company ~~2002.”~~with ~~The~~respect ~~current~~to continued ~~fiscal~~advertising in California by Pearle Vision that expressly or ~~year~~implicitly advertises the furnishing of optometric services, ~~which~~disallowing continued ~~ends~~advertising ~~January~~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 313, 2004, isthe ~~referred~~California toSupreme asCourt ~~“fiscal~~granted ~~2003~~the Company’s petition for review of the Appellate Court’s decision.” ~~Fiscal~~Although ~~2003~~the Company believes that its advertising and ~~fiscal~~operational ~~2002~~practices ~~each~~in ~~consists~~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 ~~52 weeks~~which might have a material adverse effect on the Company’s operating results and cash flow in one or more periods.

~~The~~Cole ~~Company~~National ~~has~~Corporation ~~two~~settled ~~reportable~~a ~~segments,~~class ~~Cole~~action ~~Vision~~lawsuit ~~and~~alleging ~~Things~~claims ~~Remembered.~~for ~~Most~~various violations of ~~Cole~~federal ~~Vision~~securities laws related to the Company’s publicly ~~revenue~~reported ~~represents~~revenues ~~sales~~and ofearnings. ~~prescription eyewear,~~The ~~accessories~~action, ~~warranties~~which pleaded claims under Section 10(b) and ~~other~~20(a) ~~services~~of ~~through~~the ~~its~~Securities ~~Cole~~Exchange ~~Licensed~~Act of 1934, and named the ~~Brands~~Company and ~~Pearle~~certain ~~Vision~~present ~~retail~~and ~~locations~~former officers and directors as defendants, sought unspecified compensatory damages, punitive damages “where appropriate”, costs, expenses and attorneys’ fees. ~~Cole~~On ~~Vision~~May 30, ~~revenue~~2003, ~~also~~the ~~includes~~Company and the ~~sales~~plaintiffs ofreached ~~merchandise~~an agreement to ~~franchisees,~~resolve ~~royalties~~the ~~based~~lawsuit. onOn ~~franchise~~September 29, ~~sales~~2003, ~~initial~~the ~~franchise~~Court ~~fees~~approved ~~for~~final ~~Pearle~~settlement ~~Vision~~of ~~and~~the ~~capitation~~lawsuit. ~~revenue~~A charge of $2,687,500 ~~administrative~~was ~~service~~recorded ~~fee~~in ~~revenue~~the ~~and~~first ~~discount~~quarter ~~program~~of ~~service~~fiscal ~~fees~~2003 ~~from~~with ~~its~~respect ~~Cole~~to ~~Managed~~the Company’s ~~Vision~~portion ~~business~~of the settlement.

~~Things~~Following ~~Remembered~~the Company’s ~~revenue~~announcement ~~represents~~in ~~sales~~November 2002 of ~~engraveable~~the ~~gift~~restatement ~~merchandise~~of the Company’s financial statements, ~~personalization~~the Securities and ~~other~~Exchange ~~services~~Commission began ~~primarily~~an ~~through~~investigation ~~retail in-line~~into ~~stores~~the ~~and~~Company’s ~~kiosks~~previous accounting. ~~Things~~The ~~Remembered~~course ~~revenue~~of this ~~also~~investigation ~~includes~~or ~~direct~~other ~~sales~~litigation or investigations arising out of the ~~through~~restatement ~~its~~of ~~e-commerce~~the ~~site,~~Company’s ~~www~~financial statements cannot be predicted.~~ThingsRemembered.com~~ In addition, ~~revenues~~under ~~through~~certain ~~Things~~circumstances the Company would be obliged to ~~Remembered~~indemnify ~~catalogs~~the individual current and ~~through~~former ~~affiliate~~directors ~~programs~~and ~~direct~~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 ~~businesses~~a portion of its indemnification obligations. If the Company is unsuccessful in defending against the current investigation or any litigation, there may be a material adverse effect on the Company’s financial condition, cash flow and results of operations.

11 Cole National Group, Inc. has been named as a defendant along with numerous other retailers, in patent infringement litigation challenging the defendants’ use of bar code technology. 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 patents unenforceable and not infringed. This judgment has been appealed, and the infringement litigation against Cole National Group will remain stayed pending the final resolution of the appeal. Cole National Group, Inc. believes it has available defenses and does not expect any liability. However, if Cole National Group, Inc. were to be found liable for an infringement, it might have a material adverse effect on its operating results and cash flow in the period incurred.

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

~~Results~~(9) Luxottica ofMerger ~~Operations~~ Agreement

~~The~~On ~~following~~January 23, ~~schedule~~2004, ~~sets~~the ~~forth~~Parent ~~certain~~and ~~operating~~Luxottica ~~information~~Group ~~for~~S.p.A. ~~the~~(“Luxottica”) ~~second~~entered ~~quarters~~into ~~and~~a merger agreement (the ~~first~~“Luxottica ~~six-months~~merger agreement”) pursuant to which a subsidiary of ~~fiscal~~Luxottica ~~2003~~would be merged with and ~~fiscal~~into ~~2002~~the Parent and the Parent would thereafter become a subsidiary of Luxottica. ~~This~~Under the ~~schedule~~Luxottica ~~and~~merger ~~subsequent~~agreement, ~~discussions~~Luxottica ~~should~~would beacquire ~~read~~all of the outstanding shares of the Parent in ~~conjunction~~a merger for a cash price of $22.50 per share, together with the purchase of all outstanding options and similar equity rights ~~condensed~~at ~~consolidated~~the ~~financial~~same ~~statements~~price ~~included~~per inshare, ~~this~~less ~~Form~~their respective exercise price. On June ~~10-Q~~2, 2004, the Parent 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 Parent’s stockholders approve the Luxottica merger agreement, as amended, through the closing date of the merger, subject to

			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			13.7			2.5			447.3			22.6			5.0			351.7
		Total operating expenses	$	193.4		$	179.2			8.0	%	$	377.9		$	355.6			6.3	%
Operating income (loss):
	Cole Vision		$	3.2		$	2.9			9.6	%	$	12.4		$	16.2			(23.1	)%
	Things Remembered			9.9			9.8			1.5			7.4			8.0			(7.5	)
	Unallocated corporate expenses			(13.7	)		(2.5	)		447.3			(22.6	)		(5.0	)		351.7
		Total operating income (loss)	$	(0.6	)	$	10.2			(105.9	)%	$	(2.8	)	$	19.2			(114.4	)%
Percentage of net revenue:
	Gross margin			62.7	%		64.8	%		(2.1	)		63.0	%		64.9	%		(1.9	)
	Operating expenses			62.9			61.3			(1.6	)		63.4			61.5			(1.9	)
	Operating income (loss)			(0.2	)%		3.5	%		(3.7	)		(0.5	)%		3.3	%		(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

AsTable used in Item 2 of this Form 10-Q, same-store sales growth is a non-GAAP financial measure, which includes deferred warranty sales on a cash basis and does not reflect provisions for returns and remakes and certain other items. The Company’s current systems do not gather data on these items on an individual store basis. Adjustments to the cash basis sales information accumulated at the store level are made 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 sales growth follows: Contents

12certain conditions. On July 14, 2004, the Parent 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 Parent’s stockholders which was held on July 20, 2004 and subsequently adjourned to July 22, 2004, the Parent 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 Parent’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.

~~Table~~ The Luxottica merger is subject to the satisfaction of ~~Contents~~customary conditions, including compliance with applicable antitrust clearance requirements. On February 27, 2004, the Parent 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 Parent 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 Parent 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.

		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	)%

(10) Restatement of Cash Flows

~~Same-store~~Subsequent ~~sales~~to the issuance of the fiscal 2003 condensed consolidated financial statements, the Company determined that certain components in its condensed consolidated statements of cash flows for ~~Pearle~~fiscal U2003 were incorrectly classified.S. ~~franchise~~Mistakes ~~stores~~were isdiscovered ain ~~non-GAAP~~the ~~financial~~calculation of the ~~measure~~fiscal ~~that~~2002 isoverdraft ~~provided~~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 ~~comparative~~fiscal ~~purposes~~2003 ~~only~~were also incorrectly classified. ~~The~~As ~~Company~~a ~~believes~~result, the accompanying condensed consolidated statement of ~~that~~cash ~~its~~flows ~~franchisees’~~for ~~method~~the first half of ~~reporting~~fiscal ~~sales~~2003 ishas ~~consistent~~been onrestated afrom ~~year-~~the amounts previously reported to~~-year~~ decrease cash flows from operating activities by $3.7 ~~basis~~million, increase cash flows from investing activities by $0.1 million and increase cash flows from financing activities by $3.6 million.

~~Second Quarter Fiscal 2003 Compared to Second Quarter Fiscal 2002~~ 11

ConsolidatedTable Operations of Contents

~~Total~~Item ~~revenues were $307.7 million in the second quarter of fiscal 2003, compared with $292.4 million in the same period of fiscal 2002. Total revenues increased 5.~~2~~% in the second quarter of fiscal 2003, primarily attributable to a 6~~.9% ~~increase~~Management’s inDiscussion ~~same-store sales~~ and ~~increases~~Analysis ~~in revenues from managed vision care programs. Undelivered orders taken for customers, as~~ of ~~the~~Financial ~~end~~Condition ~~of second quarter, used in the calculation of same-store sales in that period but recognized as revenue in future periods due to the timing difference between order placement~~ and ~~order~~Results ~~delivery, increased in the second quarter~~ of fiscal 2003. The increase in the “on-order” amount in the second quarter of fiscal 2003 was primarily due to a successful promotion at Sears Optical at the end of the second quarter. Same-store sales increased 9.4% at Cole Licensed Brands, 4.1% at Pearle Vision company-owned stores and 6.8% at Things Remembered in the second quarter of fiscal 2003. Operations

~~Gross~~Subsequent ~~margin~~to ~~was~~the ~~$192.8 million~~issuance inof the ~~second~~Company’s ~~quarter~~condensed ofconsolidated financial statements for fiscal 2003, ~~compared~~ ~~with $189.4 million in~~ the ~~same~~Company ~~period~~determined ofthat ~~fiscal 2002, an increase of~~certain ~~1.8%.~~components ~~The~~in ~~gross~~its ~~margin~~condensed ~~dollar~~consolidated ~~increase~~statement ~~was~~of ~~attributable~~cash toflows ~~higher~~for ~~revenues at~~fiscal ~~both~~2003 ~~Cole~~were ~~Vision~~incorrectly ~~and Things Remembered~~classified. ~~The~~As ~~gross~~a ~~margin~~result, ~~rate for~~ the ~~second~~accompanying condensed ~~quarter~~consolidated statement of ~~fiscal~~cash ~~2003~~flows ~~was 62.7%, compared to 64.8%~~ for the ~~second~~first ~~quarter~~six months of fiscal ~~2002.~~year 2003 ~~The~~has ~~gross~~been ~~margin~~restated ~~rate at Cole Vision decreased 2.5%~~ from the ~~same period~~amounts ~~last~~previously ~~year~~reported. ~~(further~~See ~~discussion~~Note is10 ~~included~~of in the ~~Cole Vision segment).~~ ~~Managed~~Notes ~~care~~to ~~claims~~the ~~expense~~Condensed ~~has~~Consolidated ~~been~~Financial ~~reclassified~~Statements infor ~~both~~a ~~years~~summary ~~to cost~~ of the ~~revenues~~significant ~~from~~effects ~~operating~~of ~~expenses~~the torestatement. ~~provide~~This ~~improved transparency to Cole Vision~~management’s ~~gross~~discussion ~~margin.~~and analysis ~~The~~of ~~gross~~financial ~~margin~~condition ~~rate~~and atresults ~~Things~~of ~~Remembered~~operations ~~decreased~~reflects bythe effect ~~0.9%,~~of ~~primarily~~the ~~due to reduced revenues from gift personalization~~restatement.

~~Operating~~On ~~expenses were $193.4~~January ~~million~~23, in2004, the ~~second~~Parent ~~quarter~~and ofLuxottica ~~fiscal~~Group S.p.A. (“Luxottica”) ~~2003,~~entered ~~compared~~into ~~with~~a ~~$179.2 million~~merger inagreement (the ~~same~~“Luxottica ~~period~~merger ofagreement”) ~~fiscal~~pursuant ~~2002, an~~to ~~increase~~which a subsidiary of ~~8.0%.~~Luxottica ~~Included~~would inbe ~~operating~~merged ~~expense~~with ~~was~~and aninto ~~increase~~the ofParent ~~$11.2~~and ~~million~~the inParent ~~unallocated~~would ~~corporate~~thereafter ~~expenses.~~become ~~The~~a ~~Company’s~~subsidiary ~~former~~of ~~Chairman~~Luxottica. ~~and~~Under the ~~Chief~~Luxottica ~~Executive~~merger ~~Officer~~agreement, ~~retired~~Luxottica atwould ~~the~~acquire ~~annual~~all ~~meeting~~of the outstanding shares of ~~shareholders~~the onParent ~~June 25,~~in ~~2003.~~a ~~The~~merger ~~Company~~for ~~fulfilled~~a ~~its~~cash ~~obligations,~~price ~~including~~of ~~certain~~$22.50 ~~contingent obligations~~per share, totogether with ~~its~~the ~~former~~purchase ~~Chairman~~of all outstanding options and ~~Chief~~similar ~~Executive~~equity ~~Officer~~rights ~~under~~at ~~his~~the ~~employment~~same ~~agreement~~price ~~and~~per ~~for~~share, ~~retirement~~less ~~and~~their ~~life~~respective ~~insurance~~exercise ~~benefits~~price. ~~These~~On June 2, 2004, ~~obligations~~the ~~required~~Parent aand ~~one-time~~Luxottica ~~cash~~entered ~~payment~~into ofthe ~~$11.9 million~~first ~~with~~of atwo ~~charge~~amendments to the ~~operating~~Luxottica ~~expenses~~merger inagreement. Under the ~~second~~first ~~quarter~~amendment ofto ~~fiscal~~the ~~2003~~Luxottica ofmerger agreement, the original $922.~~4 million.~~50 ~~The Company~~per ~~incurred~~share ~~incremental~~cash ~~charges~~merger ofconsideration ~~$1.2 million~~would ~~for~~be increased ~~legal~~by ~~and~~an ~~professional fees~~amount ~~primarily~~equal ~~related~~ to ~~the~~4% ~~reaudit~~per ~~and~~annum ~~restatement~~from ofthe ~~its~~date ~~financial statements~~on ~~and~~which the Parent’s ~~resulting~~stockholders ~~SEC~~approve ~~investigation.~~the ~~The~~Luxottica ~~Company~~merger ~~incurred incremental~~agreement, ~~professional~~as ~~and~~amended, through ~~legal~~the ~~fees~~closing date of ~~$0.7 million~~the ~~related~~merger, subject to ~~recent management~~certain ~~changes and other management initiatives~~conditions. ~~Operating~~On ~~expenses~~July 14, at2004, the ~~Cole~~ ~~Vision~~Parent ~~and~~amended ~~Things~~its ~~Remembered~~merger ~~segments~~agreement ~~increased~~with ~~1.7%~~Luxottica ~~primarily~~once ~~due to~~again. ~~higher~~Under ~~store~~the ~~payroll~~Luxottica ~~including~~merger ~~fringe~~agreement, ~~benefits~~as ~~and~~amended, ~~workers~~the ~~compensation~~original ~~and~~$22.50 per share ~~from~~cash ~~rent~~merger ~~and~~consideration ~~occupancy~~to ~~costs.~~be ~~These~~paid ~~costs~~by ~~increased~~Luxottica ~~primarily~~was inincreased ~~support~~to of$27.50 per ~~higher~~share ~~revenues.~~in ~~The~~cash, ~~Company~~plus ~~and~~an ~~its~~additional ~~optical~~amount ~~subsidiaries~~equal ~~have~~to ~~been~~4% ~~sued~~per byannum from the ~~State~~ date of stockholder ~~California~~approval ~~(see~~through ~~Note~~the 7closing date of the ~~Notes~~merger. toOn ~~Condensed~~July 22, ~~Consolidated~~2004, ~~Financial~~at ~~Statements).~~the ~~Legal~~2004 ~~costs~~annual ~~associated~~meeting ~~with~~of the ~~defense~~Parent’s ofstockholders ~~this~~which ~~matter totaled~~was ~~$1.1 million~~held inon ~~the~~July 20, ~~second~~2004 ~~quarter~~and ofsubsequently ~~fiscal~~adjourned ~~2003~~to July 22, ~~compared~~2004, ~~with $0.7 in~~ the ~~same~~Parent ~~period~~received ~~last~~votes from ~~year.~~a ~~Partially~~majority ~~offsetting~~of ~~expense~~the ~~increases~~outstanding ~~were savings~~shares ~~from~~to ~~lower~~approve ~~store~~the ~~marketing~~Luxottica ~~costs~~merger agreement, ~~totaling~~as $2amended.~~4 million,~~ aBased ~~reduction~~upon of the $127.~~0 million~~50 inprice, ~~claims processing costs in~~ the ~~second~~total ~~quarter~~purchase ofprice ~~fiscal 2003~~of ~~compared to~~ the ~~same~~Parent’s ~~time~~outstanding ~~last~~shares ~~year,~~and ~~work~~related ~~force~~equity ~~reductions~~rights ~~and~~is ~~costs~~approximately ~~for a~~$495 ~~point~~million, ofplus ~~sale~~an ~~system~~amount ~~incurred~~equal into ~~the~~4% ~~second~~per ~~quarter~~annum offrom ~~fiscal~~July 22, ~~2002~~2004 ~~which~~through ~~were~~the ~~not~~date ~~repeated~~of closing.

~~Operating~~The ~~loss~~Luxottica ~~was~~merger ~~$0.6 million~~is insubject to the ~~second~~satisfaction ~~quarter~~ of ~~fiscal 2003,~~customary ~~compared~~conditions, toincluding ~~operating~~compliance ~~income~~with ofapplicable ~~$10~~antitrust clearance requirements.2 On February ~~million~~27, in2004, the ~~same~~Parent ~~period~~and ofLuxottica ~~fiscal~~filed pre-merger ~~2002~~notifications with the U.S. ~~The~~antitrust ~~expenses~~authorities ~~associated~~pursuant ~~with~~to the Hart-Scott-Rodino ~~retirement~~Antitrust Improvements Act of 1976 (“the ~~Company’s~~HSR ~~former~~Act”). On March ~~Chairman~~30, 2004, the Parent and ~~Chief~~Luxottica ~~Executive~~jointly ~~Officer,~~announced that they had received a request from the ~~lower~~Federal ~~gross~~Trade ~~margin~~Commission ~~rate,~~(the “FTC”) for additional information and ~~higher~~documentary ~~corporate~~material ~~expenses~~with ~~due~~respect to the Luxottica merger. ~~restatement~~Luxottica and ~~reaudit~~the ofParent ~~the~~completed ~~fiscal~~their ~~2000~~required information submissions and related ~~2001~~certifications ~~financial~~to ~~statements~~the ~~were~~FTC in connection with its antitrust review on July 19, 2004 and have committed to the ~~primary~~FTC ~~reasons~~not ~~for~~to close the ~~decrease~~transaction before September 30, 2004, without its consent. The Luxottica merger is expected to close in ~~operating~~the ~~results~~second half of 2004.

13Overview

~~Table~~ Cole National Group, Inc., a wholly owned subsidiary of ~~Contents~~Cole National Corporation is a leading provider of optical products and services and personalized gifts. The Company sells its products and services through 2,417 Company-owned retail locations and 484 franchised locations in 50 states, Canada and the Caribbean.

~~Interest~~Fiscal ~~and~~years ~~other~~end ~~(income) expense,~~on ~~net, was $5.7 million for~~ the ~~second quarter~~Saturday ofclosest ~~fiscal 2003, compared~~ to ~~$17.5~~January ~~million~~31 ~~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~~are ~~costs of retiring the Company’s 9-7/8% Senior Subordinated Notes due~~identified ~~2006~~according ~~and~~to the ~~write-offs~~calendar ofyear ~~unamortized~~in ~~discount~~which ~~and~~they ~~deferred financing fees~~begin. ~~The~~ ~~Company~~For ~~recorded~~example, ~~lower interest expense in~~ the ~~second quarter of~~ fiscal ~~2003~~year ~~compared~~ended ~~to the same period last year~~January 29, ~~primarily~~2005 ~~due~~is referred to ~~replacement~~as of“fiscal ~~the $150~~2004”.~~0 million~~ ~~9-7/8%~~Fiscal ~~Senior~~2004 ~~Subordinated Notes with the issuance of 8-7/8% Senior Subordinated Notes in May 2002~~ and ~~the impact of the interest rate swap~~ ~~agreements.~~fiscal ~~See~~2003 ~~Note~~each 3consisted of ~~the~~a ~~Notes~~52-week ~~to Condensed Consolidated Financial Statements~~period.

The Company ~~recorded~~has atwo ~~tax~~reportable ~~benefit~~segments, ~~based~~Cole onVision ~~its~~and ~~estimated annual effective~~Things ~~rate~~Remembered. Most of ~~22%.~~Cole ~~The~~Vision’s ~~quarterly~~revenue ~~rate~~represents ~~reflects~~sales ~~the~~of ~~cumulative~~prescription eyewear, ~~impact~~accessories ofand ~~changing~~services ~~the estimated~~through ~~annual~~its ~~effective~~Cole ~~rate~~Licensed ~~from~~Brands ~~20%~~and inPearle Vision ~~the~~retail ~~first~~locations. ~~quarter~~Cole ofVision ~~fiscal~~revenue ~~2003~~also ~~to 22%.~~includes ~~The~~sales ~~estimated~~of ~~lower~~merchandise to ~~effective~~franchisees, ~~tax~~royalties ~~rate~~based inon ~~fiscal~~franchise ~~2003~~sales ~~compared~~and toinitial ~~fiscal~~franchise fees ~~2002~~for isPearle ~~based~~Vision onand ~~the~~capitation ~~expected~~revenue, ~~full~~administrative ~~year~~service ~~results~~fee revenue and ~~the~~discount ~~impact~~program ofservice ~~certain nondeductible~~fees ~~expenses~~from its Cole Managed Vision business.

~~Cole~~ Things ~~Vision~~Remembered’s ~~Segment~~revenue represents sales of engraveable gift merchandise, personalization and other services primarily through retail in-line stores and kiosks. Things Remembered revenue also includes direct sales through its e-commerce site, http://www.ThingsRemembered.com, sales through Things Remembered catalogs and through third party partner programs.

~~Cole Vision revenues were $228.9 million in the second quarter of fiscal~~12 2003, compared with $218.1 million in the same period of fiscal 2002, an increase of 4.9%. The revenue increase was primarily due to increased revenues at Cole Licensed Brands and increased revenues from managed vision care programs. The increase in Cole Licensed Brands revenues was primarily attributable to an 18.9% increase in same-store sales at Target Optical and an increase in the number of store locations. Same-store sales improved 7.8% at Sears Optical and 15.6% at BJ’s Optical during the second quarter of fiscal 2003. Same-store sales results at Cole Licensed Brands were driven by increases in both the number of transactions as well as the average transaction size. Revenues from managed vision care programs were higher primarily due to an increase in the number of capitated plans sold to employers, health plans and associations and increased laser procedure volume and program changes in laser vision correction resulting in higher revenues per procedure. Same-store sales for the second quarter of fiscal 2003 increased 4.1% at Pearle Vision. Same-store sales at Pearle Vision reflected a decrease in the number of transactions, offset by an increase in the average transaction size. Same store sales results 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 five new stores.

GrossTable 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 were the 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 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. Contents

~~Operating~~Results ~~expenses were $133.4 million in the second quarter~~ of ~~fiscal~~Operations ~~2003, compared to $132.8 million for the same period last year, an increase of~~ ~~0.5%. Operating expenses as a percent of net revenues decreased at Cole Vision~~ ~~by 2.6% in the second quarter of fiscal 2003, compared to the same period of~~ fiscal 2002. Store payroll and rent and occupancy costs at Cole Vision were $1.5 million and $0.7 million higher in the second quarter of fiscal 2003 compared to the same period last year, primarily to support the increase in revenues. Pearle Vision recorded a charge of $0.6 million for assets disposed of in a prior period. The Company’s Canadian operations closed its manufacturing and distribution facility located in Toronto, Canada. One time costs associated with the closure of the facility totaled $0.4 million. The Company and its optical subsidiaries have been sued by the State of California (see Note 7 of the Notes to Condensed Consolidated Financial Statements). Legal costs associated with the defense of this matter totaled $1.1 million in the second quarter of fiscal 2003, compared with $0.7 million in the same period last year. 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

14 The following schedule sets forth certain operating information for the second quarters and the first six months of fiscal 2004 and fiscal 2003. This schedule and subsequent discussions should be read in conjunction with the condensed consolidated financial statements included in this Form 10-Q.


	Second Quarter									First Six Months
							Change									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		3.3			13.7			76.1			8.5			22.6			62.4

Total operating expenses	$	178.7		$	192.7			7.3	%	$	366.1		$	376.6			2.8	%

Operating income (loss):
Cole Vision	$	9.6		$	3.2			202.2	%	$	22.3		$	12.5			79.1	%
Things Remembered		11.8			9.9			18.6			10.7			7.3			45.7
Unallocated corporate expenses		(3.3	)		(13.7	)		76.1			(8.5	)		(22.6	)		62.4

Total operating income (loss)	$	18.1		$	(0.6	)		N/A		$	24.5		$	(2.8	)		N/A

~~million~~ Information inon the ~~second~~number ~~quarter~~ of ~~fiscal~~the ~~2003, compared~~Company’s toretail ~~the~~locations ~~same~~by ~~period~~business open ~~last~~at ~~year~~July 31, 2004 and ~~a gain of $1.0~~August ~~million~~2, on2003 ~~the~~is ~~sale~~presented ofbelow: ~~five company-owned stores to a franchisee.~~

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


	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

Results of operations below are reflected as a percentage of net revenues. Data for the Cole Vision and Things Remembered ~~Segment~~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.

~~Things Remembered revenues were $78.8 million in the second quarter of~~13 fiscal 2003, compared with $74.3 million in the same period of fiscal 2002, a 6.1% increase. The same-store sales increase of 6.8% and a 35% increase in direct channel revenues were the primary reasons for the increase. Direct channel revenues include revenues from its e-commerce site, www.ThingsRemembered.com, revenues from Things Remembered catalogs and through affiliate programs direct to businesses. Improvements in the average dollar sale were offset by a lower number of transactions and a reduction in the number of stores operating at the end of the second quarter. Store count at the end of the second quarter of fiscal 2003 was 754 compared to 776 at the end of the second quarter of fiscal 2002 due to store closings.

GrossTable 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. Contents

Operating expenses were $46.3 million in the second quarter of fiscal 2003, compared to $43.9 million for the same period last year, an increase of 5.5%. Operating expenses as a percent of revenues decreased 0.3% in the second quarter of fiscal 2003 compared to the same period of fiscal 2002. Things Remembered accrued higher management bonuses of $0.9 million. Store rent and occupancy charges increased $0.5 million primarily due to higher rent and occupancy costs associated with a higher mix of inline mall locations than kiosks. Inline mall locations generally incur higher rent and occupancy costs than kiosks due to higher square footage requirements. Things Remembered recorded higher payroll costs in the second quarter of fiscal 2003, compared to the same period last year to support higher revenues and also due to increased payroll hours to comply with state statutory requirements. Workers compensation expense increased $0.4 million in the second quarter of fiscal 2003, compared to the same period last year. The increase was due to higher estimated workers compensation obligations utilizing loss development factors prepared by independent third party actuaries. Things Remembered also incurred severance costs related to a senior executive in the second quarter of fiscal 2003. Partially offsetting the expense increases were charges incurred in the second quarter of fiscal 2002 for a new store point of sale system, the implementation of which has been delayed. These costs were not repeated in the second quarter of fiscal 2003. Savings from work force reductions taken in fiscal 2002 were also realized.


	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		1.0	%		4.5	%		1.4	%		3.8	%
Total operating expenses		57.1	%		62.7	%		59.0	%		63.2	%
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		(1.0	)%		(4.5	)%		(1.4	)%		(3.8	)%
Total operating income		5.8	%		(0.2	)%		4.0	%		(0.5	)%

~~Operating~~As ~~income~~used ~~for~~in ~~the~~Item 2 ~~second~~of ~~quarter~~this ofForm ~~fiscal~~10-Q, ~~2003~~same ~~was~~store $9sales growth 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.~~9 million~~ The Company’s current systems do not gather ~~compared~~data on these items on an individual store basis. Adjustments to $9the cash basis sales information accumulated at the store level are made for these items on an aggregate basis.~~8 million~~ inAs a retailer, the ~~same~~Company ~~period~~believes that a measure of ~~fiscal~~same store ~~2002.~~sales ~~Increases~~performance inis important for understanding its operations. The ~~revenue~~Company ~~were~~calculates ~~offset~~same bystore ~~the~~sales ~~lower~~for ~~gross~~stores ~~margin~~opened ~~rate,~~for ~~higher~~at ~~bonus~~least twelve ~~expense,~~months. ~~and~~A ~~increased~~reconciliation ~~workers~~of ~~compensation,~~same store ~~rent~~sales ~~and~~to ~~occupancy~~revenue ~~costs~~is presented in the section “Reconciliation of Same Store Sales Growth”. Same store sales growth follows:

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


	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	)%

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

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

~~Gross~~Consolidated ~~margin was $375.2 million in the first six months of fiscal 2003,~~Operations ~~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 segment). The gross margin rate at Things Remembered decreased by 1.0%, primarily due to reduced revenues from gift personalization and higher freight costs associated with an increase in customer orders fulfilled by central distribution.

15 Total 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.

~~Table of Contents~~14

OperatingTable expenses were $377.9 million in the first six months of fiscal 2003, compared with $355.6 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 of Cole National Corporation on June 25, 2003 and the Company fulfilled its obligations, including certain contingent obligations, under his employment agreement and for retirement and life insurance benefits. These obligations required a one-time cash payment of $11.9 million with a charge to operating expenses in the second quarter of fiscal 2003 of $9.4 million. The Company incurred incremental charges of $4.3 million for legal, audit and professional fees primarily related to the reaudit and restatement of its financial statements and the resulting SEC investigation. Settlement costs related to the class action lawsuit, alleging claims of various violations of federal securities laws related to the Company’s publicly reporting revenues and earnings totaled $2.7 million. The Company incurred incremental professional and legal fees of $1.0 million related to recent management changes and management initiatives. Operating expenses at the Cole Vision and Things Remembered segments increased 1.3% primarily due to higher store payroll including fringe benefits and workers compensation and rent and occupancy cost. These costs increased primarily in support of higher revenues. The Company and its optical subsidiaries have been sued by the State of California (see Note 7 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 with $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. Contents

~~Operating~~Cole ~~loss~~Vision ~~was $2.8 million in the first six months of fiscal 2003,~~Segment ~~compared to operating income of $19.2 million in the same period of fiscal~~ ~~2002. The expenses associated with the retirement of the Company’s former~~ ~~Chairman and Chief Executive Officer, the decrease in the gross margin rate,~~ the costs related to the settlement of the class action lawsuits, higher corporate expenses due to the restatement and reaudit of the fiscal 2000 and 2001 financial statements were the primary reasons for the decrease in operating results.

~~Interest~~For ~~and~~the ~~other~~second ~~(income) expense~~quarter of fiscal 2004, ~~net~~Cole Vision revenues were $232.9 million, ~~was~~compared with $11228.89 million ~~for~~in the ~~first six~~same ~~months~~period of fiscal 2003, ~~compared~~an increase toof ~~$24~~1.~~0 million~~8%. ~~for~~The revenue increase was primarily due to increased revenues from managed vision care programs, increases at the ~~same~~Company’s ~~period~~Canadian operations ofand at Cole Licensed Brands, partially offset by revenue decreases ~~fiscal~~at ~~2002~~Pearle Vision U.S. ~~Second~~Revenues ~~quarter~~from ~~fiscal~~managed ~~2002~~vision ~~results~~care ~~include~~programs awere ~~loss~~higher than last year primarily due to an increase in the number of ~~$11.1~~capitated plans ~~million~~and onincreases ~~the~~in ~~early~~revenues ~~extinguishment~~from ofexisting ~~debt~~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 ~~charge~~increase ~~represents~~at the Company’s ~~payment~~Canadian operation was due to improved merchandise assortment ofcompared ~~premiums~~to last year and ~~other~~to ~~costs~~the impact in 2003 of ~~retiring~~SARS to the ~~Company~~Canadian economy. The increase in Cole Licensed Brands revenues was attributable to store sales increases at Target Optical and BJ’s ~~9-7/8%~~Optical, ~~Senior~~partially offset by a ~~Subordinated~~same ~~Notes~~store ~~due~~sales ~~2006~~decrease at Sears Optical. Same store sales increases at both Target Optical and BJ’s Optical were driven by increases in the ~~write-offs~~average transaction size and in the number of ~~unamortized~~transactions. ~~discount~~A continuing focus on selling premium products and additional features were the key factors in the ~~deferred~~average ~~financing~~transaction ~~fees~~size increase. The ~~Company~~increase ~~recorded~~in ~~lower~~the ~~interest~~number ~~expense~~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 ~~first~~size ~~six~~and ~~months~~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 ~~2003~~2004 ~~compared~~due to a decrease in the ~~same~~number ~~period~~of ~~last~~transactions. ~~year,~~The ~~primarily~~Company believes that the decrease in the number of transactions in Pearle Vision and Sears Optical during the quarter is due primarily to ~~replacement~~the increasingly competitive promotional nature of the ~~$150~~optical retail industry.~~0 million~~ 9Pearle Vision operated 19 fewer Company-~~7/8%~~owned ~~Senior~~stores ~~Subordinated~~at the end of the second quarter of fiscal 2004 than ~~Notes~~it ~~with~~did at the ~~issuance~~end of ~~8-7/8%~~the ~~Senior~~second ~~Subordinated~~quarter ~~Notes~~of infiscal ~~May~~2003, ~~2002~~due ~~and~~to the net sale of ~~impact~~10 Company stores to franchisees, the closure of 12 stores and the ~~interest~~opening ~~rate~~of ~~swap~~3 new ~~agreements~~stores. ~~See~~The ~~Note~~Company 3is ofcontinuing ~~the~~to ~~Notes~~divest Company-owned stores in markets that are predominantly franchised in order to lower its store supervision ~~Condensed~~costs, ~~Consolidated~~and ~~Financial~~provide ~~Statements~~growth opportunities for franchisees already operating in those markets.

~~The~~For ~~Company~~the ~~recorded~~first asix ~~tax~~months ~~benefit~~of ~~based~~fiscal on2004, ~~its~~Cole ~~estimated~~Vision ~~annual~~revenues ~~effective~~were $482.8 ~~rate~~million, compared with $462.4 million in the same period of 22fiscal 2003, an increase of 4.4%. The ~~estimated~~revenue ~~lower~~increase ~~effective~~was ~~tax~~primarily ~~rate~~due to increased revenues from Cole Licensed Brands and from managed vision care programs, partially offset by revenue decreases at Pearle Vision U.S. The increase in ~~fiscal~~Cole ~~2003~~Licensed Brands ~~compared~~revenues was attributable to same store sales increases at all brands ~~fiscal~~driven ~~2002~~by isincreases ~~based~~in onthe average transaction size and an increase in the number ~~expected~~of ~~full~~transactions. Revenues from managed vision care programs were higher than last year ~~results~~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 ~~impact~~first six months of fiscal 2004. Same store sales ~~certain~~decreased ~~nondeductible~~in ~~expenses~~the first six months of fiscal 2004 due to a decrease in the number of transactions.

~~Cole~~Things ~~Vision~~Remembered Segment

~~Cole~~For ~~Vision~~the ~~revenues~~second ~~were~~quarter ~~$462.4 million~~of infiscal ~~the~~2004, ~~first~~Things ~~six~~Remembered ~~months~~revenues ~~of fiscal~~were ~~2003,~~$79.9 million compared with $~~451~~78.08 million in the same period of fiscal ~~2002~~2003, ana ~~increase of 2~~1.54%. ~~The revenue~~ increase, ~~was primarily~~ due to ~~increased~~a ~~revenues at~~same ~~Cole~~store ~~Licensed Brands and increased revenues from managed vision care programs, partially offset by~~ sales ~~decreases~~increase atof ~~Pearle Vision~~1.9% ~~The~~and ~~increase in Cole Licensed Brands revenues was primarily attributable to~~ a ~~17.1~~43% increase in ~~same-store~~direct ~~sales~~channel atrevenues, partially ~~Target~~offset ~~Optical~~by ~~and~~a anlower ~~increase in the~~ number of ~~store locations.~~stores ~~Same-store~~operating ~~sales~~than ~~improved~~last 2year.8% ~~at Sears Optical and 7.8% at BJ’s~~For ~~Optical during~~ the first six months of fiscal ~~2003.~~2004, ~~Same~~Things ~~store~~Remembered ~~sales~~revenues ~~results at Cole Licensed Brands~~ were ~~driven~~$137.6 million bycompared ~~increases~~with $133.5 million in the ~~average~~same ~~transaction size.~~period ~~Revenues~~last ~~from~~year, ~~managed~~a ~~vision~~3.1% increase, ~~care programs were higher primarily~~ due to an ~~increase~~a insame ~~the~~store ~~number~~sales increase of ~~capitated~~3.8% ~~plans~~and ~~sold~~a to49% ~~employers,~~increase ~~health plans~~in ~~and~~direct ~~associations~~channel ~~and~~revenues, ~~increased~~partially ~~laser~~offset ~~procedure~~by ~~volume~~a ~~and~~lower ~~program~~number ~~changes~~of instores ~~laser~~operating. ~~vision~~Direct ~~correction~~channel ~~resulting~~revenues ininclude ~~higher~~ revenues ~~per~~from ~~procedure.~~its ~~Same~~e-~~store~~commerce site, ~~sales~~www.ThingsRemembered.com, ~~for~~revenues ~~the~~from ~~first~~Things ~~six~~Remembered ~~months~~catalogs, ofand revenues ~~fiscal~~generated ~~2003~~through ~~increased~~third ~~0.4%~~party atpartner ~~Pearle Vision~~programs. ~~Same-store~~ ~~sales~~For atthe ~~Pearle~~second ~~Vision~~quarter and ~~reflected~~first asix ~~decrease~~months inof ~~the~~fiscal ~~number of transactions~~2004, ~~offset~~improvements ~~by an increase~~ in the average transaction size. ~~Same-store sales increases at Pearle Vision~~ were partially offset by a lower number of ~~company~~transactions ~~owned stores.~~and ~~Pearle~~a ~~Vision~~reduction ~~operated~~in the 26number ~~fewer~~of ~~company~~stores ~~owned~~operating. ~~stores~~There ~~than~~were ~~the~~722 ~~same~~Things ~~time~~Remembered store ~~period~~locations ~~last~~operating ~~year~~as ~~due~~of July 31, 2004, compared to ~~the~~754 ~~subsequent~~at ~~net~~August 2, ~~sale~~2003. The ofreduction 11was ~~Company~~primarily ~~stores~~due to ~~franchisees,~~ the ~~closure~~Company’s ofdecision 20to ~~stores~~allow ~~and~~ the ~~opening~~leases at ofunder-performing ~~five~~stores ~~new~~to ~~stores~~expire.

Gross ~~margin was $279.3 million in the first six months of fiscal 2003,~~Margin ~~compared to $282.5 million in the same period last year, a decrease of 1.1% due~~ ~~to increased revenues offset by a decrease in gross margin rate. Gross margin,~~ ~~as a percentage of net revenues, decreased by 2.2 percentage points at Cole~~ ~~Vision. Cole Managed Vision gross margin rate decreased by 9.8 percentage points due to~~

16Consolidated Operations

~~Table~~Gross margin was $196.8 million in the second quarter of ~~Contents~~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 second quarter of fiscal 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.

~~a shift in revenue mix toward lower gross margin programs and~~15 from lower underwriting gains. Cole Licensed Brands gross margin rate decreased by 0.9 percentage points and was impacted by higher inventory shrink results in the second quarter of fiscal 2003, higher costs associated with a shift toward premium product, lower contact lens gross margin and an increase in paid-time-off expense at four labs due to a change in the PTO policy implemented in the third quarter of fiscal 2002. Pearle Vision gross margin, as a percent of net revenues, decreased by 2.0 percentage points, due to higher cost premium product driven by promotions, higher manufacturing costs and an increase in product sold to Pearle franchisees. Partially offsetting these factors were the increase in average spectacle selling price. Product sales to franchisees carry a lower margin but offer benefits for the Company, including producing a more uniform merchandise assortment and consistent brand look across all stores. Gross margin was also negatively impacted by increased workers compensation expense in the lab facilities. The Company closed its manufacturing and distribution facility in Toronto, Canada. The operations of this facility has been absorbed by the Company’s facility in Knoxville, TN. As part of the integration of the Canadian operations into the Knoxville lab, the Company changed the Canadian product assortment. As a result, the Company recorded a $0.3 million charge to gross margin for obsolescence of inventory.

OperatingTable expenses were $266.9 million in the first six months of fiscal 2003, compared to $266.3 million for the same period last year, an increase of 0.2%. Operating expenses as a percent of net revenues decreased at Cole Vision by 1.3% in the first six months of fiscal 2003, compared to the same period of fiscal 2002. Store payroll and rent and occupancy costs at Cole Vision were $1.5 million and $1.1 million higher respectively, in the first six months of fiscal 2003 compared to the same period last year. Pearle Vision recorded a charge of $0.6 million for assets disposed in a prior period. The Company’s Canadian operations closed its manufacturing and distribution facility located in Toronto, Canada. One time costs associated with the closure of the facility totaled $0.4 million. The Company and its optical subsidiaries have been sued by the State of California (see Note 7 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 with $0.9 million in the same period last year. Fringe benefits costs increased $1.0 million in the first six months of fiscal 2003, compared to the same period last year. Partially offsetting expense increases were savings from a reduction of $1.9 million in claims processing costs, reduced bonus expense, reduced marketing costs and work force reductions. Marketing costs were $2.3 million lower in the first six months of fiscal 2003, compared to the same period last year. The first six months of fiscal 2002 included charges of $1.0 million for the closure of 12 Target Optical stores. Pearle Vision recorded a gain of $1.0 million on the sale of five company-owned stores to a franchisee during the first six months of fiscal 2003. Contents

~~Operating income 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 $139.7 million compared to $136.0 million in the second quarter of fiscal 2003, an increase of gross margin dollars of 2.8% compared to the previous year, due to increased revenues and an increase in the gross margin rate. Gross margin, as a percent of net revenues, was 60.0% and 59.4% in the second quarter of fiscal 2004 and fiscal 2003, respectively. Increases in the gross margin rate occurred at Cole Licensed Brands, in Canada and at Cole Managed Vision, partially offset by a lower gross margin rate at Pearle Vision U.S. Cole Licensed Brands gross margin rate increased and was impacted by a higher contact lens gross margin rate and improved inventory shrink and obsolescence results. The increase in contact lens gross margin rate was due primarily to an increase in the average transaction size. The increase in the gross margin rate in Canada was due primarily to costs incurred in 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 Canadian product assortment. As a result of this decision, the Company recorded a $0.3 million charge to gross margin for obsolescence in the second quarter of fiscal 2003. The gross margin rate at Cole Managed Vision increased primarily due to a projected lower benefit utilization by plan members within funded programs, a reduction in the estimated reserve for underwriting gains and from increases in administrative revenues from capitated and fee-for-service programs. The underwriting gain reserve percentage was reduced based on historical experience. The Pearle Vision gross margin rate decreased slightly compared to the same period last year, due to an 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 to the Company, including producing a more uniform merchandise assortment and a consistent brand look across all stores. The gross margin rate was also lower due to increased promotional activity in the second quarter of fiscal 2004. Partially offsetting the gross margin rate decline was lower manufacturing costs compared to the prior year. Lower manufacturing costs were achieved primarily through in-store lab cost reductions and central lab efficiencies.

~~Things~~For ~~Remembered revenues were $133.5 million in~~ the first six months of fiscal ~~2003~~2004, gross margin was $291.5 million compared ~~with~~to $~~126~~278.80 million in the ~~same~~first ~~period~~six months of fiscal ~~2002~~2003, ~~a 5.3%~~an increase. of ~~The~~gross ~~same-store~~margin ~~sales~~dollars ~~increase~~ of 4.89% ~~and~~compared ato ~~34%~~the ~~increase~~same ~~in direct~~period ~~channel~~the ~~revenues~~previous ~~were~~year, due ~~the~~to ~~primary~~increased ~~reasons~~revenues ~~for~~and ~~the~~an increase. ~~Direct channel~~in ~~revenues~~the ~~include~~gross ~~revenues~~margin ~~from~~rate. ~~its e-commerce site,~~Gross ~~www.ThingsRemembered.com~~margin, ~~revenues~~as ~~from~~a ~~Things~~percent ~~Remembered~~of ~~catalogs~~net ~~and~~revenues, ~~through affiliate~~was ~~programs~~60.4% ~~direct~~and ~~to businesses~~60.1% ~~Improvements~~ in the ~~average~~first ~~dollar~~six ~~sale~~months ~~were~~of ~~offset~~fiscal by2004 aand ~~lower~~fiscal ~~number~~2003, ofrespectively. ~~transactions~~The ~~and~~Company ~~from~~recorded increases ~~a reduction~~ in the ~~number~~ ofgross ~~stores~~margin ~~operating~~rate at ~~the~~both ~~end~~Cole ofManaged ~~the~~Vision ~~second~~and ~~quarter.~~from ~~Store~~its Canadian ~~count~~operations atdue to the ~~end~~ ofreasons ~~the~~discussed ~~second~~above. ~~quarter~~The ofgross ~~fiscal~~margin ~~2003~~rate for Cole Licensed Brands was ~~754~~the ~~compared~~same toas ~~776~~last atyear for the ~~end~~first ofsix months. ~~the~~The ~~second~~Pearle ~~quarter~~Vision ofgross ~~fiscal~~margin ~~2002~~rate was slightly lower than last year due to promotional ~~store closings~~activity.

~~Gross~~Things ~~margin~~Remembered ~~was $95.9 million in the first six months of fiscal 2003,~~Segment ~~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.~~

~~Operating~~For ~~expenses~~the ~~were~~second ~~$88.5 million~~quarter inof ~~the~~fiscal ~~first~~2004, ~~six~~gross ~~months~~margin ofwas ~~fiscal~~$57.1 million ~~2003,~~ compared to $8456.31 million ~~for~~in the ~~same~~second ~~period~~quarter ~~last~~of ~~year~~fiscal 2003, an increase of 51.06%. ~~Operating~~For ~~expenses~~the asfirst asix ~~percent~~months of ~~revenues~~fiscal ~~decreased~~2004, 0gross margin was $99.2%1 million compared to $95.8 million in the first six months of fiscal 2003, ~~compared~~an ~~to the same period~~ increase of ~~fiscal 2002~~3.4%. ~~Things Remembered~~The ~~incurred~~increase ~~incremental~~in ~~advertising~~the ~~costs~~second ofquarter ~~$1.1 million~~and ~~for~~ the first six months was ofprimarily ~~fiscal~~driven ~~2003,~~by ~~compared to~~ the same ~~period~~store ~~last~~sales ~~year~~performance and ~~higher management~~an ~~bonuses~~increase ~~totaling~~in ~~$1.0 million~~the gross ~~were~~margin ~~accrued~~rate. ~~Store~~Gross ~~rent~~margin, ~~and~~as ~~occupancy charges~~a ~~increased~~percent $0of net revenues, was 71.~~9 million~~5% ~~primarily~~in ~~due~~the second quarter of fiscal 2004 compared to ~~higher~~71.3% ~~rent~~in ~~and~~the ~~occupancy~~second ~~costs~~quarter of fiscal ~~associated~~2003 ~~with~~and agross ~~higher~~margin ~~mix~~rate was 72.0% in the first six months of ~~inline~~fiscal ~~mall~~2004 ~~locations~~compared ~~than~~to ~~kiosks~~71.8% ~~Inline~~in ~~mall locations~~the ~~generally~~first ~~incur~~six ~~higher~~months ~~rent~~of fiscal ~~and~~2003. ~~occupancy~~The ~~costs~~increase ~~than~~was ~~kiosks~~primarily due to higher ~~square~~revenues from gift personalization.

17Operating Expenses

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

~~footage~~ For ~~requirements. Things Remembered recorded higher payroll costs in~~ the ~~first~~second ~~six~~quarter ~~months~~ of fiscal ~~2003~~2004, ~~compared~~operating toexpenses ~~the~~were ~~same period last~~$178.7 ~~year~~million tocompared ~~support higher revenues and also due~~ to ~~increased~~$192.7 million ~~payroll~~in ~~hours~~the ~~to comply~~second ~~with~~quarter ~~state~~of ~~statutory~~fiscal ~~requirements~~2003. ~~Workers~~Of ~~compensation expense~~the ~~increased~~decrease ~~$0.8 million~~ in the ~~first~~second ~~six~~quarter ~~months~~ of fiscal ~~2003,~~2004 compared to the same period last year, $3.6 million ~~The~~is ~~increase~~attributable ~~was~~to ~~due~~the tooperating ~~higher~~segments ~~estimated~~and ~~workers~~$10.4 million ~~compensation~~to ~~obligations~~unallocated ~~utilizing~~corporate ~~loss~~expenses. ~~development~~For ~~factors~~the ~~prepared~~first ~~by independent~~six ~~third~~months ~~party~~of ~~actuaries.~~fiscal ~~Things~~2004, operating ~~Remembered~~expenses ~~also~~were ~~incurred~~$366.1 million ~~severance costs~~compared ~~related~~with to$376.6 million ~~senior executives~~ in the first six months of fiscal 2003. ~~Partially~~ ~~offsetting~~Of the ~~expense~~decrease ~~increases were charges incurred~~ in the first six months of fiscal ~~2002~~2004 ~~for~~compared ato ~~new~~the ~~store~~same ~~point~~period oflast ~~sale system~~year, ~~the implementation of which has been delayed~~$14.1 million ~~These costs were not repeated in the~~is ~~second~~attributable ~~quarter~~to ofunallocated ~~fiscal~~corporate ~~2003.~~expenses ~~Savings~~partially ~~from~~offset ~~travel~~by ~~expense,~~an ~~store depreciation~~increase ~~and~~in ~~work~~operating ~~force~~expenses ~~reductions~~at ~~taken~~the inoperating ~~fiscal~~segments ~~2002~~of ~~were also realized~~$3.6 million.

~~Operating~~As ~~income~~discussed ~~for~~in ~~the~~detail ~~first~~below, ~~six~~certain ~~months~~unusual ofitems ~~fiscal~~affected ~~2003~~the ~~was~~Company’s operating $7expenses during these periods.~~4 million~~ The Company defines unusual items as ~~compared~~transactions that are non-comparable or infrequent in nature, including significant one time transactions unrelated to $8core operations and special charges and impairments.~~0 million~~ Management believes that operating expenses excluding unusual items is a useful measure for understanding trends in ~~the~~core ~~same~~operations and ~~period~~excludes some of ~~fiscal~~these ~~2002~~items in the management bonus plans. ~~Increases~~Operating expenses inexcluding unusual items is a non-GAAP financial measure and should not ~~revenue~~be ~~were~~used ~~partially~~as ~~offset~~a bysubstitute for the ~~lower~~directly ~~gross~~comparable ~~margin~~GAAP ~~rate,~~financial ~~and~~measure. ~~higher~~In ~~advertising,~~order ~~bonus~~to ~~expense,~~facilitate ~~workers~~an ~~compensation,~~understanding ~~severance~~of ~~and~~such ~~store~~unusual ~~rent~~items and ~~occupancy~~ ~~costs.~~their effect on the

~~Reconciliation of Same-Store Sales Growth~~ 16

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

			2003
			Second Quarter			First Six Months
			(In thousands)
Current year same-store sales			$	270,147		$	522,058
Prior year same-store sales				252,623			505,972
Percent change				6.9	%		3.2	%
Current year same-store sales			$	270,147		$	522,058
Adjustment for:
	Sales at new and closed stores			4,017			9,107
	Extended warranties			(890	)		(2,849	)
	Order vs. customer receipt			(3,457	)		(5,483	)
	Returns, remakes and refunds			(133	)		(382	)
	Other			232			299
		Store sales		269,916			522,750
Nonstore revenues				44,860			88,849
Intercompany eliminations				(7,117	)		(15,691	)
GAAP Basis Net Revenue			$	307,659		$	595,908

results of the operations, the following table is provided as a reconciliation of reported operating expense to operating expense excluding certain unusual items.

Liquidity and Capital Resources


	Second Quarter								First Six Months
(Dollars in millions)	2004			2003			Change Fav/(Unfav)		2004			2003			Change Fav/(Unfav)
Operating expenses, as reported	$	178.7		$	192.7		$	14.0	$	366.1		$	376.6		$	10.5
Unusual items:
Legal & professional fees for restatement & SEC investigation		0.8			0.9					1.1			2.6
Legal fees for California litigation		0.4			1.1					1.3			1.9
Target Optical store closure costs		(0.6	)		—					1.5			—
CEO Retirement		—			9.2					—			9.2
Shareholder settlement		—			—					—			2.7
Audit fees for restatement		—			—					—			1.7

Total unusual items		0.6			11.2					3.9			18.1

Operating expenses, excluding unusual items	$	178.1		$	181.5		$	3.4	$	362.2		$	358.5		$	(3.7	)

Operating expenses, excluding unusual items, as a percent of total net revenues		56.9	%		59.0	%				58.4	%		60.1	%
Operating expenses, as reported, as a percent of total net revenues		57.1	%		62.7	%				59.0	%		63.2	%

~~The~~Unusual ~~Company’s primary source of liquidity is funds provided from~~Items ~~operations of its operating subsidiaries. On June 27, 2003, the Company and its~~ ~~operating subsidiaries amended, restated and extended its working capital line~~ ~~of credit. The maturity date of the credit facility was extended to February 1,~~ 2007 from May 31, 2006. The size of the facility was adjusted to $60.0 million from $75.0 million. In addition, certain financial covenants were amended. As of the end of the second quarter of fiscal 2003, the total commitment was $60.0 million and the availability under the credit facility totaled $45.0 million after reduction for commitments outstanding of $15.0 million under letters of credit. There were no working capital borrowings outstanding at any time during the first six months of fiscal 2003 or fiscal 2002.

~~The~~Cole ~~credit~~National ~~facility~~Corporation announced on October 8, ~~which~~2003 isthat ~~guaranteed~~its byBoard ~~Cole~~of Directors ~~National~~had ~~Corporation~~formed ~~and~~a Special Committee of independent directors on July 28, 2003 to evaluate the Company’s strategic alternatives, ~~requires~~including a possible merger or sale of the Company, ~~and~~a ~~its~~corporate ~~principal~~restructuring ~~operating~~or ~~subsidiaries~~other toalternatives. ~~comply~~The ~~with~~Parent ~~various~~and ~~operating~~Luxottica ~~covenants~~entered ~~that~~into ~~restrict~~a ~~corporate~~definitive ~~activities,~~merger agreement on January ~~including~~23, ~~covenants~~2004 ~~restricting~~with the ~~ability~~unanimous approval of the ~~subsidiaries~~Boards toof ~~incur~~Directors of both ~~additional~~companies, ~~indebtedness~~which was subsequently amended on June 2, ~~pay~~2004 ~~dividends~~and July 14, ~~prepay~~2004. ~~subordinated~~On July 22, ~~indebtedness~~2004, the Parent received votes from a majority of the outstanding ~~dispose~~shares to approve the merger agreement with Luxottica. (See Note 9 of ~~certain~~the ~~investments~~Notes to orCondensed ~~make~~Consolidated ~~acquisitions~~Financial Statements). ~~The~~Costs ~~credit~~related ~~facility~~to ~~also~~legal ~~requires~~advisory ~~the~~and ~~Company~~other professional expenses related to ~~comply~~the ~~with~~evaluation ~~certain~~of strategic ~~financial~~alternatives ~~covenants,~~and ~~including~~the negotiation of the definitive merger agreement and its amendments are recorded at the Parent.

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.

~~covenants~~ As ~~regarding~~a ~~interest~~result ~~coverage~~of ~~and~~the ~~maximum~~Company’s ~~leverage~~modified agreement with Target Corporation, the Company closed 25 underperforming Target Optical stores on April 10, 2004. Under ~~The~~the terms of the modified agreement, the Company iswas inrequired to pay ~~compliance~~Target ~~with~~Corporation a fee of up to $30,000 for each closed store. During the second ~~covenants~~quarter of fiscal 2004, Target Corporation informed the Company that the actual fee would be significantly lower. As a result, in the ~~credit~~second ~~agreement~~quarter asof fiscal 2004, the Company reversed $0.6 million of charges, which had been accrued in the ~~date~~first quarter of ~~this~~fiscal 2004. Costs relating to the closure of ~~report~~these stores were $1.5 million in the first six months of fiscal 2004.

~~The~~In ~~indentures~~the ~~pursuant~~second toquarter ~~which~~of ~~the~~fiscal ~~8-5/8%~~2003, ~~notes and~~ the ~~8-7/8%~~Company’s ~~notes were~~former ~~issued~~Chairman ~~contain certain optional~~ and Chief ~~mandatory~~Executive ~~redemption~~Officer ~~features~~retired and ~~other~~ ~~financial covenants, including restrictions on~~ the ~~ability of the~~ Company to ~~incur~~fulfilled ~~additional~~its ~~indebtedness~~obligations, ~~pay dividends or make other restricted~~ ~~payments~~including tocertain ~~Cole~~contingent ~~National~~obligations, ~~Corporation.~~under ~~The~~his ~~indentures~~employment ~~permit~~agreement ~~payments to Cole~~and ~~National Corporation~~ for ~~certain~~retirement ~~tax obligations~~ and ~~for~~life ~~administrative expenses~~insurance ~~not to exceed 0~~benefits.~~25%~~ ofThese ~~net~~obligations ~~sales.~~required ~~See~~a one-time ~~Note~~cash 3payment of ~~the Notes to Condensed Consolidated Financial Statements~~$11.9 million ~~The~~with ~~Company~~a ~~may~~charge ~~from time~~ to ~~time~~operating ~~purchase its~~expense ~~outstanding notes~~ in the ~~open~~second ~~market~~quarter orof ~~refinance~~fiscal ~~them,~~2003 ~~depending~~of ~~on capital market conditions~~$9.2 million.

~~No significant principal payment obligations are due under the Company’s~~17 outstanding indebtedness until 2007, when the $125.0 million Senior Subordinated debt is due. The ability of the Company and its subsidiaries to satisfy their obligations will be primarily dependent upon future 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.

OperationsTable for the six months of fiscal 2003 used $1.7 million of cash compared with cash provided by operations of $23.2 million in the same period of fiscal 2002. The change in operating cash was primarily attributable to lower operating results as described above in the Results of Operations section of this report and from changes in operating assets and liabilities, which used $4.8 million in the first six months of fiscal 2003, compared with a source of funds of $2.2 million in the first six months of fiscal 2002. Changes in accounts receivable and other assets resulted in a use of funds of $6.6 million in the first six months of fiscal 2003, compared to a use of funds of $2.8 million in the same period last year. The increase in receivables in both periods is due primarily to increased revenues at both Cole Licensed Brands and Cole Managed Vision. Changes in inventories resulted in a use of funds of $9.9 million in the first six months, compared with a use of funds of $6.4 million in the prior year. The increase was primarily due to earlier new product introduction, an increased mix of premium products, additional inventory needed to change the product assortment in the Canadian operations and additional inventory needed to support the increase in store count at Cole Licensed Brands. Changes in accounts payable and accrued liabilities provided $10.9 million in the first six months, compared with $7.2 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 $0.6 million in the first six months of fiscal 2003 compared to $3.0 million in the same period last year. The change was primarily due to a lower current tax provision. Contents

~~Net~~Settlement ~~cash~~costs ~~from~~related ~~investing~~to ~~activities resulted in~~ a ~~use~~class ofaction ~~funds~~shareholder oflawsuit, ~~$23.9~~that ~~million~~alleged ~~for~~claims ~~the first six months~~ of ~~fiscal~~various ~~2003~~violations ~~compared to a use~~ of ~~funds totaling~~federal ~~$16.3 million~~securities inlaws ~~the~~related ~~same~~to ~~period of fiscal 2002. Capital expenditures,~~the ~~which~~Company’s ~~accounted~~reported ~~for~~revenues ~~most~~and ofearnings ~~the~~totaled ~~cash used for investing, were~~ $152.57 million ~~and $13.9 million~~ in the first six months of fiscal 2003 ~~and 2002, respectively~~. ~~The~~ ~~majority~~Audit offees ~~capital~~attributable ~~expenditures~~to ~~for~~the ~~both~~restatement ~~periods were for store fixtures, equipment~~ and ~~leasehold improvements for new stores and remodeling~~ reaudit of ~~existing stores. Expenditures for systems development costs totaled $4.3 million and $2.3 million for~~ the ~~first~~Company’s ~~six~~financial ~~months~~statements ofwere ~~fiscal 2003 and 2002, respectively. The Company used~~ $31.87 million in the first six months of fiscal 2003 ~~for a contingent payment in connection with the prior acquisition of MetLife’s managed vision business~~.

~~Net~~Unallocated ~~cash~~Corporate ~~provided by financing activities totaled $0.6 million in the~~Expenses ~~first six months of fiscal 2003, compared with cash used for financing of $21.3~~ ~~million in the prior year. In May 2002, the Company 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 the Company’s $150.0 million 9-7/8% Senior Subordinated Notes due 2006. Finance fees and early repayment premiums 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. Changes in the balance to the parent provided $3.7 million in the first six months of fiscal 2003, compared to a use of $1.2 million in the same period last year.

~~The~~Unallocated ~~Company~~corporate ~~believes~~expenses ~~that~~were ~~funds~~$3.3 million ~~provided~~and ~~from~~$8.5 million ~~operations~~in the second quarter and first six months of fiscal 2004, ~~including~~respectively, ~~cash~~compared to on$13.7 million ~~hand~~and $22.6 million for the second quarter and first six months of fiscal 2003, ~~along~~respectively. ~~with~~Included ~~funds~~in ~~available~~unallocated ~~under~~corporate expense are all of the ~~credit~~unusual ~~facility~~items ~~will~~listed ~~provide~~above except for the California litigation charges ~~adequate~~and ~~sources~~the ofTarget ~~liquidity~~Optical tostore ~~allow~~closure ~~its~~costs, ~~operating~~which ~~subsidiaries~~are torecorded ~~continue~~in the Cole toVision ~~expand~~segment. The unusual items included in unallocated corporate expense totaled $0.8 million and $10.1 million in the ~~number~~second quarter of ~~stores~~fiscal 2004 and fiscal to2003, ~~fund~~respectively ~~capital~~and ~~expenditures~~$1.1 million and ~~system~~$16.2 million in the first six ~~development~~months ~~costs~~of fiscal 2004 and fiscal 2003, respectively.

~~Off~~ For ~~Balance~~the ~~Sheet~~second ~~Arrangements~~quarter of fiscal 2004, excluding the unusual items above, unallocated corporate expenses were $2.5 million compared to $3.6 million for the same period last year. The Company’s legal expenses were $0.7 million lower and ~~Contractual~~professional ~~Commitments~~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 $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.

For the first six months of fiscal 2004, excluding the unusual items above, unallocated corporate expenses were $7.4 million compared to $6.4 million for the same period last year. The Company ~~leases~~incurred aincremental management ~~substantial~~bonus ~~portion~~expense of ~~its~~$1.0 million ~~equipment~~for ~~and~~the ~~facilities including~~first ~~laboratories~~six months of fiscal 2004, ~~office~~compared ~~and~~to ~~warehouse~~the ~~space,~~same ~~and~~period ~~retail~~last ~~locations~~year. InThe Company incurred incremental ~~addition,~~audit ~~Cole~~and ~~Vision~~professional ~~operates~~fees ~~departments~~of in$0.7 million ~~various~~compared ~~host~~to ~~stores~~the ~~and~~same ~~pays~~period last ~~occupancy~~year due to higher audit costs ~~solely~~and ashigher aexpenses ~~percentage~~incurred to comply with Section 404 of ~~sales~~the Sarbanes-Oxley Act of 2002. AUnallocated ~~more~~corporate ~~complete~~expenses included ~~discussion~~compensation expense of $0.5 million for variable stock options in the first ~~Company’s~~six ~~lease~~months ~~and~~of ~~license~~fiscal ~~commitments~~2004 isas ~~included~~discussed inabove. ~~Note~~Partially 6offsetting these expense increases were lower professional fees of ~~the~~$1.1 million ~~Notes~~associated with tomanagement ~~Condensed~~changes ~~Consolidated~~and ~~Financial~~management ~~Statements~~initiatives taken in the first six months of fiscal 2003.

19Cole Vision Segment

~~Table~~ Operating expenses were $130.1 million and $269.2 million in the second quarter and first six months of ~~Contents~~fiscal 2004, respectively, compared to $132.8 million and $265.5 million for the second quarter and first six months of fiscal 2003, respectively. Operating expense decreased by 2.0% and totaled 55.9% of net revenues in the second quarter of fiscal 2004, compared to 58.0% in the same period last year. Operating expenses in the first six months of fiscal 2004 increased by 1.4% and totaled 55.8% of net revenues, compared with 57.4% for the same period last year. Included in operating expenses are the unusual items of California litigation charges described above which 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, and the $0.6 million reversal of charges in the second quarter and $1.5 million charge for the first six months of fiscal 2004 for the closure of 25 Target Optical locations.

~~The~~For ~~Company~~the ~~guarantees~~second ~~future~~quarter ~~minimum~~of ~~lease~~fiscal ~~payments~~2004 ~~for~~compared ~~certain~~to ~~store~~the same period last ~~locations~~year, ~~leased~~store ~~directly~~advertising byand ~~Pearle~~store ~~franchisees.~~payroll ~~The~~costs ~~term~~were of$1.7 million ~~these~~and ~~guarantees~~$0.9 ~~range~~million ~~from~~lower ~~one~~in tothe ~~ten~~second ~~years~~quarter of ~~which~~fiscal ~~many~~2004, ~~are~~compared ~~limited~~ to ~~periods~~the ~~that~~same ~~are less~~period ~~than~~last ~~the~~year. ~~full~~Management ~~term~~bonus ofexpense ~~the~~was ~~leases involved~~$1.2 million Ahigher ~~more~~in ~~complete~~the ~~discussion~~second quarter of fiscal 2004, compared to the same period last year. Claims ~~Company’s~~processing ~~guarantees~~costs iswere ~~included~~$0.3 million higher in ~~Note~~the 6second quarter of fiscal 2004, compared to the ~~Notes~~same period last year, primarily due to ~~Condensed~~increased production ~~Consolidated~~and ~~Financial~~distribution ~~Statements~~expense for explanation of benefit statements, system support costs and systems 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.

~~The Company’s significant accounting policies are discussed in the Notes~~18 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.

ForwardTable Lookingof Statements Contents

~~The~~Partially ~~same-store~~offsetting ~~sales in the Company’s vision segment increased in the~~expense ~~second~~increases ~~quarter~~were oflower ~~fiscal~~store ~~2003~~advertising ~~compared~~costs. toThe ~~the same period last year and the~~ Company ~~continues~~recorded ~~to see that trend in August, with same-store sales for the~~$2.3 million ~~vision~~lower ~~segment~~advertising ~~increasing~~costs in the ~~mid single digits. Things Remembered August’s same-store sales continued their trend from the~~ first six months of fiscal ~~2003.~~ ~~There~~2004, iscompared noto ~~assurance~~the same ~~that~~period ~~these~~last ~~same-store~~year ~~sales~~primarily ~~trends~~due ~~will~~to ~~continue for~~ the ~~remainder~~timing of ~~the~~advertising ~~third quarter~~spending.

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

~~The~~Operating ~~Company’s~~expenses ~~expectations~~were $45.3 million and ~~beliefs~~$88.4 million ~~concerning~~in the ~~future contained in~~second ~~this~~quarter ~~document~~and ~~are~~first ~~forward~~six ~~looking~~months ~~statements within the meaning~~ of ~~the~~fiscal ~~Private Securities~~2004, ~~Litigation~~respectively, ~~Reform~~compared ~~Act~~to ~~of 1995~~$46. ~~Actual results may differ materially~~2 ~~from~~million ~~those~~and ~~forecasted~~$88.5 million ~~due~~for ~~to a variety of factors that can adversely affect~~ the ~~Company’s~~ ~~operating~~second ~~results,~~quarter ~~liquidity~~ and ~~financial~~first ~~condition~~six ~~such~~months ~~as risks associated with potential adverse consequences~~ of ~~the restatement of the~~fiscal ~~Company’s financial statements~~2003, ~~including~~respectively. ~~those~~Compared ~~resulting from litigation or government investigations, and including the court approval of the proposed settlement of a class action lawsuit related~~ to the ~~restatement;~~same ~~restrictions or~~period ~~curtailment of~~ the ~~Company’s~~previous ~~credit facility and other credit situations~~year, ~~costs~~ ~~and other effects associated with the California litigation, the timing~~operating ~~and~~expenses ~~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~~ of ~~disruptions~~fiscal of2004 ~~the~~decreased ~~economy~~by ~~from terrorist~~2.0% ~~activities or major health concerns~~ and ~~from governmental and~~totaled ~~consumer~~56.7% ~~responses to such situations, the actual utilization~~ of ~~Cole~~net ~~Managed Vision funded eyewear programs~~revenues, ~~the~~compared ~~success~~to of58.7% ~~new~~in ~~store openings and~~ the ~~rate at~~same ~~which~~period ~~new~~last ~~stores~~year. ~~achieve profitability, the Company’s ability to select,~~Compared ~~stock and price merchandise attractive~~ to ~~customers,~~the ~~success~~same ofperiod ~~systems development and integration, competition in~~ the ~~optical~~previous ~~industry~~year, ~~integration of acquired businesses, economic and weather factors affecting consumer spending,~~ operating ~~factors~~expenses ~~affecting~~in ~~customer~~the ~~satisfaction,~~first ~~including~~six ~~manufacturing~~months ~~quality~~ of ~~optical~~fiscal ~~and~~2004 ~~engraved~~decreased ~~goods,~~by ~~the~~0.1% ~~Company’s relationships with host stores~~ and ~~franchisees,~~totaled ~~the~~64.2% ~~mix~~ of ~~goods~~net ~~sold, pricing and other competitive factors, the seasonality of the Company’s business and the amount payable to Cole National Corporation which is due on demand~~revenues.

~~Item~~ For the second quarter of fiscal 2004, management bonus expense was $0.7 million lower compared to the same period last year. Store payroll was $0.6 million lower in the second quarter of fiscal 2004, compared to the same period last year, due to fewer stores operating and lower workers compensation costs. Field management wages and bonuses were $0.4 3million lower in the second quarter than the same period last year due to open staff positions in the second quarter of fiscal 2004. ~~Quantitative~~Partially offsetting expense reductions were $0.5 million increased costs of advertising and ~~Qualitative~~$0.3 million ~~Disclosures~~direct ~~About~~channel expenses ~~Market~~in ~~Risk~~support of higher net revenues.

~~The~~For ~~Company’s~~the ~~major~~first ~~market~~six ~~risk~~months ~~exposure~~of isfiscal to2004, ~~changes~~Things inRemembered ~~foreign~~recorded ~~currency~~lower ~~exchange~~store ~~rates~~payroll incosts ~~Canada,~~compared ~~which~~to ~~could~~the ~~impact~~same ~~its~~period ~~results~~last ofyear ~~operations~~due ~~and~~to fewer stores ~~financial~~operating ~~condition.~~and ~~Foreign~~lower ~~exchange~~workers ~~risk~~compensation ~~arises~~and ~~from~~fringe ~~the~~benefits ~~Company’s~~costs. ~~exposure~~Store topayroll ~~fluctuations~~costs, inas ~~foreign~~a ~~currency~~percent ~~exchange~~of ~~rates~~net ~~because~~revenues, were lower in the ~~Company’s~~first six months ~~reporting~~of ~~currency~~fiscal is2004, compared to the ~~United~~same ~~States~~period ~~dollar.~~last ~~Management~~year, ~~seeks~~due to ~~minimize~~improvements in ~~the~~productivity. ~~exposure~~Home tooffice ~~foreign~~expenses, ~~currency~~including ~~fluctuations~~recruiting, ~~through~~bonus ~~natural~~and ~~internal~~legal ~~offsets~~fees, towere $0.4 million lower than the ~~fullest~~same ~~extent~~period ~~possible~~last year. Partially offsetting these lower expenses were increased costs of store advertising and direct channel, which were $1.2 million higher than last year in support of higher net revenues.

InOperating ~~addition,~~Income ~~the Company is exposed to changes in the fair value of its~~(Loss) ~~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~~

20Consolidated Operations

~~Table~~ Operating income was $18.1 million and $24.5 million in the second quarter and first six months of ~~Contents~~fiscal 2004, respectively, compared to operating losses of $0.6 million and $2.8 million in the second quarter and first six months of fiscal 2003, respectively. The improvement was due to lower unallocated corporate expenses and higher operating income at Cole Vision and Things Remembered, compared to the same period last year.

~~require~~Cole ~~the~~Vision ~~Company to pay an average floating interest rate based~~Segment ~~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.

AOperating ~~change~~income inat ~~six-month~~Cole ~~LIBOR~~Vision ~~would~~was ~~affect~~$9.6 million and $22.3 million in the second ~~interest~~quarter ~~cost~~and ~~associated~~first ~~with the~~six months of fiscal 2004, respectively, compared to $503.02 million ~~notional~~and ~~value~~$12.5 million ofin the ~~swap~~second ~~agreements.~~quarter Aand ~~50%~~first ~~change~~six months of ~~(approximately~~fiscal 652003, ~~basis~~respectively. ~~points)~~The increase in operating income at Cole Vision compared to the ~~market~~same ~~rates~~period oflast ~~interest~~year ~~for~~was ~~six~~due ~~month~~to higher net revenues at Cole ~~LIBOR~~Licensed Brands and revenue increases from managed vision care programs as ~~compared~~well as toimprovements in the ~~5.6838%~~gross margin rate inand ~~effect~~lower ~~for~~operating ~~the~~expenses ~~second~~as ~~quarter~~a percent of net revenues. These improvements were partially offset by higher ~~fiscal~~management ~~2003~~bonus, ~~would~~costs ~~increase~~related ~~the~~to ~~Company’s~~store ~~annual~~closure ~~interest~~at ~~cost~~Target byOptical, $0and higher claims processing costs.~~3 million.~~

~~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 $10.7 million in ~~Controls~~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~~$5.9 million ~~supervision~~ and ~~with the~~$12.0 ~~participation~~million ofin ~~its~~the ~~Chief~~second ~~Executive~~quarter ~~Officer~~ and ~~Chief~~first ~~Financial~~six ~~Officer, pursuant~~months ~~to Rule 13a-15 promulgated under the Securities Exchange Act~~ of ~~1934 (the~~fiscal ~~“Exchange Act”)~~2004, respectively, ascompared ~~amended,~~to of$5.7 million ~~the~~and ~~effectiveness~~$11.8 million ofin the ~~Company’s~~second ~~design,~~quarter ~~operation~~ and ~~effectiveness~~first ofsix ~~its~~months ~~disclosure~~of ~~controls~~fiscal ~~and~~2003, ~~procedures~~respectively. The Company’s ~~Chief Executive Officer and Chief Financial Officer concluded that~~recorded ~~based~~interest onexpense ~~such evaluation, as~~ of ~~August~~$6.3 2,million ~~2003, the Company’s disclosure controls~~ and ~~procedures~~$6.2 million ~~were reasonably designed to ensure that information required to be disclosed by the Company~~ in the ~~reports~~second itquarter ~~files or submits~~of ~~under~~fiscal ~~the~~2004 ~~Exchange~~and ~~Act~~fiscal ~~is recorded~~2003, ~~processed,~~respectively ~~summarized~~ and ~~reported~~$12.5 million ~~within~~ in the ~~time~~first ~~periods~~six months ~~specified~~of infiscal ~~the~~2004 ~~rules~~ and ~~forms~~fiscal of2003. ~~the~~Interest ~~Securities~~income, ~~and Exchange~~primarily ~~Commission.~~from temporary

~~(b) There have not been any changes in the internal controls or in other~~19 ~~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.~~

PARTTable IIof — OTHER INFORMATION Contents

~~Item~~investments and franchise interest income, totaled $0.3 1million and $0.6 million ~~Legal~~in ~~Proceedings~~the second quarter and first six months of fiscal 2004, respectively, and $0.5 million and $0.7 million in the second quarter and first six months if fiscal 2003, respectively.

AsIncome ~~previously~~Tax ~~reported in the Company’s report on Form 10-Q for the~~Rate ~~quarter ended May 3, 2003, Cole National Corporation is in the process of~~ ~~settling a class action lawsuit alleging claims for various violations of~~ ~~federal securities laws related to the Company’s publicly reported revenues and~~ earnings. The action, which pleaded claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1993, named the Company and certain present and former officers and directors as defendants, sought unspecified compensatory damages, punitive damages “where appropriate”, costs, expenses and attorneys’ fees. On May 30, 2003, the Company and attorneys for the plaintiffs executed a memorandum of understanding for a settlement to resolve the lawsuit. On July 3, 2003, the Company and attorneys for the plaintiffs executed a formal Stipulation of Settlement. The settlement has received preliminary court approval but remains subject to final court approval following a fairness hearing. A charge of $2,687,500 for the settlement was recorded in the first quarter of fiscal 2003.

~~Item 6~~ The effective income tax rate was 43% for the first six months of fiscal 2004 compared to 22% for the first six months of fiscal 2003. ~~Exhibits~~The ~~and~~higher effective ~~Reports~~tax onrate ~~Form 8~~in fiscal 2004, compared to fiscal 2003 was primarily due to the expected full year results and the non-Kdeductibility of certain expenses.

~~(a) Exhibits.~~Reconciliation ~~The~~of ~~following~~Same ~~Exhibits~~Store ~~are~~Sales ~~filed herewith and made a part~~Growth ~~there of:~~

3.2(ii)		Amended and Restated By-Laws of Cole National Group, Inc., 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.

Same store sales growth 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:


	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

~~Table~~Liquidity ofand ~~Contents~~Capital Resources

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.
(b)		Reports on Form 8-K.
		The Company filed a Form 8-K (Items 7 and 9) on June 17, 2003 announcing financial results for the first fiscal quarter of 2003.
		The Company filed a report on Form 8-K (Items 5 and 7) on June 27, 2003 announcing that it had amended, restated and extended its Credit Agreement with bank lenders.
		The Company filed a report on Form 8-K (Items 5 and 7) on June 30, 2003 announcing that Cole National Corporation and 1-800-CONTACTS, Inc., had signed a marketing agreement under which customers of 1-800-CONTACTS can receive eye exams at a discount from a network of doctors associated with Cole National’s stores, including Pearle Vision, Sears Optical and Target Optical.

The Company’s primary source of liquidity is funds provided from operations of its operating subsidiaries. In addition, the Company and its operating subsidiaries have a working capital line of credit. As of the end of the second quarter of fiscal 2004, the total commitment was $60.0 million and availability under the credit facility totaled $43.7 million after reduction for $16.3 million under letters of credit. There were no working capital borrowings outstanding at any time during the first six months of fiscal 2004 or fiscal 2003.

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

~~Table of Contents~~20

SIGNATURES Table of Contents

~~Pursuant~~On toNovember 3, 2003, the ~~requirements~~Company ofentered ~~the~~into ~~Securities~~an ~~Exchange~~agreement ~~Act~~with ofa ~~1934,~~bank ~~the~~to ~~registrant~~provide ~~has~~documentary ~~duly~~letters ~~caused~~of ~~this~~credit ~~Report~~for import inventory purchases not to exceed be$7.0 million. ~~signed~~The onletters ~~its~~of ~~behalf~~credit are secured by the inventory ~~undersigned~~purchased. ~~thereunto~~As ~~duly~~of ~~authorized~~July 31, 2004, the Company has $3.8 million outstanding under this facility.

~~COLE~~ The ~~NATIONAL~~indentures ~~GROUP~~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, ~~INC~~including restrictions on the ability of the Company to incur additional indebtedness, pay dividends or make other restricted payments to Cole National Corporation. The indentures also 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. 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 the Company at a price of 101% of par plus accrued interest. If the holders exercise such right, the Company may be required to obtain financing from its parent or a third party to satisfy such obligation.

~~By:~~ No /significant principal payment obligations are due under the Company’s outstanding indebtedness until 2007, when the 8-5/8% ~~Lawrence~~senior E.subordinated ~~Hyatt~~note ~~Lawrence~~of $125.0 million Eis due. ~~Hyatt~~The ~~Executive~~ability ~~Vice~~of ~~President~~the Company and ~~Chief~~its ~~Financial~~subsidiaries ~~Officer~~to satisfy their obligations will be primarily dependent upon the future 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.

~~By:~~Cash ~~/s/~~Flows ~~Ann~~from M.Operating ~~Holt Ann M. Holt Senior Vice President and Corporate Controller (Principal Accounting Officer)~~Activities

~~Date:~~ Cash ~~September~~and cash equivalents were $64.0 15million at July 31, 2004 compared to $17.1 million at August 2, 2003. Operations generated net cash of $29.6 million in the first six months of fiscal 2004 and used $5.4 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. Changes in deferred income tax provision (benefit) were $4.3 million and ($4.8) 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. Non-cash interest and other expense (income) was $0.5 million in the first six months of fiscal 2004, compared to ($0.6) million in the same period last year. The change was primarily due 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.

23 Changes in working capital resulted in a use of funds totaling $2.9 million in the first six months of fiscal 2004, compared to $8.5 million in the first six months of fiscal 2003. Changes in accounts and notes receivable resulted in a use of funds totaling $5.3 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 source of funds totaling $1.1 million and a source of funds totaling $6.5 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.

~~Table of Contents~~21

COLETable NATIONALof GROUP, INC. FORM 10-Q QUARTER ENDED AUGUST 2, 2003 Contents

~~EXHIBIT~~Cash ~~INDEX~~Flows from Investing Activities

Exhibit
Number		Description
3.2(ii) †		Amended and Restated By-Laws of Cole National Group, Inc., 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.

Net cash from investing activities resulted in a use of funds of $12.2 million in the first six months of fiscal 2004, compared to $23.8 million in the first six months of fiscal 2003. Capital expenditures, which accounted for most of the cash used for investing activities, were $11.0 million and $15.4 million in the first six 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 lower capital spending for remodeling at Things 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, respectively. Systems development 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 fiscal 2003 for a contingent payment in connection with the prior acquisition of MetLife’s managed vision business.

†Cash ~~Filed~~Flows ~~herewith.~~from Financing Activities

24 Net cash used for financing activities totaled $12.6 million in the first six months of fiscal 2004 compared to cash provided from financing totaling $4.2 million in the first six months of fiscal 2003. Advances from (to) the Parent used ($16.1) million and provided $3.6 million for the first six months of fiscal 2004 and fiscal 2003 respectively. 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.

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

Off-Balance Sheet Arrangements and Contractual Obligations

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.

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

In addition, the Company is exposed to changes in the fair value of its debt portfolio, primarily resulting from the effects of changes in interest rates. The Company utilizes interest rate swaps to manage its exposure. 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 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 Certifications”). 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 Certifications and should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.

The Company carried out an evaluation, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, pursuant to Rule 13a-15 promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, of the 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 Cole National Corporation shareholder filed a shareholders’ class action complaint against the Parent, 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 Parent by causing the Parent to enter into an agreement to be acquired by Luxottica for $22.50 per share “without having exposed the Parent 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 Parent 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 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 GROUP, INC.

		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 GROUP, INC.
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.

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