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                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549 

                                   FORM 10-K 

(Mark One) 

     [X]       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE      
                        SECURITIES EXCHANGE ACT OF 1934 

                  FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1997 

                                      OR 

     [ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE     
                        SECURITIES EXCHANGE ACT OF 1934 

                FOR THE TRANSITION PERIOD FROM       TO       . 

                          COMMISSION FILE NO. 0-21690

                        SUNGLASS HUT INTERNATIONAL, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) 

            FLORIDA                                       65-0667471      
 (STATE OR OTHER JURISDICTION OF                       (I.R.S. EMPLOYER   
 INCORPORATION OR ORGANIZATION)                       IDENTIFICATION NO.) 

                255 ALHAMBRA CIRCLE, CORAL GABLES, FLORIDA 33134
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (305) 461-6100

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

 TITLE OF EACH CLASS      NAME OF EACH EXCHANGE ON WHICH REGISTERED
        NONE                               NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: 

                    COMMON STOCK (PAR VALUE $.01 PER SHARE)
                                (TITLE OF CLASS)

                   5 1/4% CONVERTIBLE SUBORDINATED DEBENTURES
                                (TITLE OF CLASS)

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

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

     The aggregate market value of Common Stock held by non-affiliates of the
Registrant on April 24, 1997 was $400,252,167, based on a $7.78 average of the
high and low sales prices for the Common Stock on such date. For purposes of
this computation, all executive officers and directors have been deemed to be
affiliates. Such determination should not be deemed to be an admission that such
executive officers and directors are, in fact, affiliates of the Registrant. The
number of shares outstanding of the Registrant's Common Stock on April 24, 1997
was 54,654,046 shares.

                      DOCUMENTS INCORPORATED BY REFERENCE 

     The information called for by Part III is incorporated by reference to the
Proxy Statement for the Annual Meeting of Shareholders of the Company to be held
June 4, 1997, which will be filed on or before May 9, 1997. 

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<PAGE>

                       SUNGLASS HUT INTERNATIONAL, INC. 

                               TABLE OF CONTENTS 

                                                                        PAGE
                                                                        ----
                                 PART I                                     

Item 1.     BUSINESS   ................................................  3  

Item 2.     PROPERTIES ................................................  6  

Item 3.     LEGAL PROCEEDINGS   .......................................  7  

Item 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  ......  7  

                                PART II                                     

Item 5.     MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED            
              STOCKHOLDER MATTERS  ....................................  7  

Item 6.     SELECTED FINANCIAL DATA   .................................  8  

Item 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL               
              CONDITION AND RESULTS OF OPERATIONS .....................  10 

Item 8.     FINANCIAL STATEMENTS   ....................................  14 

Item 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON                
              ACCOUNTING AND FINANCIAL DISCLOSURE .....................  36 

                                PART III                                    

Item 10.    DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT ............  36 

Item 11.    EXECUTIVE COMPENSATION ....................................  36 

Item 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS                 
              AND MANAGEMENT ..........................................  36 

Item 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............  36 

                                PART IV                                     

Item 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS             
              ON FORM 8-K .............................................  36 
 

<PAGE>

                                     PART I

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 

     In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), Sunglass Hut International,
Inc. (the "Company") is hereby providing cautionary statements identifying
important factors that could cause the Company's actual results to differ
materially from those projected in forward-looking statements (as such term is
defined in the Reform Act) of the Company made by or on behalf of the Company
herein or which are made orally, whether in presentations, in response to
questions or otherwise. Any statements that express, or involve discussions as
to expectations, beliefs, plans, objectives, assumptions or future events or
performance (often, but not always, through the use of words or phrases such as
"will result," "are expected to," "will continue," "is anticipated," "plans,"
"intends," "estimated," "projection" and "outlook") are not historical facts and
may be forward-looking and, accordingly, such statements involve estimates,
assumptions and uncertainties which could cause actual results to differ
materially from those expressed in the forward-looking statements. Such
uncertainties include, among others, the following factors:

     ABILITY TO MANAGE GROWTH. The Company has grown significantly in the past
several years. However, there is no assurance that the Company will sustain the
growth in the number of stores and revenues that it has achieved historically.
Moreover, there can be no assurance that the Company's management and financial
controls, executive personnel and other corporate support systems will be
adequate to manage the increase in the size and scope of the Company's business
in prior and future periods. The continued growth of the Company is dependent,
in large part, upon the Company's ability to open and operate new stores on a
profitable basis, which in turn is subject to, among other things, the Company's
ability to secure suitable store sites on a timely basis and on satisfactory
terms, the Company's ability to hire, train and retain qualified management and
other personnel, the availability of adequate capital resources and the
successful integration of new stores into existing operations. There can be no
assurance that, because of demographic or other reasons, the Company's new
stores will achieve sales and profitability comparable to the Company's existing
stores. In addition, there can be no assurance that the opening of new locations
will not cannibalize sales at existing locations. 

     RISKS OF NEW SPECIALTY STORE CONCEPTS AND LOCATIONS. The Company's ability
to expand into new concepts has not been fully tested. The Company opened its
first Watch Station store, a watch specialty store, in May 1996. Accordingly,
its operations will be subject to the numerous risks of establishing new
business enterprises, including unanticipated operating problems, lack of
experience and customer acceptance, significant competition from existing and
new retailers, and the extent of existing relationships between such retailers
and manufacturers/distributors. There can be no assurance that Watch Station
will be able to duplicate the growth of the Company's Sunglass Hut stores or
that it will achieve sales and profitability levels that justify the Company's
investment therein. Expansion of Watch Station also involves other risks that
could have a material adverse effect on the Company, including (i) diversion of
management's attention from the Company's core business, (ii) difficulties with
the hiring, retention and training of key personnel, and (iii) risks associated
with unanticipated problems or legal liabilities. In the fourth quarter of
fiscal 1996, the Company halted expansion of EyeX, a prescription glasses and
corrective lens store concept launched in October 1995. 

     There can be no assurance that the Company will be able to successfully
execute other components of its growth strategies. The Company's expansion plans
include both its "Sunscriptions" prescription sunglass program and an increasing
percentage of non-traditional retail locations, including licensed departments,
with respect to which the Company has substantially less experience. Moreover,
the Company's international expansion subjects the Company to certain risks and
limitations not associated with its current U.S. operations, including (i) the
uncertainty of market acceptance of specialty retailers and/or the Company's
product offerings, (ii) the Company's ability to hire and train local personnel,
(iii) the Company's dependence on local business practices, (iv) foreign
currency losses, (v) the impact of foreign taxes, and (vi) foreign investment
restrictions and limitations. 

     Although the Company has acquired competitors in the past and considers
acquiring additional smaller chains of specialty sunglass retailers on an
ongoing basis, there can be no assurance that the 

                                       1

<PAGE>

Company will be able to consummate acquisitions on satisfactory terms or that
any acquired operations will be successfully integrated. Moreover, the
consolidation of the domestic specialty sunglass industry has reduced the number
of larger companies available for sale, which could lead to higher prices being
paid for the acquisition of the remaining independent companies. 

     MERCHANDISING AND CONCENTRATION OF SUPPLIERS. The Company's success depends
to a large degree on its ability to provide a merchandise selection that appeals
to customers' changing desires and that appropriately reflects geographical or
other demographic differences in brand and style preferences. A failure by the
Company to identify or take advantage of emerging fashion trends in sunglasses
could have a material adverse effect on its results of operations. Moreover, the
Company has no long-term purchase contracts or other contractual assurance of
continued supply, pricing or access to new products. While the Company believes
that it has good relationships with its vendors, the inability to obtain
merchandise from one or more key vendors on a timely basis, or a material change
in the Company's current purchase terms, could have a material adverse effect on
its results of operations. 

     The market for sunglasses is increasingly subject to the risk of changing
fashion trends, and the demand for certain styles can change. Although the
Company has historically enjoyed favorable return privileges with its vendors,
there can be no assurance that the Company will not be subject to limitations on
returns in the future. In addition, the Company's efforts to develop branded
sunglass products will increase the Company's exposure to risks of inventory
obsolescence. Accordingly, in the event that a particular style of sunglass does
not achieve widespread consumer acceptance, the Company may be required to take
significant markdowns, which could have a material adverse effect on its gross
profit margin and other operating results. 

     In fiscal 1996, Bausch & Lomb (including RayBan, Revo, Killer Loop and
other brands) and Oakley, the Company's largest suppliers, accounted for
approximately 31% and 25% of the Company's total merchandise purchases,
respectively. 

     DEPENDENCE ON KEY PERSONNEL. The Company's success and ability to properly
manage its growth depends to a significant extent both upon the performance of
its current senior management team (particularly Jack B. Chadsey, the Company's
President and Chief Executive Officer) and its ability to attract, hire,
motivate and retain additional, qualified management personnel in the future.
The inability to recruit and retain such additional personnel, or the loss of
service of any of the Company's current executive officers, could have a
material adverse impact on the Company. 

     SEASONALITY. The Company has historically experienced and expects to
continue to experience seasonal fluctuations in its net sales and net income.
The Company has generally experienced lower net sales and net income in each of
the first and third fiscal quarters of each year, and the Company expects this
trend may continue for the foreseeable future. The Company's quarterly results
of operations may also fluctuate significantly as a result of a variety of
factors, including the timing of new store openings and sales contributed by new
stores. 

     POSSIBLE VOLATILITY OF STOCK AND NOTE PRICES. The market prices of the
Company's common stock and convertible subordinated notes are subject to
significant volatility caused by factors such as quarterly fluctuations in the
financial results of the Company, monthly comparable store sales results,
changes in financial estimates by securities analysts, shortfalls in earnings or
sales below analysts' expectations, the overall economy and the financial
markets. In addition, the common stock is quoted on the NASDAQ National Market
and the notes are traded on the NASDAQ SmallCap Market, which stock markets have
experienced, and are likely to experience in the future, significant price and
volume fluctuations which could adversely affect the market price of the common
stock and the notes without regard to the operating performance of the Company. 

     ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF
INCORPORATION AND BYLAWS. Certain provisions of the Company's Articles of
Incorporation and Bylaws may be deemed to have anti-takeover effects and may
delay, defer or prevent a takeover attempt that a stockholder might consider in
its best interest. These provisions (i) classify the Company's Board of
Directors into three 

                                       2

<PAGE>

classes, each of which will serve for different three-year periods, (ii) provide
that only the Board of Directors or Chief Executive Officer may call special
meetings of the stockholders, and (iii) establish certain advance notice
procedures for nomination of candidates for election as directors and for
stockholder proposals to be considered at stockholders' meetings. The Company is
also subject to certain provisions of the Florida Business Corporation Act which
may deter or frustrate takeovers of Florida corporations. 

                                   *********

     The Company cautions that the risk factors described above could cause
actual results or outcomes to differ materially from those expressed in any
forward-looking statements of the Company made by or on behalf of the Company.
Any forward-looking statement speaks only as of the date on which such statement
is made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrences of unanticipated
events. New factors emerge from time to time and it is not possible for
management to predict all of such factors. Further, management cannot assess the
impact of each such factor on the Company's business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements. 

ITEM 1. BUSINESS 

GENERAL AND RECENT DEVELOPMENTS 

     Sunglass Hut International, Inc. ("Sunglass Hut" or the "Company") is the
world's largest specialty retailer of sunglasses with over 2,000 locations
worldwide. Since opening its first kiosk in Miami, Florida in 1971, the Company
has grown rapidly, both through internal expansion and acquisitions, increasing
from 716 stores as of fiscal yearend 1992 to 2,036 specialty sunglass, 51 Watch
Station and 28 EyeX optical locations as of fiscal yearend 1996. 

     During fiscal 1996, the Company opened or acquired 249 Sunglass Hut
locations and 122 licensed departments, 51 Watch Station stores and 26 EyeX
optical stores. The Company closed 59 locations (including 23 stores related to
a restructuring plan-see below). 

     The Company's May 1996 entry into retail watch sales, through its Watch
Station concept, is intended to take advantage of the Company's successful kiosk
and in-line store formats that it has developed for its sunglass stores. The
Company believes an opportunity exists to develop Watch Station as a watch
specialty store concept which caters to a market demographic that is similar to
the existing demographics for sunglasses-a younger, more affluent shopper. 

     After testing and evaluating the performance of EyeX, a separate optical
store concept, the Company decided to halt future expansion of this concept and
plans to close or convert its existing 28 EyeX stores. 

     In order to support its future expansion plans, during the second quarter
of 1996 the Company (1) moved its domestic distribution operations from its main
facility in Medley, Florida and four satellite facilities to its new centralized
facility in Atlanta, Georgia and (2) issued $115 million principal amount of
convertible subordinated notes to certain qualified investors (see Note 5 of the
Notes to Consolidated Financial Statements for additional information with
respect to these notes). In June 1996, the Company changed its state of
incorporation from Delaware to Florida. 

     In the third quarter of 1996, the Company recognized $2.5 million in
charges to reflect higher than anticipated inventory shrinkage and defective
product write-offs due to changes in manufacturers' return policies recognized
as a result of a physical inventory conducted at the end of the third quarter
after the consolidation of the Company's distribution facilities.

     During the fourth quarter of 1996, in response to weakening sunglass sales
and to address recognized changes in the premium sunglass industry, management
developed and commenced implementation of a restructuring plan for the Company's
worldwide operations and, concurrently, its 

                                       3

<PAGE>

strategic initiatives for 1997. The major points of the restructuring and
strategic plans consist of (1) the elimination of marginal or unprofitable
locations through closure or conversion, and (2) the realignment of the
Company's corporate structure to focus administrative, marketing and customer
service efforts on the Sunglass Hut and Watch Station concepts.

     As part of the restructuring plan, the Company recorded restructuring
expenses of $18.7 million ($15.2 million net of tax benefits) in connection with
the closure of approximately 90 North American and 30 international Sunglass Hut
locations, the closure or conversion of approximately 30 licensed departments,
and the closure or conversion of the Company's 28 EyeX stores as part of
management's decision to halt future expansion of that concept. The charge
includes expenses related to the write-down of fixed and other assets, and lease
exit, inventory restocking and handling, and severance costs. The after-tax
charge also reflects the non-deductibility of certain international costs and
the probability that certain net operating loss carryforwards will not provide
future tax benefits to the Company. As of yearend 1996, the Company has closed
23 of the locations targeted for closure/conversion under the restructuring
plan. Management intends to complete the closure/conversion plan during 1997, as
part of its efforts to improve long-term financial performance and resource
productivity.

     Also, during the fourth quarter of 1996, the Company commenced an inventory
reduction program which included order cancellations, and product returns and
exchanges, in addition to product sell-through. These cancellations and returns
effected reduced vendor performance incentives and other margin and marketing
support leading to a $5.0 million increase in merchandise cost and marketing
expenses during the fourth quarter. Management plans to continue to reduce
inventory levels and rebalance merchandise assortments in 1997 in an effort to
bring more new, innovative product to the consumer and, consequently, expects
gross margin pressures to continue into 1997.

     The Company's 1997 strategic initiatives to address the issues that
negatively impacted 1996 performance encompass administration, merchandising,
marketing and customer service. The Company is in the process of reorganizing
its corporate structure to allocate the appropriate level of resources to
support the Company's initiatives including its international expansion and
Watch Station strategies and recorded, during the fourth quarter of 1996, $1.1
million in connection with these initiatives. The 1997 plan includes the hiring
of a Vice President of New Product Design and Development to focus on both
expanding the Sunglass Hut private label brand and assisting key vendors in
identifying and responding to emerging fashion trends. The Company also intends
to hire a Vice President of Marketing to develop the Company's first major
national advertising program, has recently hired a Vice President of
International Development and intends to hire a General Manager for Watch
Station to focus on their respective aspects of the business.

THE COMPANY 

     Sunglass Hut's business strategy is to enhance its position as the largest
retailer of sunglasses by emphasizing: 

     (i) Dominant Merchandise Selection-The Company strives to offer the most
extensive selection of brand name function, sport and fashion sunglasses in the
industry. A typical store carries a broad assortment, including sunglasses made
by Ray-Ban, Oakley, Serengeti, Revo, Calvin Klein, Stussy, DKNY, Vuarnet,
Giorgio Armani and Guess, as well as private label sunglasses sold primarily
under the Sungear brand name. 

     (ii) Competitive Everyday Low Pricing-The Company's market-by-market
pricing policy is to maintain everyday low prices that are competitive within
each market. The Company supports this policy by regularly monitoring price
levels at its competitors' stores and by offering a lowest price guarantee. 

     (iii) Flexible Innovative Formats-The relatively small size of sunglasses
gives the Company the ability to operate many sizes of in-line and kiosk
formats. In addition to operating in traditional regional malls, management
believes that the flexibility of the Company's store formats permits it to 

                                       4

<PAGE>

operate stores in (a) quality outlet malls, (b) on-street sites in high-traffic
locations, (c) mixed use, festival, hotel and other specialty locations, (d)
airports and other transportation terminals, and (e) licensed departments within
department stores. 

     (iv) Exceptional Customer Service-The Company believes that its
knowledgeable and personalized customer service differentiates it from its
competitors and is a critical component of its success. The Company has
implemented extensive employee training programs designed to ensure that its
sales associates are both thoroughly familiar with the technical, fashion and
function elements of its sunglass offerings and committed to achieving total
customer satisfaction. 

     (v) Key Vendor Partnerships-The Company views its key suppliers as partners
and works with these vendors on an ongoing basis to develop new products and
sunglass styles. From time to time, the Company negotiates exclusive and
favorable volume purchasing terms for merchandise. Sunglass Hut believes that it
is the largest retail customer of Bausch & Lomb, Oakley and Serengeti, as well
as other leading sunglass manufacturers. 

     The Company's business strategy for Watch Station focuses on retail watch
sales consistent with the successful kiosk and in-line store formats that the
Company developed for its sunglass stores. The Company believes an opportunity
exists to develop "Watch Station" as a watch specialty store concept which
caters to a market demographic that is similar to the existing demographics for
sunglasses-a younger, more affluent shopper. The stores offer the customer a
unique product assortment in a fun, casual environment. A current prototype
Watch Station store offers up to 1,000 styles of fashion, sport, function and
novelty watches retailing typically from $50 to $1,000. 

     The following table shows the historical growth of the Company's locations:
 

<TABLE>
<CAPTION>
                                                              FISCAL                      
                                         -------------------------------------------------
STORE LOCATION                           1996       1995       1994       1993      1992  
--------------                           --------   --------   --------   -------   ------
<S>                                      <C>        <C>        <C>        <C>       <C>    
Sunglass Hut  ........................     1,881      1,686      1,202      872       716 
Licensed sunglass departments   ......       155         38          1        1         - 
                                          -------    -------    -------    -----     -----
  Sunglass specialty subtotal   ......     2,036      1,724      1,203      873       716 
Watch Station stores   ...............        51          -          -        -         - 
EyeX optical stores    ...............        28          2          -        -         - 
                                          -------    -------    -------    -----     -----
  Total    ...........................     2,115      1,726      1,203      873       716 
                                          =======    =======    =======    =====     =====
</TABLE>

     At February 1, 1997, the Company operated 1,521 stores and 109 licensed
departments throughout the United States as well as 101 stores and 44 licensed
departments in Canada, 123 stores in Australia, five stores in New Zealand and
four stores in Singapore, 112 locations (including 110 stores and two licensed
departments) throughout eleven countries in Europe, ten stores in Puerto Rico,
five stores in the U.S. Virgin Islands and two stores in other Caribbean
locations for a total of 2,036 specialty sunglass locations. At yearend, the
Company also operated 51 Watch Station stores and 28 EyeX optical stores in the
United States.

     The Company believes that the flexibility of its specialty store formats
and its attractive unit level economics provide it with access to a wide range
of leasing opportunities which will facilitate its continued expansion. The
Company is pursuing opportunities to continue to expand sunglass specialty
locations both domestically and internationally and plans to open approximately
130 domestic locations and 15 international locations in fiscal 1997. The
Company also plans to open approximately 30 to 40 domestic Watch Station stores
in fiscal 1997. 

COMPETITION 

     The Company is the largest specialty retailer of sunglasses in the world.
However, both the retail sunglass and watch businesses are highly competitive
and the Company competes with many different types of retail stores. Since
retail stores generally serve individual or local markets, competition is 

                                       5

<PAGE>

fragmented and varies substantially from one location or geographic area to
another. Competitors in the over $30 sunglass market include chain and
individual sunglass specialty stores, department stores, optical chains and
sporting goods specialty stores. Catalog showrooms, warehouse clubs, discount
stores, drug stores and other mass merchandisers that currently compete
primarily in the under $30 segment of the retail sunglass industry also have a
significant market share in the over $30 segment and could increase competitive
pressure in this segment in the future. Competitors in the retail watch market
include chain and individual watch specialty stores, department stores, catalog
showrooms and jewelry stores. Certain of these competitors may have greater
industry experience, financial and other resources than the Company. Management
believes that the primary elements of competition in the specialty stores are
breadth, quality and in-stock availability of merchandise selection, price,
level of customer service and convenience of store location, and that its
specialty store concepts compete successfully on the basis of all such factors. 

EMPLOYEES 

     At February 1, 1997, the Company employed 8,121 persons, of whom 4,132 were
full-time employees and 3,989 were part-time employees. The number of part-time
associates employed by the Company fluctuates depending on seasonal needs. None
of the Company's domestic employees are covered by collective bargaining
agreements, and management believes that the Company's relations with its
employees are good.

SERVICEMARKS AND TRADEMARKS 

     The name "Sunglass Hut International" is a servicemark registered in the
United States Patent and Trademark Office. As of fiscal yearend 1996, the
Company has taken steps to register this servicemark and its logo with
approximately 60 legal jurisdictions worldwide. The Company has also taken
active steps to register its "Watch Station" and "SunGear" servicemarks on a
worldwide basis. Management believes that these servicemarks are an integral
element of the Company's marketing strategy. Although the Company has a number
of other registered servicemarks, management does not believe that these are
material to the Company's operations. 

FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS 

     The Company continues to expand its sunglass specialty concept into
international markets on an ongoing basis. In 1996, the Company opened 52 new
stores in nine European countries. In the Pacific Rim region, the Company opened
36 stores in Australia, five in New Zealand and four in Singapore. See Note 10
of the Notes to Consolidated Financial Statements for additional information
with respect to foreign and domestic operations. 

ITEM 2. PROPERTIES 

     The Company currently leases all of its existing store locations and
expects that its policy of leasing rather than owning will continue as it
expands. The Company's leases generally provide for initial lease terms ranging
up to seven years for kiosks and up to 10 years for in-line stores. Management
believes that the use of short-term leases enhances the Company's flexibility to
pursue various expansion opportunities resulting from changing market
conditions. Rent generally includes a percentage of the store's sales volume and
a fixed minimum base rent. The majority of lease rental payments are also
subject to annual increases for taxes, common area maintenance and insurance. 

     As current leases expire, the Company believes that it will be able either
to obtain lease renewals, if desired, for present store locations, or to obtain
leases for equivalent or better locations in the same general area. To date, the
Company has not experienced difficulty in either renewing leases for existing
locations or securing leases for suitable locations for new stores. 

     The Company leases its corporate headquarters in Coral Gables, Florida. The
lease has a ten-year term (expiring in 2004) with options to expand to
additional space. During 1996, the Company moved its domestic

                                       6

<PAGE>

distribution operations from its main facility in Medley, Florida and four
satellite facilities to its new centralized facility in Atlanta, Georgia. The
Company has a five-year lease with two renewable options of five years each at
the new 92,000 square foot Atlanta distribution center. 

     See Note 7 of the Notes to Consolidated Financial Statements for additional
information with respect to the Company's operating leases. 

ITEM 3. LEGAL PROCEEDINGS 

     In January 1997, a class action securities lawsuit was filed against the
Company and certain of its executive officers in the U.S. District Court of the
Southern District of Florida. The lawsuit alleges, among other things, that the
Company and certain of its officers made materially false and misleading
statements regarding the Company's business performance and prospects. The
Company believes that the lawsuit has no basis, and intends to vigorously defend
the action. Although the ultimate outcome of the lawsuit cannot be predicted,
management does not believe the lawsuit will have a material adverse effect on
the financial position, results of operations or cash flows of the Company. 

     There are no other significant legal proceedings pending against the
Company. 

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

     No matters were submitted to a vote of security holders during the fourth
quarter of the Company's 1996 fiscal year. 

                                    PART II

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

     The Company's common stock is traded on the NASDAQ National Market under
the symbol "RAYS." The following table sets forth, for the periods indicated,
the high and low sale prices of shares of the common stock as reported on the
NASDAQ National Market. 

<TABLE>
<CAPTION>
                                                                HIGH        LOW   
                                                              ----------   -------
<S>                                                           <C>          <C>     
 Fiscal 1995:                                                                     
   First Fiscal Quarter (January 29 to April 29)  .........   $15 1/4      $11 1/8 
   Second Fiscal Quarter (April 30 to July 29) ............    20 7/8       13 5/8 
   Third Fiscal Quarter (July 30 to October 28)   .........    25 7/16      18 7/8 
   Fourth Fiscal Quarter (October 29 to February 3)  ......    29           18 1/2 

 Fiscal 1996: .............................................                       
   First Fiscal Quarter (February 4 to May 4)  ............   $36 15/16    $25    
   Second Fiscal Quarter (May 5 to August 3)   ............    30           10 5/8 
   Third Fiscal Quarter (August 4 to November 2)  .........    18 3/4        8 1/4 
   Fourth Fiscal Quarter (November 3 to February 1)  ......     8 7/8        5 1/2 
</TABLE>

     On April 24, 1997, the last reported sale price for the Company's common
stock on the NASDAQ National Market was $7 1/2 per share. As of April 24, 1997,
the Company had 388 stockholders of record (including brokerage firms and other
nominees).

     The Company intends to retain its earnings to finance the growth and
development of its business and does not anticipate paying cash dividends on its
capital stock in the foreseeable future. Future dividends, if any, will depend,
among other things, on the future earnings, capital requirements and financial
condition of the Company, and on such other factors as the Company's Board of
Directors may consider relevant. In addition, the Company's revolving credit
facility prohibits the payment of cash dividends if an event of default exists
and generally limits the payment of cash dividends to 10% of the Company's net
income. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources." 

                                       7

<PAGE>


ITEM 6. SELECTED FINANCIAL DATA 

     The selected financial data presented below should be read in conjunction
with the consolidated financial statements and related notes, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the other financial information included elsewhere in this Form 10-K. The data
as of February 1, 1997 and February 3, 1996 and for each of fiscal 1996, 1995
and 1994 are derived from the Company's audited consolidated financial
statements included elsewhere in this Form 10-K. The data as of January 28,
1995, January 29, 1994 and January 30, 1993 and for the fiscal 1993 and 1992
periods are derived from audited financial statements not included in this Form
10-K. 

              (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)

<TABLE>
<CAPTION>
                                                                           FISCAL(1)         
                                                                  ---------------------------
                                                                     1996          1995      
                                                                  ----------- ---------------
<S>                                                               <C>         <C>             
INCOME STATEMENT DATA:                                                                       
Net sales  ......................................................   $527,081       $418,228  
Cost of goods sold, occupancy and buying expenses    ............    316,285        235,292  
                                                                    --------       --------  
 Gross profit    ................................................    210,796        182,936  
                                                                    --------       --------  
Selling, general and administrative expenses:                                                
 Operating expenses    ..........................................    151,786        114,045  
 Depreciation and leasehold amortization    .....................     23,715         16,604  
 Amortization of cost in excess of net assets of                                             
  acquired businesses  ..........................................      2,325          1,746  
 Amortization of noncompete agreements   ........................          -              -  
 Management incentive compensation    ...........................          -              -  
 Restructuring expenses   .......................................     18,700              -  
 Expenses related to acquisitions  ..............................          -         10,100  
                                                                    --------       --------  
                                                                     196,526        142,495  
                                                                    --------       --------  
Earnings before interest, taxes and extraordinary item  .........     14,270         40,441  
Interest expense    .............................................      7,969          3,292  
                                                                    --------       --------  
Earnings (loss) before income taxes and extraordinary item    ...      6,301         37,149  
Provision for income taxes   ....................................      6,526         15,512  
                                                                    --------       --------  
Earnings (loss) before extraordinary item   .....................       (225)        21,637  
Extraordinary charge on debt retirement, net of tax  ............          -              -  
                                                                    --------       --------  
Net income (loss)   .............................................       (225)        21,637  
Pro forma adjustment for income taxes(2)    .....................          -           (775) 
                                                                    --------       --------  
Pro forma net income (loss)  ....................................       (225)        20,862  
Redeemable preferred stock dividends  ...........................          -              -  
                                                                    --------       --------  
Pro forma net income (loss) applicable to                                                    
 common stockholders   ..........................................   $   (225)      $ 20,862  
                                                                    ========       ========  
Pro forma net income (loss) per share    ........................   $   0.00       $   0.38  
                                                                    ========       ========  
Weighted average shares outstanding   ...........................     54,213         55,009  
                                                                    ========       ========  
Supplemental pro forma earnings per share   .....................                     $0.52 (3)
                                                                                   ========  
SELECTED OPERATING DATA:                                                                     
Number of stores open at end of period   ........................      2,115          1,726  
Comparable store net sales increase(5)   ........................        2.5%          10.3% 
</TABLE>

<TABLE>
<CAPTION>
                                                                                   FISCAL(1)                   
                                                                  -------------------------------------------  
                                                                     1994          1993            1992        
                                                                  ----------- --------------- ---------------  
<S>                                                               <C>         <C>             <C>               
INCOME STATEMENT DATA:                                                                                         
Net sales  ......................................................   $289,985       $206,005        $159,322    
Cost of goods sold, occupancy and buying expenses    ............    162,631        115,314          90,268    
                                                                    --------       --------        --------    
 Gross profit    ................................................    127,354         90,691          69,054    
                                                                    --------       --------        --------    
Selling, general and administrative expenses:                                                                  
 Operating expenses    ..........................................     82,515         63,176          49,092    
 Depreciation and leasehold amortization    .....................     11,832          8,660           7,405    
 Amortization of cost in excess of net assets of                                                               
  acquired businesses  ..........................................      1,106            834             789    
 Amortization of noncompete agreements   ........................          -          5,000           5,000    
 Management incentive compensation    ...........................          -            476             317    
 Restructuring expenses   .......................................          -              -               -    
 Expenses related to acquisitions  ..............................          -          1,485             785    
                                                                    --------       --------        --------    
                                                                      95,453         79,631          63,388    
                                                                    --------       --------        --------    
Earnings before interest, taxes and extraordinary item  .........     31,901         11,060           5,666    
Interest expense    .............................................      2,670          2,926           6,065    
                                                                    --------       --------        --------    
Earnings (loss) before income taxes and extraordinary item    ...     29,231          8,134            (399)   
Provision for income taxes   ....................................     10,913          4,559             221    
                                                                    --------       --------        --------    
Earnings (loss) before extraordinary item   .....................     18,318          3,575            (620)   
Extraordinary charge on debt retirement, net of tax  ............          -         (1,573)              -    
                                                                    --------       --------        --------    
Net income (loss)   .............................................     18,318          2,002            (620)   
Pro forma adjustment for income taxes(2)    .....................     (1,007)          (541)           (457)   
                                                                    --------       --------        --------    
Pro forma net income (loss)  ....................................     17,311          1,461          (1,077)   
Redeemable preferred stock dividends  ...........................          -           (472)         (1,200)   
                                                                    --------       --------        --------    
Pro forma net income (loss) applicable to                                                                      
 common stockholders   ..........................................   $ 17,311       $    989        $ (2,277)   
                                                                    ========       ========        ========    
Pro forma net income (loss) per share    ........................   $   0.34       $   0.02        $  (0.07)   
                                                                    ========       ========        ========    
Weighted average shares outstanding   ...........................     50,481         45,269          32,040    
                                                                    ========       ========        ========    
Supplemental pro forma earnings per share   .....................                     $0.20 (4)       $0.12 (4)
                                                                                   ========        ========    
SELECTED OPERATING DATA:                                                                                       
Number of stores open at end of period   ........................      1,203            873             716    
Comparable store net sales increase(5)   ........................       13.5%          10.6%           6.7%    
</TABLE>

<TABLE>
<CAPTION>
                                          FEBRUARY 1,      FEBRUARY 3,      JANUARY 28,      JANUARY 29,      JANUARY 30,         
                                             1997             1996             1995             1994             1993             
                                          --------------   --------------   --------------   --------------   -------------       
<S>                                       <C>              <C>              <C>              <C>              <C>                  
BALANCE SHEET DATA:                                                                                                               
Working capital   .....................      $131,934         $87,925          $35,863          $20,889          $  2,272         
Total assets   ........................       363,937         267,076          153,614           98,695            77,857         
Total debt  ...........................       163,279          69,561           48,528           18,307            52,285         
Redeemable preferred stock    .........             -               -                -                -            13,800         
Stockholders' equity (deficit)   ......       157,792         152,824           72,216           53,682           (13,723)        

<FN>
---------------- 

(1) In June 1995, the Company acquired Sunsations through the exchange of
    7,411,764 shares of the Company's common stock for all of the outstanding
    common stock of Sunsations. The acquisition was accounted for as a pooling
    of interests, and, 

                                       8

<PAGE>

    accordingly, the accompanying selected financial data has been
    retroactively adjusted to include the operations of Sunsations for all
    periods prior to the acquisition. Prior to the acquisition, Sunsations used
    a calendar yearend. Accordingly, the selected financial data for fiscal
    1994, 1993 and 1992 combine Sunsations' historical selected financial data
    on a calendar yearend basis with the Company's historical selected financial
    data on a fiscal yearend basis. As a result of the acquisition, effective
    January 29, 1995 (the first day of the Company's fiscal 1995 year),
    Sunsations' yearend was changed to conform to the Company's fiscal yearend.

(2) The pro forma adjustment for income taxes reflects the additional tax
    provision that would have been recorded at the corporation level had
    Sunsations not been an S corporation during the respective periods. 

(3) Supplemental pro forma earnings per share for fiscal 1995 excludes $10.1
    million (net of taxes) of nonrecurring expenses related to the acquisition
    of Sunsations during 1995. 

(4) Supplemental pro forma earnings per share for fiscal years 1993 and 1992
    exclude certain specific selling, general and administrative expenses (net
    of taxes) that did not continue beyond fiscal 1993, including amortization
    of noncompete agreements, management incentive compensation and expenses
    related to acquisitions. Supplemental pro forma earnings per share also
    excludes the interest expense, extraordinary charge on debt retirement and
    preferred stock dividends related to the debt and preferred stock retired
    with the proceeds of the Company's initial public offering of common stock
    in June 1993 (the "IPO"), assuming that the IPO occurred as of the beginning
    of each period. 

(5) A store becomes comparable after it has been operated by the Company for
    more than 12 full months, except that the fiscal 1992 increase also reflects
    134 stores that were added through the acquisition of Sun Mark, Inc. in
    February 1992 and otherwise meet the definition of comparable stores. In
    addition, all comparable store results reflect the operations of Sunsations.
</FN>
</TABLE>
     
                                       9

<PAGE>


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
        FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS 

     The following table sets forth, for the periods indicated, certain selected
income statement data expressed as a percentage of net sales: 

<TABLE>
<CAPTION>
                                                                                        FISCAL               
                                                                          -----------------------------------
                                                                           1996        1995         1994     
                                                                          ---------   ---------   -----------
<S>                                                                       <C>         <C>         <C>         
Net sales  ............................................................      100.0%       100.0%      100.0% 
Cost of goods sold, occupancy and buying expenses    ..................       60.0         56.3        56.1  
                                                                           -------      -------     -------  
 Gross profit    ......................................................       40.0         43.7        43.9  
                                                                           -------      -------     -------  
Selling, general and administrative expenses:                                                                
 Operating expenses    ................................................       28.8         27.3        28.4  
 Depreciation and leasehold amortization    ...........................        4.5          4.0         4.1  
 Amortization of cost in excess of net assets of acquired businesses           0.4          0.4         0.4  
 Restructuring expenses   .............................................        3.6            -           -  
 Expenses related to acquisition   ....................................          -          2.4           -  
                                                                           -------      -------     -------  
                                                                              37.3         34.1        32.9  
                                                                           -------      -------     -------  
Earnings before interest and income taxes   ...........................        2.7          9.7        11.0  
Interest expense    ...................................................        1.5          0.8         0.9  
                                                                           -------      -------     -------  
Earnings before income taxes    .......................................        1.2          8.9        10.1  
Provision for income taxes   ..........................................        1.2          3.7         3.8  
                                                                           -------      -------     -------  
Net income    .........................................................          -          5.2         6.3  
Pro forma adjustment for income taxes    ..............................          -         (0.2)       (0.3) 
                                                                           -------      -------     -------  
Pro forma net income   ................................................          -          5.0%        6.0% 
                                                                           =======      =======     =======  
</TABLE>

OVERVIEW 

     During fiscal 1996, the Company's net income was negatively affected by a
progressive slowdown in comparable store sunglass sales in addition to the
underperformance of new stores. In response to this trend, management developed
and commenced implementation of a restructuring plan for the Company's worldwide
operations (including the elimination of marginal or unprofitable locations
through closure or conversion) and recorded an $18.7 million restructuring
charge ($15.2 million net of tax benefits) in connection with the planned
closure of approximately 90 domestic and 30 international Sunglass Hut stores,
as well as the planned closure or conversion of 30 licensed departments and the
Company's 28 EyeX stores. 

     Additionally, during the third and fourth quarters of 1996, the Company
recognized (1) $2.5 million of expenses during the third quarter to reflect
higher than anticipated inventory shrinkage and defective product write-offs due
to changes in manufacturers' return policies recognized as a result of a
physical inventory conducted at the end of the third quarter after the
consolidation of the Company's U.S. distribution facilities, (2) $5.0 million of
expenses during the fourth quarter related to its product purchases from Bausch
& Lomb, including a reduction of the Company's performance incentive and other
margin and marketing support attributable to the Company's lower than expected
fourth quarter sales performance, cancellation of purchase orders and return of
product, and (3) $1.1 million of expenses during the fourth quarter primarily
associated with its efforts to establish an organizational infrastructure to
support the Company's 1997 strategic initiatives. 

     During fiscal 1995, the Company's net income was negatively affected by
$10.1 million of nonrecurring acquisition-related costs and expenses incurred as
a result of the Sunsations acquisition. Exclusive of these nonrecurring
acquisition-related costs and expenses, earnings for fiscal 1995 were $0.52 per
share, an increase of 53% compared to earnings of $0.34 per share for fiscal
1994. Earnings 

                                       10

<PAGE>

inclusive of acquisition expenses were $20.9 million or $0.38 per share. The
nonrecurring acquisition costs and expenses included (1) $2.3 million in
contingent interest incurred by Sunsations as a result of the acquisition, (2)
$1.4 million incurred in connection with the termination of Sunsations'
management agreement with one of Sunsations' affiliates, (3) $3.1 million
incurred for legal, accounting and consulting fees relating to the acquisition,
and (4) $3.3 million incurred for other costs and expenses relating to the
business combination. 

FISCAL 1996 COMPARED TO FISCAL 1995 

     Net sales increased $108.9 million, or 26.0%, to $527.1 million in fiscal
1996 from $418.2 million in fiscal 1995, of which $98.8 million, or 90.7%, was
primarily attributable to sales from new stores opened in fiscal 1996 (and
fiscal 1995 to the extent not reflected in comparable store sales increases) and
$10.1 million, or 9.3%, was attributable to an increase in comparable store
sales. Comparable store sales increased 2.5% in fiscal 1996 from fiscal 1995.
Throughout fiscal 1996, sales performance in both comparable and new stores
progressively weakened. Management attributes this weakness to a variety of
factors, including unfavorable weather conditions (as compared to prior year),
lack of timely new product introductions, and increased turnover of store level
associates (particularly as a result of acquisitions completed in fiscal 1995).

     Gross profit increased $27.9 million, or 15.2%, to $210.8 million in fiscal
1996 from $182.9 million in fiscal 1995, primarily due to the increase in net
sales. As a percentage of net sales, gross profit decreased by 3.7% to 40% in
fiscal 1996 from 43.7% in fiscal 1995. The 3.7% decrease in gross profit margin
was primarily due to (1) higher occupancy costs related to the Company's new
store expansion, including expansion into international markets, and (2) higher
inventory shrinkage and changes in manufacturers' return policies which resulted
in defective product write-offs. Management expects that, due to increasing
international expansion, higher occupancy costs, changes in manufacturers' terms
and policies, and anticipated markdowns and promotions to reduce inventory
levels, coupled with the Company's entry into the retail watch industry, future
gross profit rates will approximate 1996 levels. 

     Operating expenses increased $37.7 million, or 33.1%, in fiscal 1996,
primarily due to costs associated with the operations and management of new
stores opened in fiscal 1996 and fiscal 1995. As a percentage of net sales,
operating expenses increased 1.5% to 28.8% in fiscal 1996 from 27.3% in fiscal
1995, primarily due to the negative impact of slower sales growth on the
Company's fixed expenses. The Company's contemplated hiring of new senior
management personnel, increased marketing activities and other components of its
1997 strategic initiatives are expected to increase operating expenses in 1997. 

     Depreciation and leasehold amortization expense increased $7.1 million, or
42.8%, in fiscal 1996, primarily due to new store growth during fiscal 1996 and
1995. 

     Amortization of costs in excess of net assets of acquired businesses
increased by $.6 million, or 33.2%, in fiscal 1996. 

     Restructuring expenses consist of $18.7 million of nonrecurring costs and
expenses incurred in connection with store closures (see "Overview" for
additional details).

     Interest expense increased $4.7 million, or 142%, in fiscal 1996 due to an
increase in average outstanding borrowings, primarily to support inventory
growth and new store operating and capital cash needs. 

     The Company's effective tax rate for fiscal 1996 and fiscal 1995 was 103.6%
and 43.8%, respectively. The increase in the tax rate for fiscal 1996 is
primarily due to an increase in the valuation allowance for foreign net
operating loss carry-forwards and the non-deductibility of certain international
costs related to the restructuring. 

     As a result of the foregoing, the Company had a net loss of $(225,000) in
fiscal 1996 compared to pro forma net income of $20.9 million in fiscal 1995.
Results in fiscal 1996 include operating earnings 

                                       11

<PAGE>

from domestic operations, operating losses from international operations (see
Note 10 of Notes to Consolidated Financial Statements for additional information
regarding segment performance), interest costs related to indebtedness, and
restructuring and strategic initiative costs. 

FISCAL 1995 COMPARED TO FISCAL 1994 

     Net sales increased $128.2 million, or 44.2%, to $418.2 million in fiscal
1995 from $290.0 million in fiscal 1994, of which (1) $90.0 million, or 70%, was
primarily attributable to sales from new stores opened in fiscal 1995 (and
fiscal 1994 to the extent not reflected in comparable store sales increases),
(2) $28.4 million, or 22%, was attributable to an increase in comparable store
sales, and (3) $9.8 million, or 8%, was attributable to sales from stores added
through the acquisition of the remaining 50% interest in Sunglass World.
Comparable store sales increased 10.3% in fiscal 1995 from fiscal 1994,
primarily due to increased unit sales of the Company's branded sunglass
offerings and, to a lesser extent, its expanded private label sunglass
offerings.

     Gross profit increased $55.6 million, or 43.6%, to $182.9 million in fiscal
1995 from $127.4 million in fiscal 1994, primarily due to the increase in net
sales. As a percentage of net sales, gross profit decreased by 0.2% to 43.7% in
fiscal 1995 from 43.9% in fiscal 1994. This decrease resulted primarily from
slightly higher occupancy rates as a percentage of net sales. 

     Operating expenses increased $31.5 million, or 38.2%, in fiscal 1995 from
fiscal 1994, primarily due to costs associated with the operations and
management of new stores opened in fiscal 1995 and 1994. Operating expenses as a
percentage of net sales decreased 1.1% to 27.3% in fiscal 1995 from 28.4% in
fiscal 1994, primarily as a result of operating efficiencies and economies of
scale resulting from higher sales volume.

     Depreciation and leasehold amortization expense increased $4.8 million, or
40.3%, in fiscal 1995 from fiscal 1994, primarily due to new store growth. 

     Amortization of costs in excess of net assets of acquired businesses
increased by $640,000, or 57.9%, in fiscal 1995, due primarily to the
acquisition of the remaining 50% interest in Sunglass World, a premier specialty
retailer of sunglasses in Australia. 

     Expenses related to acquisition consists of $10.1 million of nonrecurring
acquisition-related costs and expenses incurred in connection with the
Sunsations acquisition (see "Overview" for additional details). 

     Interest expense increased $622,000, or 23.3%, in fiscal 1995 primarily due
to an increase in average outstanding borrowings, which in turn was attributable
to new store growth. 

     The Company's effective tax rate for fiscal 1995 and fiscal 1994 was 43.8%
and 40.8%, respectively. The increase in tax rate for fiscal 1995 was primarily
due to the non-deductibility of certain expenses related to the Sunsations
acquisition.

     As a result of the foregoing, the Company had pro forma net income of $20.9
million in fiscal 1995 compared to pro forma net income of $17.3 million in
fiscal 1994. 

LIQUIDITY AND CAPITAL RESOURCES 

     The Company's short-term cash needs are primarily for working capital to
support its inventory requirements and new store additions. The Company's
long-term liquidity requirements relate principally to the maturity of the
revolving credit facility in December 1998, the maturity of the $115 million
convertible subordinated notes in June 2003, operating lease commitments and
continued store expansion. During fiscal 1996, the Company amended its existing
revolving credit facility with NationsBank of Florida, National Association
("NationsBank"), acting as the agent for a conglomerate of banks, to decrease
maximum borrowings from $100 million to $75 million, amend certain financial
covenants, and modify the applicable interest rate. The credit facility includes
up to $10.0 million in

                                       12

<PAGE>

letters of credit. Borrowings under the credit facility generally bear interest
at a floating rate equal to, at the Company's option, (i) the greater of (a) the
prime rate or (b) the federal funds effective rate plus 0.50%, plus, in each
case, up to a maximum of 0.75% depending on the levels of certain financial
ratios, or (ii) LIBOR plus a range from .625% to 1.75% depending on the levels
of certain financial ratios. 

     Due to the seasonal nature of the Company's business, outstanding
borrowings under the credit facility typically peak during the first and third
fiscal quarters as the Company finances inventory purchases in advance of the
Company's highest sales periods. See "Seasonality and Quarterly Results."
However, during the first and second quarters of fiscal 1997, as a result of the
Company's strategic initiatives to reduce inventory levels, outstanding
borrowings are expected to progressively decline from yearend levels. At
February 1, 1997, the Company had outstanding borrowings under the credit
facility of $50.5 million and $1.7 million in letters of credit outstanding,
which were maintained as security for performance under the Company's executive
office lease and for purchases of certain merchandise. 

     Net cash used in operating activities was $18.1 million during fiscal 1996
compared to $132,000 during fiscal 1995. The difference between the net income
and operating cash flow for fiscal 1996 was primarily attributable to the
Company's $44.0 million increase in its investment in working capital during the
year, partially offset by $26.0 million of non-cash charges for depreciation and
amortization.

     Net cash used in investing activities was $76.2 million during fiscal 1996
compared to $70.8 million during fiscal 1995. The fiscal 1996 cash flow reflects
increased capital expenditures compared to 1995 due to the opening of 448 new
store locations as well as increased expenditures for renovation and relocation
of existing stores (approximately $10 million), investment in new financial and
human resource management information systems (approximately $6 million) and
costs for the new Atlanta distribution center (approximately $3 million). 

     Net cash provided by financing activities was $94.5 million for fiscal 1996
compared to $71.8 million for fiscal 1995. The fiscal 1996 cash flow reflects
the net proceeds of $112.2 million from the issuance of 5 1/4% convertible
subordinate debentures in June 1996, partially offset by net repayments on the
revolving credit facility with NationsBank of $17.8 million. 

     At February 1, 1997, the Company's commitments for capital expenditures
totaled approximately $3.9 million and related primarily to capital costs for
new store construction and existing store renovations. Management believes that
net cash provided by operations together with borrowing availability under the
Company's revolving credit facility will be sufficient to fund estimated capital
expenditures associated with the Company's planned opening of approximately 180
Sunglass Hut and Watch Station locations in fiscal 1997 and other working
capital requirements through at least fiscal 1997. Management believes that 1997
capital costs will decline substantially when compared to fiscal 1996, primarily
as a result of a reduced level of new store openings, lower remodel and
renovation spending, and reduced investment in financial and human resource
systems and distribution activities. 

SEASONALITY AND QUARTERLY RESULTS 

     Historically, the Company's operations have been seasonal, with highest net
sales and net income occurring in the second fiscal quarter (reflecting
increased demand for sunglasses during the spring and summer months) and, to a
lesser extent, the fourth fiscal quarter (reflecting increased demand during the
yearend holiday selling season). 

     The Company's results of operations may also fluctuate from quarter to
quarter as a result of the amount and timing of sales contributed by new stores,
the integration of new stores into the operations of the Company and the timing
of planned store closures, as well as other factors. The addition of a large
number of new stores can affect results of operations on a quarter-to-quarter
basis. See Note 11 of the Notes to Consolidated Financial Statements for
additional information regarding quarterly financial data. 

                                       13

<PAGE>

ITEM 8. FINANCIAL STATEMENTS 

                                                             PAGE
                                                             ----
Report of Independent Certified Public Accountants  ......    15 

Consolidated Balance Sheets ..............................    16 

Consolidated Statements of Operations   ..................    17 

Consolidated Statements of Stockholders' Equity  .........    18 

Consolidated Statements of Cash Flows   ..................    19 

Notes to Consolidated Financial Statements ...............    21 

                                       14

<PAGE>

              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 

To the Board of Directors and Stockholders
 of Sunglass Hut International, Inc.: 

     We have audited the accompanying consolidated balance sheets of Sunglass
Hut International, Inc. (a Florida corporation) and subsidiaries as of February
1, 1997 and February 3, 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three fiscal
years in the period ended February 1, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
fiscal 1994 financial statements of Sunsations Sunglass Company, a company
acquired during fiscal 1995 in a transaction accounted for as a pooling of
interests. Such statements are included in the consolidated financial statements
of Sunglass Hut International, Inc. and subsidiaries and reflect net sales of
16% of the related consolidated total for the year ended January 28, 1995. These
statements were audited by other auditors whose report has been furnished to us
and our opinion, insofar as it relates to amounts included for Sunsations
Sunglass Company, is based solely on the report of the other auditors. 

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

     In our opinion, based on our audits and the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Sunglass Hut International, Inc. and
subsidiaries as of February 1, 1997 and February 3, 1996, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended February 1, 1997 in conformity with generally accepted accounting
principles. 

ARTHUR ANDERSEN LLP 

Miami, Florida,
 March 20, 1997.

                                       15

<PAGE>

               SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES 

                          CONSOLIDATED BALANCE SHEETS
                                (IN THOUSANDS) 

                                                                  FISCAL       
                                                         ----------------------
                                                            1996         1995   
                                                         -----------   --------
                       ASSETS                                                  
CURRENT ASSETS:                                                                
 Cash and cash equivalents    ........................     $ 5,673      $ 4,506
 Accounts receivable    ..............................       3,032        2,379
 Inventory  ..........................................     145,194      110,268
 Prepaid rent  .......................................       7,706        5,912
 Other current assets   ..............................      13,324        9,680
                                                           -------      -------
   Total current assets    ...........................     174,929      132,745
                                                           -------      -------
PROPERTY AND EQUIPMENT, net   ........................     135,930       83,980
UNAMORTIZED COST IN EXCESS OF NET ASSETS OF                                    
 ACQUIRED BUSINESSES, net  ...........................      38,849       39,095
OTHER ASSETS   .......................................      14,229       11,256
                                                           -------      -------
   Total assets   ....................................    $363,937     $267,076
                                                           =======      =======
         LIABILITIES AND STOCKHOLDERS' EQUITY                                  
CURRENT LIABILITIES:                                                           
 Accounts payable    .................................     $13,610      $28,791
 Accrued payroll and related taxes  ..................       6,435        5,662
 Accrued rent  .......................................       6,759        3,568
 Accrued expenses    .................................         966        6,670
 Accrued restructuring expenses  .....................      15,096            -
 Current portion of long-term debt  ..................         129          129
                                                           -------      -------
   Total current liabilities  ........................      42,995       44,820
LONG-TERM DEBT, net of current portion    ............     163,150       69,432
                                                           -------      -------
   Total liabilities    ..............................     206,145      114,252
                                                           -------      -------
COMMITMENTS AND CONTINGENCIES (Note 7)                                         

STOCKHOLDERS' EQUITY:                                                          
 Preferred stock  ....................................           -            -
 Common stock  .......................................         544          538
 Additional paid-in capital   ........................     164,326      159,088
 Foreign currency translation adjustment  ............        (227)        (500)
 Accumulated deficit    ..............................      (6,851)      (6,302)
                                                           -------      -------
   Total stockholders' equity    .....................     157,792      152,824
                                                           -------      -------
   Total liabilities and stockholders' equity   ......    $363,937     $267,076
                                                           =======      =======

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

                                       16

<PAGE>

               SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES 

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA) 

<TABLE>
<CAPTION>
                                                                             FISCAL               
                                                             -------------------------------------
                                                               1996          1995          1994    
                                                             -----------   -----------   ---------
<S>                                                          <C>           <C>           <C>       
Net sales    .............................................     $527,081      $418,228    $289,985 
Cost of goods sold, occupancy and buying expenses   ......      316,285       235,292     162,631 
                                                               --------      --------    -------- 
   Gross profit    .......................................      210,796       182,936     127,354 
                                                               --------      --------    -------- 
Selling, general and administrative expenses:                                                     
 Operating expenses   ....................................      151,786       114,045      82,515 
 Depreciation and leasehold amortization   ...............       23,715        16,604      11,832 
 Amortization of cost in excess of net assets of                                                  
  acquired businesses ....................................        2,325         1,746       1,106 
 Restructuring expenses  .................................       18,700             -           - 
 Expenses related to acquisition .........................            -        10,100           - 
                                                               --------      --------    -------- 
                                                                196,526       142,495      95,453 
                                                               --------      --------    -------- 
   Earnings before interest and income taxes  ............       14,270        40,441      31,901 
Interest expense   .......................................        7,969         3,292       2,670 
                                                               --------      --------    -------- 
   Earnings before income taxes   ........................        6,301        37,149      29,231 
Provision for income taxes  ..............................        6,526        15,512      10,913 
                                                               --------      --------    -------- 
   Net income (loss)  ....................................         (225)       21,637      18,318 
Pro forma adjustment for income taxes (Note 4)   .........            -          (775)     (1,007)
                                                               --------      --------    -------- 
   Pro forma net income (loss)    ........................     $   (225)     $ 20,862    $ 17,311 
                                                               ========      ========    ======== 
   Pro forma net income per share    .....................     $   0.00      $   0.38    $   0.34 
                                                               ========      ========    ======== 
Weighted average shares outstanding  .....................       54,213        55,009      50,481 
                                                               ========      ========    ======== 
</TABLE>

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

                                       17

<PAGE>

               SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES 

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                       (IN THOUSANDS, EXCEPT SHARE DATA) 

<TABLE>
<CAPTION>
                                                       COMMON STOCK                     
                                                  -----------------------  ADDITIONAL               
                                                    NUMBER OF               PAID-IN     
                                                     SHARES      AMOUNT     CAPITAL     
                                                  ------------- --------- ------------- 
<S>                                               <C>           <C>       <C>            
BALANCE, FISCAL 1993  ...........................   47,857,092    $478       $95,496    
Distributions to stockholders by                                                        
 pooled company    ..............................            -       -             -    
Foreign currency translation adjustment    ......            -       -             -    
Exercise of stock options including                                                     
 tax benefit    .................................      616,644       7         1,659    
Net income for fiscal 1994  .....................            -       -             -    
                                                   ------------   -----      --------   
BALANCE, FISCAL 1994  ...........................   48,473,736     485        97,155    
Distributions to stockholders by                                                        
 pooled company    ..............................            -       -             -    
Adjustment for change in fiscal yearend of                                              
 pooled company    ..............................            -       -             -    
Pooling of interests with an acquired entity.....      152,032       1             -    
Foreign currency translation adjustment    ......            -       -             -    
Exercise of stock options including                                                     
 tax benefit    .................................    1,005,598      10         8,075    
Public offering of common stock, net    .........    4,195,500      42        53,858    
Net income for fiscal 1995  .....................            -       -             -    
                                                   ------------   -----      --------   
BALANCE, FISCAL 1995  ...........................   53,826,866     538       159,088    
Pooling of interests with acquired entities   ...       65,186       1             -    
Foreign currency translation adjustment    ......            -       -             -    
Exercise of stock options including                                                     
 tax benefit    .................................      556,494       5         5,238    
Net loss for fiscal 1996    .....................            -       -             -    
                                                   ------------   -----      --------   
BALANCE, FISCAL 1996  ...........................   54,448,546    $544       $164,326   
                                                   ============   =====      ========   
</TABLE>

<TABLE>
<CAPTION>
                                                     FOREIGN
                                                    CURRENCY
                                                   TRANSLATION       ACCUMULATED
                                                   ADJUSTMENT          DEFICIT          TOTAL   
                                                  -------------- -------------------- ----------
<S>                                               <C>            <C>                  <C>        
BALANCE, FISCAL 1993  ...........................      $   -              $ (42,292)    $53,682 
Distributions to stockholders by                                                                
 pooled company    ..............................          -                 (1,274)     (1,274)
Foreign currency translation adjustment    ......       (176)                     -        (176)
Exercise of stock options including                                                             
 tax benefit    .................................          -                      -       1,666 
Net income for fiscal 1994  .....................          -                 18,318      18,318 
                                                       -----              ---------     ------- 
BALANCE, FISCAL 1994  ...........................       (176)               (25,248)     72,216 
Distributions to stockholders by                                                                
 pooled company    ..............................          -                 (1,226)     (1,226)
Adjustment for change in fiscal yearend of                                                      
 pooled company    ..............................          -                 (1,321)     (1,321)
Pooling of interests with an acquired entity.....          -                   (144)       (143)
Foreign currency translation adjustment    ......       (324)                     -        (324)
Exercise of stock options including                                                             
 tax benefit    .................................          -                      -       8,085 
Public offering of common stock, net    .........          -                      -      53,900 
Net income for fiscal 1995  .....................          -                 21,637      21,637 
                                                       -----              ---------     ------- 
BALANCE, FISCAL 1995  ...........................       (500)                (6,302)    152,824 
Pooling of interests with acquired entities   ...          -                   (324)       (323)
Foreign currency translation adjustment    ......        273                      -         273 
Exercise of stock options including                                                             
 tax benefit    .................................          -                      -       5,243 
Net loss for fiscal 1996    .....................          -                   (225)       (225)
                                                       -----              ---------     ------- 
BALANCE, FISCAL 1996  ...........................      $(227)             $  (6,851)   $157,792 
                                                       =====              =========     ======= 
</TABLE>

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

                                       18
<PAGE>

               SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES 

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (IN THOUSANDS) 

<TABLE>
<CAPTION>
                                                                                          FISCAL                   
                                                                        -------------------------------------------
                                                                             1996          1995            1994      
                                                                        -------------   -----------   -------------
<S>                                                                     <C>             <C>           <C>           
CASH FLOWS FROM OPERATING ACTIVITIES:                                                                              
 Net income (loss)   ................................................     $    (225)    $  21,637       $  18,318  
                                                                          ---------     ---------       ---------  
 Adjustments to reconcile net income (loss) to net cash provided                                                   
  by (used in) operating activities:                                                                                
  Depreciation and amortization  ....................................        26,040        18,350          13,078  
  Adjustment for change in fiscal yearend of pooled company..........             -          (900)              -  
  Accretion of debt discount  .......................................           194             -               -  
  Changes in assets and liabilities, net of effect of                                                              
   acquisitions-                                                                                                     
   Changes in assets:                                                                                              
    Accounts receivable    ..........................................          (649)         (186)         (1,524) 
    Inventory  ......................................................       (34,524)      (38,974)        (17,777) 
    Prepaid rent  ...................................................        (1,794)       (2,430)         (1,194) 
    Other current assets   ..........................................          (133)       (5,029)         (1,532) 
    Other assets  ...................................................        (2,414)       (3,972)           (971) 
    Deferred income taxes  ..........................................        (5,747)       (3,442)           (302) 
   Changes in liabilities:                                                                                         
    Accounts payable    .............................................       (15,249)        5,078           5,117  
    Accrued expenses    .............................................        16,398         9,736           3,677  
    Deferred income taxes  ..........................................             -             -          (1,309) 
                                                                          ---------     ---------       ---------  
                                                                            (17,878)      (21,769)         (2,737) 
                                                                          ---------     ---------       ---------  
   Net cash provided by (used in) operating activities   ............       (18,103)         (132)         15,581  
                                                                          ---------     ---------       ---------  
CASH FLOWS FROM INVESTING ACTIVITIES:                                                                              
 Capital expenditures   .............................................       (74,358)      (46,213)        (24,861) 
 Acquisition of businesses    .......................................        (1,807)      (10,190)        (11,366) 
 Investment in and advances to affiliate  ...........................             -       (14,435)         (6,200) 
 Payments for noncompete agreements    ..............................             -             -            (338) 
                                                                          ---------     ---------       ---------  
   Net cash used in investing activities  ...........................       (76,165)      (70,838)        (42,765) 
                                                                          ---------     ---------       ---------  
CASH FLOWS FROM FINANCING ACTIVITIES:                                                                              
 Proceeds from issuance of long-term debt    ........................       112,625         4,000             500  
 Principal payments on long-term debt  ..............................          (526)       (8,885)           (483) 
 Proceeds from borrowings under revolving credit facilities    ......       188,518       154,176         149,120  
 Principal payments on revolving credit facilities    ...............      (207,579)     (131,281)       (118,928) 
 Proceeds from sale of common stock    ..............................             -        53,900               -  
 Distributions to stockholders by pooled company   ..................             -        (1,226)         (1,274) 
 Payment of deferred financing costs   ..............................          (583)         (199)           (247) 
 Proceeds from exercise of stock options  ...........................         2,036         1,318             771  
                                                                          ---------     ---------       ---------  
   Net cash provided by financing activities    .....................        94,491        71,803          29,459  
                                                                          ---------     ---------       ---------  
Effect of exchange rate changes on cash and cash equivalents   ......           944             -               -  
                                                                          ---------     ---------       ---------  
NET INCREASE IN CASH AND CASH EQUIVALENTS    ........................         1,167           833           2,275  
CASH AND CASH EQUIVALENTS, beginning of year    .....................         4,506         3,673           1,398  
                                                                          ---------     ---------       ---------  
CASH AND CASH EQUIVALENTS, end of year    ...........................     $   5,673     $   4,506       $   3,673  
                                                                          =========     =========       =========  
</TABLE>

                                                        (CONTINUED ON NEXT PAGE)

                                       19

<PAGE>

               SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES 

               CONSOLIDATED STATEMENTS OF CASH FLOWS-(CONTINUED)
                       (IN THOUSANDS, EXCEPT SHARE DATA) 

<TABLE>
<CAPTION>
                                                                               FISCAL YEAR             
                                                                    ---------------------------------- 
                                                                     1996         1995        1994     
                                                                    ----------   ---------   --------- 
<S>                                                                 <C>          <C>         <C>        
SUPPLEMENTAL DISCLOSURES OF                                                                            
 CASH FLOW INFORMATION:                                                                                
 Cash paid during the year for:                                                                        
  Interest    ...................................................     $ 7,229     $3,386      $ 2,177   
                                                                      =======    =======      =======  
  Income taxes   ................................................     $13,627     $9,987      $10,735  
                                                                      =======    =======      =======  
 Non-cash activities:                                                                                  
  Impact on stockholders' equity from tax benefit related to the                                       
   exercise of stock options ....................................     $ 3,207     $6,767      $   895   
                                                                      =======    =======      =======  
</TABLE>

     In June 1995, the Company acquired Sunsations Sunglass Company in a
transaction in which the Company exchanged 7,411,764 shares of its common stock
for all of the outstanding common stock of Sunsations Sunglass Company. The
acquisition has been accounted for as a pooling of interests. All periods
presented have been retroactively restated to reflect the acquisition. 

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

                                       20

<PAGE>

               SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES 

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1-ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

NATURE OF OPERATIONS 

     Sunglass Hut International, Inc., a Florida corporation, and subsidiaries
(collectively, the "Company"), are engaged in retail sunglass, eyeglass and
watch sales. The Company operates stores located throughout the United States,
Canada, the Caribbean, Europe, Australia, New Zealand and Singapore. 

FISCAL YEAR 

     The Company's yearend is the Saturday nearest January 31. Consequently, the
Company's fiscal 1996, 1995 and 1994 years encompass the periods February 4,
1996 through February 1, 1997, January 29, 1995 through February 3, 1996 (which
constituted 53 weeks), and January 30, 1994 through January 28, 1995,
respectively. 

PRINCIPLES OF CONSOLIDATION 

     The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. 

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS 

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates made by management include but are not
limited to the realizability of the Company's deferred tax assets, the possible
outcome of outstanding litigation, inventory shrinkage accruals, recognition of
supplier incentives and support, and future obligations and costs associated
with the Company's restructuring plan and strategic initiatives. Actual results
in subsequent periods could differ from those estimates. 

STOCK DIVIDENDS 

     On September 15, 1995 and October 31, 1994, the Company's Board of
Directors declared two-for-one stock splits effected in the form of 100% stock
dividends paid on October 16, 1995 and November 30, 1994, respectively. Except
as otherwise noted, all share data relating to the Company's common stock has
been restated to reflect the two-for-one stock splits.

EARNINGS PER SHARE 

     Earnings per common share and common share equivalents have been computed
by dividing net income by the weighted average number of shares of common stock
and common stock equivalents outstanding (when dilutive). Common stock
equivalents include all outstanding stock options and warrants after applying
the treasury stock method. The 7,411,764 shares exchanged for stock of
Sunsations Sunglass Company, as discussed in Note 2, have been reflected as
outstanding for all periods presented. The difference between primary and fully
diluted earnings per share is insignificant. 

     In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share".
SFAS 128 modifies the 

                                       21

<PAGE>

               SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES 

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE 1-ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED) 

methodology for calculating earnings per share and is effective for periods
after December 15, 1997. Management does not expect SFAS 128 to have a material
effect on the Company's earnings per share. Early adoption is not permitted. 

CASH AND CASH EQUIVALENTS 

     The Company classifies as cash and cash equivalents all interest-bearing
deposits with original maturities of three months or less. 

SUPPLIERS 

     In fiscal 1996, Bausch & Lomb (including RayBan, Revo, Killer Loop and
other brands) and Oakley, the Company's largest suppliers, accounted for
approximately 31% and 25%, respectively, of the Company's total merchandise
purchases. The Company has not experienced any significant difficulty in
obtaining satisfactory sources of supply in the past. However, the Company has
no long-term purchase contracts or other contractual assurance of continued
supply, pricing or access to new products. While the Company believes that it
has good relationships with its vendors, the inability to obtain merchandise
from one or more key vendors on a timely basis, or a material change in the
Company's current purchase terms, could have a material adverse effect on its
results of operations. 

INVENTORY 

     Inventory, which consists of retail merchandise, is stated at the lower of
cost (computed using the average cost method which approximates the first-in,
first-out method) or market. 

PROPERTY AND EQUIPMENT 

     Property and equipment are stated at cost less accumulated depreciation and
leasehold amortization. Depreciation and leasehold amortization are calculated
using the straight-line method over the expected useful lives of the related
assets. Useful lives generally range from 5 to 10 years. Upon the sale or
disposition of property and equipment, the asset cost and related accumulated
depreciation and leasehold amortization are removed from the accounts and any
resulting gain or loss is included in income. Maintenance and repairs are
expensed as incurred. The implementation of Statement of Financial Accounting
Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived
Assets and Assets to be Disposed Of" in the first quarter of fiscal 1996 did not
have an impact on the financial statements of the Company. 

UNAMORTIZED COST IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESSES 

     The unamortized cost in excess of net assets of acquired businesses is
being amortized on a straight-line basis over periods ranging primarily from 15
to 25 years. Accumulated amortization at February 1, 1997 and February 3, 1996
was $27,587,000 and $25,273,000, respectively. The Company continually evaluates
whether events and circumstances have occurred subsequent to acquisitions that
indicate the remaining estimated useful life of cost in excess of net assets of
acquired businesses may warrant revision or that the remaining balance of cost
in excess of net assets of acquired businesses may not be recoverable. When
factors indicate that cost in excess of net assets of acquired businesses should
 
                                       22

<PAGE>

               SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES 

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE 1-ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED) 

be evaluated for possible impairment, the Company uses an estimate of the
related business' undiscounted operating contribution over the remaining life of
the cost in excess of net assets of acquired businesses in measuring whether
such cost is recoverable. The implementation of SFAS 121 in the first quarter 
of fiscal 1996 did not have an impact on the financial statements of the
Company. 

STORE OPENING COSTS 

     Salaries, training and travel costs relating to opening new retail
locations are expensed as incurred. 

INCOME TAXES 

     Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that are expected to be in effect
when the differences are expected to reverse. Deferred income tax provisions and
benefits are based on the changes to the asset or liability from period to
period. A valuation reserve is recognized to reduce net deferred tax assets to
amounts that management believes are more likely than not to be realized. The
Company files a consolidated tax return with its domestic subsidiaries. 

TRANSLATION OF FOREIGN CURRENCIES 

     Assets and liabilities of foreign subsidiaries are translated at the rate
of exchange in effect at the balance sheet date; income and expenses are
translated at the average rates of exchange prevailing during the year. The
related translation adjustments are reflected in the accumulated translation
adjustment section of the consolidated balance sheets. Foreign currency gains
and losses resulting from transactions denominated in foreign currencies,
including intercompany transactions, except for intercompany loans of a
long-term investment nature, are included in results of operations. 

FORWARD CURRENCY SWAP AGREEMENTS 

     The Company enters into forward currency swap agreements from time to time
to hedge the effect of changes in currency exchange rates on certain short-term
intercompany transactions. Forward currency swap agreements obligate the Company
to exchange, at future dates, various currencies at agreed upon exchange rates.
Gains and losses on these agreements resulting from changes in currency exchange
rates, if any, are offset against corresponding gains and losses on the
short-term intercompany transactions, if any. Premiums paid or discounts
received on these agreements are amortized over the term of the agreement. For
reporting purposes, the assets and liabilities resulting from these agreements
are offset because there is a legal right of offset. 

     At February 1, 1997, foreign currency swap agreements approximate $4.1
million and mature in fiscal 1997. The fair values of these instruments
approximate their carrying values at February 1, 1997. 

     The counterparties to these agreements are major international financial
institutions, and the Company does not anticipate losses resulting from the
credit risk of these institutions. 

                                       23

<PAGE>

               SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES 

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

FAIR VALUE OF FINANCIAL INSTRUMENTS 

     The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and borrowings under the revolving credit facility approximate
fair value as of February 1, 1997 and February 3, 1996. The fair value of
convertible subordinated debentures approximates $97 million as of February 1,
1997, based on borrowing rates currently available to the Company for bank loans
with similar terms and maturities. 

NOTE 2-ACQUISITIONS 

SUNSATIONS SUNGLASS COMPANY ACQUISITION 

     During the second quarter of fiscal 1995, the Company acquired Sunsations
Sunglass Company ("Sunsations"), an Indiana corporation, through the exchange of
all of the outstanding common stock of Sunsations for 7,411,764 shares of the
Company's common stock. At the time of the acquisition, Sunsations operated 351
stores in 44 states and Canada. The acquisition was accounted for as a pooling
of interests, and, accordingly, the accompanying consolidated financial
statements have been retroactively restated to include the accounts and
operations of Sunsations for all periods prior to the acquisition. 

     Prior to the acquisition, Sunsations used a calendar yearend. Accordingly,
the accompanying consolidated statements of operations and cash flows for fiscal
1994 combine the historical results of operations and historical cash flows of
Sunsations for the year ended December 31, 1994 with the historical results of
operations and historical cash flows of the Company for the year ended January
28, 1995. Certain Sunsations balances and amounts have been reclassified to
conform to the Company's presentation. 

     As a result of the acquisition, effective January 29, 1995 (the first day
of the Company's fiscal 1995 year), Sunsations' fiscal yearend was changed to
conform with the Company's fiscal yearend. Sunsations' results of operations for
the 28 days ended January 28, 1995 have been recorded in the accompanying fiscal
1995 financial statements as an adjustment to accumulated deficit. Net sales and
pro forma net loss for Sunsations for the 28 days ended January 28, 1995, not
included in the accompanying statement of operations, were approximately
$2,190,000 and $789,000 (net of pro forma income tax benefit of $532,000),
respectively. 

                                       24

<PAGE>

               SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES 

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE 2-ACQUISITIONS-(CONTINUED)

     The Company's and Sunsations' separate results for the twenty-two weeks
ended July 1, 1995 and for fiscal 1994 are as follows: 

                                              TWENTY-TWO                    
                                              WEEKS ENDED                   
                                              JULY 1, 1995     FISCAL 1994  
                                              --------------   -------------
                                                      (IN THOUSANDS)        
 Net sales:                                                                 
  Sunglass Hut International, Inc.   ......      $146,227        $243,954   
  Sunsations Sunglass Company  ............        28,780          46,031   
                                                 --------        ---------  
                                                 $175,007        $289,985   
                                                 ========        =========  
 Pro forma net income:                                                      
  Sunglass Hut International, Inc.   ......      $  9,118        $ 15,558   
  Sunsations Sunglass Company  ............         1,319           1,753   
                                                 --------        ---------  
                                                 $ 10,437        $ 17,311   
                                                 ========        =========  

     In connection with the acquisition, approximately $10.1 million of
nonrecurring acquisition-related costs and expenses were incurred and charged to
expense in the Company's second fiscal quarter of 1995. These nonrecurring
acquisition-related costs and expenses included (1) $2.3 million in debt
extinguishment costs incurred by Sunsations as a result of the acquisition, (2)
$1.4 million incurred in connection with the termination of Sunsations'
management agreement with one of Sunsations' affiliates (under which Sunsations
incurred management fees of $125,000 and $250,000 during 1995 and 1994,
respectively), (3) $3.1 million incurred for legal, accounting and consulting
fees relating to the acquisition, and (4) $3.3 million incurred for other costs
and expenses relating to the business combination. As of yearend 1996, no
accrual was remaining for Sunsations acquisition-related costs and expenses. 

SUNGLASS WORLD HOLDINGS PTY LTD. ACQUISITION 

     In fiscal 1994, the Company acquired a 50% interest in Sunglass World
Holdings Pty Ltd. ("Sunglass World"), a premier specialty retailer of sunglasses
in Australia. The 50% interest was accounted for using the equity method until
the third quarter of 1995, when the Company acquired the remaining 50% interest.
As such, in the third quarter of 1995, the acquisition of Sunglass World was
accounted for as a purchase, and the assets acquired and liabilities assumed,
and results of operations since the acquisition, have been included in the
Company's consolidated financial statements. The fair value of the net assets
acquired approximated their book value at the dates of acquisition. The
aggregate purchase price paid for Sunglass World exceeded the fair value of the
net assets acquired by approximately $13.7 million and is being amortized over
25 years. At the time of acquisition, Sunglass World operated 85 stores in
Australia. 

     Pro forma results of operations, assuming the acquisition occurred at the
beginning of fiscal 1995 and 1994, would not be materially different from the
consolidated results reported herein. Equity in the income (loss) of the joint
venture (net of management fees and interest on advances charged to the joint
venture) was approximately $(562,000) in fiscal 1995 and $223,000 in fiscal
1994. All such amounts are included in operating expenses in the accompanying
consolidated statements of operations for the respective periods. 

                                       25

<PAGE>

               SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES 

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE 2-ACQUISITIONS-(CONTINUED)

OTHER ACQUISITIONS 

     During fiscal 1996, 1995 and 1994, Sunglass Hut continued to take advantage
of additional opportunities to acquire other smaller competitive chains of
sunglass specialty retailers that provide the Company with access to new markets
as well as desirable locations in existing markets. The Company acquired an
additional 19 store locations in fiscal 1996, 89 store locations in fiscal 1995
and 55 store locations in fiscal 1994 from competitors in a number of
acquisitions, a majority of which were accounted for as purchases. For those
acquisitions accounted for as pooling of interests, prior periods were not
restated due to immateriality. 

NOTE 3-PROPERTY AND EQUIPMENT 

     Property and equipment consists of the following at fiscal yearend: 

<TABLE>
<CAPTION>
                                                             1996          1995      
                                                           -----------   ------------
                                                                 (IN THOUSANDS)      
<S>                                                        <C>           <C>          
 Leasehold improvements   ..............................     $ 89,793      $ 62,054  
 Furniture and fixtures   ..............................       97,401        61,673  
 Construction in progress    ...........................       12,677         6,337  
                                                             --------      --------  
                                                              199,871       130,064  
 Less-Accumulated depreciation and amortization   ......      (63,941)      (46,084) 
                                                             --------      --------  
                                                             $135,930      $ 83,980  
                                                             ========      ========  
</TABLE>

NOTE 4-INCOME TAXES 

     Income tax expense attributable to income from continuing operations
consists of: 

                      1996         1995         1994     
                     ----------   ----------   --------- 
                               (IN THOUSANDS)            
 Current:                                                
  Federal   ......     $ 8,572      $14,568    $ 9,328   
  State  .........       2,000        2,989      2,158   
  Foreign   ......       1,300        1,215        522   
                       -------      -------    -------   
                        11,872       18,772     12,008   
                       -------      -------    -------   
 Deferred:                                               
  Federal   ......      (2,339)      (2,186)      (841)  
  State  .........        (572)        (191)      (234)  
  Foreign   ......      (2,435)        (883)       (20)  
                       -------      -------    -------   
                        (5,346)      (3,260)    (1,095)  
                       -------      -------    -------   
                       $ 6,526      $15,512    $10,913   
                       =======      =======    =======   

                                       26

<PAGE>

               SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES 

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE 4-INCOME TAXES-(CONTINUED)

     Income tax expense attributable to income from continuing operations
differed from the amounts computed by applying the U.S. federal income tax rate
of 35% to pretax income from continuing operations as a result of the following:
 
<TABLE>
<CAPTION>
                                                               1996        1995         1994    
                                                              ---------   ----------   ---------
                                                                        (IN THOUSANDS)          
<S>                                                           <C>         <C>          <C>       
 Income tax provision at the statutory rate    ............     $2,205      $13,000    $10,230  
 State and local income taxes, net of                                                           
  federal income tax benefit ..............................        945        1,819      1,305  
 Non-deductible amortization of cost in excess                                                  
  of net assets of acquired businesses   ..................        453          325        289  
 Non-deductible amortization of purchase accounting                                             
  adjustment to property and equipment   ..................         44           44         44  
 Non-deductible expenses related to acquisition   .........       (352)       1,385          -  
 Adjustment to deferred tax assets for change in                                                
  tax status of pooled company   ..........................          -         (353)         -  
 Pro forma adjustment to reflect income taxes  ............          -         (775)    (1,007) 
 Non-deductible expenses related to restructuring costs....      1,903            -          -  
 Valuation allowance and contingencies   ..................      1,225            -          -  
 Other, net   .............................................        103           67         52  
                                                                ------      -------    -------  
                                                                $6,526      $15,512    $10,913  
                                                                ======      =======    =======  
</TABLE>

     The pro forma adjustment to reflect income taxes in the consolidated
statements of operations and in the reconciliation above reflects the additional
tax provision that would have been recorded at the corporation level had
Sunsations (see Note 2) not been an S corporation during the respective periods.
Taxes paid, as presented in the accompanying consolidated statements of cash
flows, represent those paid by the Company and Sunsations and do not include
distributions made to the former stockholders of Sunsations for payment of
federal income taxes. 

                                       27

<PAGE>

               SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES 

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE 4-INCOME TAXES-(CONTINUED)

     The components of the current and noncurrent deferred tax assets are
summarized as follows at fiscal yearend: 

<TABLE>
<CAPTION>
                                                                          1996          1995     
                                                                         ----------   -----------
                                                                              (IN THOUSANDS)     
<S>                                                                      <C>          <C>         
 Current deferred tax assets:                                                                    
  Inventory, principally due to additional costs                                                 
   capitalized for tax purposes  .....................................     $ 1,327      $   737  
  Reserves, principally due to accrual for financial                                             
   reporting purposes  ...............................................       4,030          321  
  Net operating loss carryforwards   .................................           -          762  
  Other   ............................................................         (30)          26  
                                                                           -------      -------  
    Current deferred tax assets                                                                  
     (included in other current assets) ..............................       5,327        1,846  
                                                                           -------      -------  
 Noncurrent deferred tax assets:                                                                 
  Property and equipment, principally due to                                                     
   differences in depreciation .......................................       2,634        2,930  
  Lease transaction costs, principally due to                                                    
   accrual for financial reporting purposes ..........................         182          155  
  Deferred compensation, principally due to                                                      
   accrual for financial reporting purposes  .........................         412          408  
  Accrued rents, principally due to the equalization                                             
   of expenses for financial reporting purposes  .....................       1,003          910  
  Net operating loss carryforwards   .................................       4,349        1,123  
  Other   ............................................................          36           33  
                                                                           -------      -------  
    Noncurrent deferred tax assets   .................................       8,616        5,559  
 Valuation allowance and contingencies  ..............................      (3,427)      (2,636) 
                                                                           -------      -------  
    Noncurrent deferred tax assets (included in other assets)   ......       5,189        2,923  
                                                                           -------      -------  
 Net deferred tax assets    ..........................................     $10,516      $ 4,769  
                                                                           =======      =======  
</TABLE>

     A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset may not be realized. The net change in the
total valuation allowance and contingencies for the year ended February 1, 1997
was an increase of $791,000. 

     The Company has not recognized a deferred tax liability for the
undistributed earnings of its wholly-owned foreign subsidiaries because the
Company currently does not expect those unremitted earnings to reverse and
become taxable to the Company in the foreseeable future. A current or deferred
tax liability, as applicable, will be recognized when the Company expects that
it will recover those undistributed earnings in a taxable manner. As of February
1, 1997, the undistributed earnings of these subsidiaries (not including foreign
net operating losses) were approximately $3.6 million. 

                                       28

<PAGE>

               SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES 

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE 5-LONG-TERM DEBT

     Long-term debt consists of the following at fiscal yearend: 

<TABLE>
<CAPTION>
                                                                1996         1995     
                                                              -----------   ----------
                                                                   (IN THOUSANDS)     
<S>                                                           <C>           <C>        
 5 1/4% convertible subordinated notes, net of unamortized                                
  discount of $2,537,000, interest payable semi-annually,                              
  principal due June 2003.   ..............................     $112,463      $    -  
 Borrowings under the Company's revolving credit facility                             
  with NationsBank at the Company's option of (i) the                                  
  greater of (a) the prime rate or (b) the federal funds                               
  effective rate plus 0.50%, plus, in each case, up to a                               
  maximum of 0.75% depending on the levels of certain                                  
  financial ratios or (ii) LIBOR plus a range of .625% to                              
  1.75% depending on the levels of certain financial ratios                            
  (8.38% and 6.48%, respectively, as of February 1, 1997),                            
  due December 1998.   ....................................       50,500      68,300  
 Other  ...................................................          316       1,261  
                                                                --------      ------  
                                                                 163,279      69,561  
 Less-Current portion of long-term debt  ..................         (129)       (129) 
                                                                --------      ------  
                                                                $163,150     $69,432  
                                                                ========      ======  
</TABLE>

     The Company's unsecured revolving credit facility, as amended, with
NationsBank of Florida, National Association ("NationsBank"), acting as the
agent for a conglomerate of banks, provides for a three-year commitment through
1998 to fund revolving credit borrowings of up to $75 million and up to $10
million in letters of credit. During fiscal 1996, the Company amended its
revolving credit facility to reduce the maximum borrowings under the facility to
$75.0 million from $100.0 million, amend certain financial covenants and modify
the applicable interest rate. At February 1, 1997, the Company had $1.7 million
in unsecured letters of credit outstanding which are being maintained as
security for performance under the Company's executive office lease and for
certain purchases of merchandise.

     The NationsBank facility, as amended, includes certain restrictive
covenants, including limitations on the payment of dividends as well as the
maintenance of certain financial ratios. As of February 1, 1997, the Company was
in compliance with the above described debt covenants. 

     In June 1996, the Company issued $115 million principal amount of
convertible subordinated notes (the "Notes") to certain qualified institutional
investors. (The resale of the Notes was later registered with the Securities and
Exchange Commission in October 1996.) The private placement was made for the
purpose of refinancing senior indebtedness and to finance the Company's
expansion plans. The notes bear interest at 5 1/4%, payable semi-annually, and
mature June 2003. The Notes are not redeemable by the Company prior to June 17,
1998. The Notes are subordinated to all existing and future indebtedness of the
Company, and are convertible into Company common stock at $30.25 per share. 

                                       29

<PAGE>

               SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES 

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE 5-LONG-TERM DEBT-(CONTINUED)

     Maturities of long-term debt are as follows as of February 1, 1997: 

 FISCAL YEAR              AMOUNT       
--------------------   ----------------
                       (IN THOUSANDS)  
 1997   ............       $   129     
 1998   ............        50,687     
 1999-2001    ......             -     
 Thereafter   ......       115,000     
                          --------     
                          $165,816     
                          ========     

NOTE 6-RESTRUCTURING EXPENSES

     In the fourth quarter of 1996, the Company developed and commenced
implementation of a restructuring plan to eliminate marginal or unprofitable
locations through closure or conversion. In connection with the restructuring
plan, the Company recorded restructuring expenses of $18.7 million ($15.2
million net of tax) related to the closure of approximately 90 North American
and 30 international Sunglass Hut locations, the closure or conversion of
approximately 30 licensed departments to self-service departments, and the
closure or conversion of the Company's 28 EyeX stores as part of management's
decision to halt future expansion of that concept. The pre-tax charge includes
expenses related to the write-down of fixed and other assets, and lease exit,
inventory restocking and handling, and severance costs. The after-tax charge
also reflects the non-deductibility of certain international costs and the
probability that certain net operating loss carryforwards will not provide
future tax benefits to the Company. The Company expects the planned closures and
conversions to be completed during 1997.

NOTE 7-COMMITMENTS AND CONTINGENCIES 

OPERATING LEASES 

     The Company leases all of its retail stores and its office and warehouse
facilities under operating leases. Store rent expense generally includes a
percentage of the retail store's sales volume or a fixed minimum base rent. In
addition, the majority of leases are subject to an annual adjustment for
increases in real estate taxes, maintenance and insurance costs. 

     The Company was obligated for the following minimum annual base rentals
under operating leases at February 1, 1997: 

 FISCAL YEAR              AMOUNT       
--------------------   ----------------
                       (IN THOUSANDS)  

 1997   ............       $71,341     
 1998   ............        65,356     
 1999   ............        58,066     
 2000   ............        47,872     
 2001   ............        39,512     
 Thereafter   ......       128,626     
                          --------     
                          $410,773     
                          ========     

     Base rent expense totaled $73,402,000, $49,007,000 and $33,391,000 for
fiscal years 1996, 1995 and 1994, respectively. Percentage of sales over a fixed
minimum base rent totaled $5,677,000, $6,132,000 and $3,773,000 for fiscal years
1996, 1995 and 1994, respectively. 

                                       30

<PAGE>

               SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES 

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE 7-COMMITMENTS AND CONTINGENCIES-(CONTINUED)

SELF-INSURED GROUP HEALTH 

     The Company is self-insured for employee medical benefits under the
Company's group health plan. The Company maintains stop loss coverage for
individual medical claims in excess of $125,000 and for annual Company medical
claims which exceed approximately $2,100,000 in the aggregate. While the
ultimate amount of claims incurred are dependent on future developments, in
management's opinion, recorded reserves are adequate to cover the future payment
of claims. However, it is reasonably possible that recorded reserves may not be
adequate to cover the future payment of claims. Adjustments, if any, to
estimates recorded resulting from ultimate claim payments will be reflected in
operations in the periods in which such adjustments are known. 

CONSTRUCTION COMMITMENTS

     In the normal course of business, the Company enters into commitments for
the construction of both new stores and existing store renovations. At February
1, 1997, the amount outstanding under these construction commitments totaled
approximately $3.9 million. 

LITIGATION, CLAIMS AND ASSESSMENTS 

     In January 1997, a class action securities lawsuit was filed against the
Company and certain of its executive officers in the U.S. District Court of the
Southern District of Florida. The lawsuit alleges, among other things, that the
Company and certain of its officers made materially false and misleading
statements regarding the Company's business performance and prospects. The
Company believes that the lawsuit has no basis, and intends to vigorously defend
the action. Although the ultimate outcome of the lawsuit cannot be predicted,
management does not believe the outcome of the lawsuit will have a material
adverse effect on the financial position, results of operations or cash flows of
the Company. 

     There are no other significant legal proceedings pending against the
Company.

NOTE 8-STOCKHOLDERS' EQUITY 

COMMON AND PREFERRED STOCK 

     As of February 1, 1997, the Company was authorized to issue 100,000,000
shares of common stock, $.01 par value per share, and had issued and outstanding
54,448,546 shares with a par value of $544,485. As of February 3, 1996, the
Company was authorized to issue 100,000,000 shares of common stock, $.01 par
value per share, and had issued and outstanding 53,826,866 shares with a par
value of $538,269. 

     The Company is authorized to issue 1,000,000 shares of preferred stock,
$.01 par value per share. The Company's Board of Directors has the authority to
fix the voting powers, dividend rates, liquidation preferences, conversion and
other rights. No preferred stock is outstanding. 

PUBLIC OFFERINGS 

     In February 1995, the Company completed a secondary offering of 4,195,500
shares of its common stock while an additional 370,000 shares were sold by
selling stockholders. The net proceeds from the offering of approximately
$53,900,000 were used to repay approximately $41,300,000 of indebtedness under
the NationsBank revolving credit facility (see Note 5). The remaining net
proceeds were used for general working capital purposes. 

                                       31

<PAGE>

               SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES 

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE 9-EMPLOYEE BENEFIT PLANS 

STOCK-BASED COMPENSATION PLAN

     Effective March 31, 1996, the Company adopted the Sunglass Hut
International, Inc. 1996 Executive Incentive Compensation Plan (the "1996 Plan")
for key employees, officers, non-employee directors and independent contractors,
which superseded the Company's previous stock-based compensation plan. The
previous stock-based compensation plan provided for the grant of either
incentive stock options or non-statutory stock options to key employees,
officers and non-employee directors of up to 5,800,000 shares of common stock.
The 1996 Plan provides for grants of stock options, stock appreciation rights,
restricted stock and other related awards that may be settled in cash, stock or
other property. The total number of common shares subject to grant under the
1996 Plan is limited to 6,000,000, adjusted, based on the 1996 Plan's formula,
for issuances, redemptions and certain outstanding awards. Through March 20,
1997, only awards of stock options had been granted under the 1996 Plan. The
exercise period for all grants expires ten years from date of grant. 

     A summary of the status of the Company's stock-based compensation plans as
of the end of fiscal years 1996, 1995 and 1994, and changes during the fiscal
years then ended is presented below: 

<TABLE>
<CAPTION>
                                                     1996                        1995                        1994          
                                           -------------------------   -------------------------   ------------------------
                                                        WEIGHTED-                   WEIGHTED-                   WEIGHTED-  
                                                         AVERAGE                     AVERAGE                    AVERAGE    
                                           SHARES       EXERCISE       SHARES       EXERCISE       SHARES       EXERCISE   
 FIXED OPTIONS                             (000'S)        PRICE        (000'S)        PRICE        (000'S)       PRICE     
----------------------------------------   ----------   ------------   ----------   ------------   ----------   -----------
<S>                                        <C>            <C>            <C>          <C>            <C>           <C>         
 Outstanding, beginning of year   ......      2,340       $ 9.00           2,844      $ 7.87          2,931        $1.15   
 Granted  ..............................        373        28.33             514       13.50            581         8.26   
 Exercised   ...........................       (556)        3.66          (1,005)       1.30           (616)        1.25   
 Forfeited   ...........................        (84)        6.13             (13)      10.68            (52)        4.58   
                                             ------                      -------                     ------                
 Outstanding, end of year   ............      2,073       $ 9.55           2,340      $ 9.00          2,844        $7.87   
                                             ======                      =======                     ======                
 Options exercisable  ..................      1,282                        1,747                      2,132                
                                             ======                      =======                     ======                
</TABLE>

     The following table summarizes information about stock options outstanding
at fiscal 1996 yearend: 

<TABLE>
<CAPTION>
                                 OPTIONS OUTSTANDING                             OPTIONS EXERCISABLE     
                           --------------------------------                  ----------------------------
                                              WEIGHTED-                                                  
                                               AVERAGE        WEIGHTED-                       WEIGHTED-  
                             OPTIONS          REMAINING        AVERAGE         OPTIONS        AVERAGE    
 RANGE OF                  OUTSTANDING       CONTRACTUAL      EXERCISE       EXERCISABLE      EXERCISE   
 EXERCISE PRICES            AT 2/1/97        LIFE (YEARS)       PRICE         AT 2/1/97        PRICE     
------------------------   --------------   ---------------   ------------   --------------   -----------
<S>                        <C>              <C>               <C>            <C>              <C>         
 $0.25 to $2.50   ......       883,564              4.59         $0.99           883,564         $0.99   
 6.94 to 8.72  .........       437,300              7.22          8.04           250,400          8.07   
 13.43 to 17.75   ......       453,375              8.24         13.78           111,550         13.63   
 26.25 to 30.81   ......       298,350              9.13         30.72            36,500         30.44   
                             ----------                                        ----------                
 $0.25 to $30.81  ......     2,072,589              6.60         $9.55         1,282,014         $4.31   
                             ==========                                        ==========                
</TABLE>

     As permitted under SFAS No. 123 ("SFAS 123"), "Accounting for Stock-Based 
Compensation", the Company accounts for stock-based employee compensation
arrangements in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", whereby no compensation cost is
deducted in determining net income (loss). Had the Company recorded stock- based
compensation cost for options granted in fiscal 1996 and 1995 pursuant to SFAS
123 (using the

                                       32

<PAGE>

               SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES 

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE 9-EMPLOYEE BENEFIT PLANS-(CONTINUED)

Black-Scholes options pricing model) net income (loss) and net income (loss) per
share, including the assumptions used in these calculations, would have been as
follows for fiscal 1996 and 1995: 

<TABLE>
<CAPTION>
                                                         1996             1995      
                                                     ---------------   -------------
<S>                                                  <C>               <C>           
 Pro forma net income (loss)    ..................     $ (2,942,000)   $19,775,000  
 Pro forma net income (loss) per share   .........     $      (0.05)   $      0.36  
 Pro forma weighted average fair value of options                                   
   granted .......................................     $      14.47    $      6.94  
 Risk free interest rates    .....................       5.92%-7.05%    5.98%-7.09%  
 Expected lives  .................................        6.2 years      5.9 years  
 Expected volatility   ...........................               41%            41% 
 Expected dividends    ...........................                -              -  
</TABLE>

SAVINGS PLAN 

     In February 1994, the Company implemented an employee savings plan (the
"Savings Plan") pursuant to Section 401(k) of the Internal Revenue Code. All
employees who are age 21 or older and who have been credited with at least 1,000
hours of service within 12 consecutive months are eligible to participate in the
Savings Plan. Employees may elect to contribute to the Savings Plan through
payroll deductions in an amount not to exceed the amount permitted under the
Internal Revenue Code. The Company has the discretion to make matching
contributions on behalf of the participants. Employees are fully vested in their
contributions. Company contributions vest at a rate of 20% on February 1 of each
year, provided that the participant has completed one full year of employment
with the Company as of such date. 

     During the fiscal years 1996, 1995 and 1994, the Company's contributions to
the Savings Plan aggregated approximately $295,000, $246,000 and $345,000,
respectively. 

STOCK PURCHASE PLAN 

     In February 1996, the Company implemented an employee stock purchase plan
(the "Stock Purchase Plan"). The Stock Purchase Plan enables qualified employees
of the Company to subscribe to shares of the Company's common stock on periodic
offering dates at a purchase price equal to the fair market value of the shares
on such dates. 

                                       33

<PAGE>

               SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES 

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE 10-SEGMENT AND GEOGRAPHIC INFORMATION 

     The Company operates in the retail sunglass, eyeglass and watch industries.
Retail eyeglass and watch operations are not material to the operations of the
Company. Substantially all net sales result from the sale of sunglasses to
unaffiliated customers. The Company's international operations are located in
Canada, the Caribbean, Europe, Australia, New Zealand and Singapore. The
following summarizes the Company's domestic and international operations: 

<TABLE>
<CAPTION>
                                                 1996          1995         1994    
                                               -----------   -----------   ---------
                                                           (IN THOUSANDS)           
<S>                                            <C>           <C>           <C>       
 Net sales:                                                                         
  Domestic    ..............................     $433,901     $370,448     $270,312 
  International  ...........................       93,180       47,780       19,673 
                                                 --------     ---------    ---------
   Total   .................................     $527,081     $418,228     $289,985 
                                                 ========     =========    =========
 Earnings (loss) before interest and taxes:                                         
  Domestic    ..............................     $ 20,705     $ 38,479     $ 31,163 
  International  ...........................       (6,435)       2,524          515 
                                                 --------     ---------    ---------
   Total   .................................     $ 14,270     $ 41,003     $ 31,678 
                                                 ========     =========    =========
 Total assets:                                                                      
  Domestic    ..............................     $274,643     $211,956     $134,890 
  International  ...........................       89,294       55,120       12,479 
                                                 --------     ---------    ---------
   Total   .................................     $363,937     $267,076     $147,369 
                                                 ========     =========    =========
</TABLE>

     In fiscal 1994, the Company acquired a 50% interest in a joint venture in
Australia (see Note 2). In fiscal 1995, the Company acquired the remaining 50%
interest in the joint venture. Equity in the income (loss) of the joint venture
(net of management fees and interest on advances charged to the joint venture)
was approximately $(562,000) in fiscal 1995 and $223,000 in fiscal 1994. 

NOTE 11-QUARTERLY FINANCIAL DATA (Unaudited)

     Unaudited summarized financial data by quarter for fiscal 1996 and 1995 is
as follows (in thousands, except per share data): 

<TABLE>
<CAPTION>
                                                                    FISCAL 1996                              
                                                                    -------------                            
                                         FIRST         SECOND         THIRD          FOURTH         TOTAL    
                                        -----------   -----------   -------------   ------------   ----------
<S>                                     <C>           <C>           <C>             <C>            <C>        
 Net sales   ........................    $122,822      $166,469        $112,866       $ 124,924    $527,081  
 Gross profit   .....................    $ 52,711      $ 78,641        $ 40,779       $  38,665    $210,796  
 Net income (loss)    ...............    $  7,158      $ 20,008        $ (2,942)      $ (24,449)   $   (225) 
 Net income (loss) per share   ......    $   0.13      $   0.36        $  (0.05)      $   (0.45)   $   0.00  
</TABLE>

<TABLE>
<CAPTION>
                                                                      FISCAL 1995                             
                                                                      -------------                           
                                            FIRST        SECOND         THIRD          FOURTH        TOTAL    
                                           ----------   -----------   -------------   -----------   ----------
<S>                                        <C>          <C>           <C>             <C>           <C>        
 Net sales   ...........................    $87,579      $127,512        $91,426       $111,711      $418,228 
 Gross profit   ........................    $37,574      $ 60,584        $37,473       $ 47,305      $182,936 
 Pro forma net income    ...............    $ 5,015      $  8,358        $ 2,535       $  4,954      $ 20,862 
 Pro forma net income per share   ......    $  0.09      $   0.15        $  0.05       $   0.09      $   0.38 
</TABLE>

     In the fourth quarter of 1996, the Company's management developed and
commenced implementation of a restructuring plan for the Company's worldwide
operations (including the 

                                       34

<PAGE>

               SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES 

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE 11-QUARTERLY FINANCIAL DATA (UNAUDITED)-(CONTINUED)

elimination of marginal or unprofitable locations through closure or conversion)
and recorded an $18.7 million restructuring charge in connection with the
planned closure of approximately 90 domestic and 30 international Sunglass Hut
stores, as well as the planned closure or conversion of 30 licensed departments
and the Company's 28 EyeX stores. (See Note 6 for further information.) 

     Additionally, during the third and fourth quarters of 1996, the Company
incurred the following other costs and expenses: (1) $2.5 million recognized
during the third quarter to reflect higher than anticipated inventory shrinkage
and defective product write-offs due to changes in manufacturers' return
policies recognized as a result of a physical inventory conducted at the end of
the third quarter after the consolidation of the Company's U.S. distribution
facilities, (2) $5.0 million of costs and expenses during the fourth quarter
related to its product purchases from Bausch & Lomb, including a reduction of
the Company's performance incentive and other margin and marketing support
attributable to the Company's lower than expected fourth quarter sales
performance, cancellation of purchase orders and return of product, and (3) $1.1
million of expenses during the fourth quarter primarily associated with its
efforts to establish an organizational infrastructure to support the Company's
1997 strategic initiatives.

     In the second quarter of 1995, the Company acquired Sunsations (see Note
2). The acquisition was accounted for as a pooling of interests. All periods
prior to the acquisition were restated to reflect the accounts and balances of
Sunsations. Differences between the restated amounts and the amounts reported
prior to the acquisition, if any, are due solely to this acquisition. In
connection with the acquisition, approximately $10.1 million of nonrecurring
acquisition-related costs and expenses were incurred and charged to expense in
the Company's second quarter of fiscal 1995. 

     In the third quarter of 1995, the Company acquired the remaining 50%
interest in Sunglass World (see Note 2). The acquisition was accounted for as a
purchase. As such, the assets and liabilities and results of operations since
the date of acquisition have been included in the Company's consolidated
financial statements. Approximately $9.8 million in net sales and approximately
$4.1 million in gross profit have been included in the Company's consolidated
fiscal 1995 fourth quarter amounts. The impact of this acquisition on fiscal
1995 consolidated fourth quarter pro forma net income and consolidated pro forma
net income per share was not material. 

                                       35

<PAGE>

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

   None. 

                                   PART III 

     The Proxy Statement for the Annual Meeting of Stockholders to be held June
4, 1997 which, when filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934, will be incorporated by reference in this Annual Report on
Form 10-K pursuant to General Instruction G(3) of Form 10-K, will provide the
information required under Part III (Items 10, 11, 12, and 13). 

                                    PART IV 

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

    (a) 1. FINANCIAL STATEMENTS. Reference is made to the Index set forth on
page 14 of this Annual Report on Form 10-K. 

        2. FINANCIAL STATEMENTS SCHEDULE. All schedules for which provision is
made in the applicable accounting regulations of the Commission are not required
under the related instructions or are not applicable, and therefore have been
omitted. 

        3. EXHIBITS. An asterisk to the left of an exhibit number denotes a
management contract or compensatory plan or arrangement required to be filed as
an exhibit to the Annual Report on Form 10-K. 

<TABLE>
<CAPTION>
EXHIBIT                                            DESCRIPTION
-------                                            -----------
<S>        <C>
   3.1     Registrant's Articles of Incorporation(3.1)(6)

   3.2     Registrant's Amended and Restated Bylaws(3.2)(6)

   4.1     Registration Rights Agreement, dated as of May 31, 1993, among the Registrant, the Investor
           Group and the Management Group (as such terms are defined in the Agreement)(4.2)(3)

   4.2     Registration Rights Agreement, dated as of December 30, 1993, between the Registrant and   
           Wallis D. Arnold and Karen Arnold(4.3)(5)

   4.3     Registration Rights Agreement, dated June 29, 1995, between the Registrant and the former  
           shareholders of Sunsations Sunglass Company(4.4)(4)

   4.4     Registration Rights Agreement, dated November 30, 1995, between the Registrant and the     
           former shareholders of Sun Shades 501, Ltd.

   4.5     Registration Rights Agreement, dated April 25, 1996, between the Registrant and the former 
           shareholders of Shady Biz, Inc. and Spectacular Eyewear, Inc. (4.6)(7)

   4.6     Registration Rights Agreement, dated June 26, 1996, between the Registrant and the initial 
           purchasers of the 51/4% Convertible Subordinated Notes due 2003 (4.7)(6)

   4.7     Indenture, dated as of June 26, 1996, among the Registrant and the Bank of New York for    
           Convertible Subordinated Notes (4.8)(6)

  10.1     Registrant's Amended and Restated Stock Option Plan, as amended.

  10.2     Sunglass Hut International, Inc. 1996 Executive Incentive Compensation Plan (10.1)(8)      

  10.3     Form of Indemnification Agreement between the Registrant and each of its directors and     
           certain executive officers(10.2)(1)

  10.4     Office Space Lease Agreement, dated as of October 28, 1993, between The Travelers Insurance
           Company and the Registrant(10.7)(3)

  10.5     Amended and Restated Revolving Credit and Reimbursement Agreement, dated as of             
           December 14, 1995, among the Registrant, NationsBank, N.A. and the other Lenders named     
           therein.
</TABLE>

                                       36

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT                                             DESCRIPTION
-------                                             -----------
<S>        <C>                                                                                                                      
10.6       Amendment No. 1 to Revolving Credit and Reimbursement Agreement, dated as of May 22,         
           1996, among the Registrant, NationsBank, N.A. and the other Lenders named therein            
           (incorporated by reference to Exhibit 10.1 of the Company's Report on Form 10-Q for the     
           fiscal quarter ended May 4, 1996).                                                           

10.7       Sunglass Hut International, Inc. 1996 Executive Incentive Compensation Plan (incorporated by 
           reference to Exhibit 10.7 of the Company's Report on Form 10-Q for the fiscal quarter ended  
           August 3, 1996).                                                                             

10.8       Amendment No. 2 to Revolving Credit and Reimbursement Agreement, dated as of                 
           September 9, 1996, among the Registrant, NationsBank N.A. and the other Lenders named        
           therein (incorporated by reference to Exhibit 10.8 of the Company's Report on Form 10-Q     
           for the fiscal quarter ended August 3, 1996).                                                

10.9       Amendment No. 3 to Amended and Restated Revolving Credit and                       
           Reimbursement Agreement, effective as of November 2, 1996, dated as of December 13,          
           1996, among the Registrant, NationsBank N.A. and the other Lenders named therein             
           (incorporated by reference to Exhibit 10.9 of the Company's Report on Form 10-Q for the     
           fiscal quarter ended November 2, 1996).                                                      

10.10      Amendment No. 4 to Amended and Restated Revolving Credit and Reimbursement                   
           Agreement, effective as of February 1, 1997, dated as of March 20, 1997, among the           
           Registrant, NationsBank, N.A. and the other Lenders named therein(2)

21.1       Subsidiaries of the Registrant(2)

23.1       Consent of Arthur Andersen LLP(2)

23.2       Consent of Coopers & Lybrand L.L.P.(2)

27         Financial Data Schedule

99         Report of Coopers & Lybrand L.L.P.(2)

<FN>
---------------- 

(1) Incorporated by reference to the exhibit shown in the preceding parentheses
    and filed with the Registrant's Registration Statement on Form S-1 (File No.
    33-59872). 

(2) Filed herewith. 

(3) Incorporated by reference to the exhibit shown in the preceding parenthesis
    and filed with the Registrant's Registration Statement on Form S-1 (File No.
    33-70214). 

(4) Incorporated by reference to the exhibit shown in the preceding parenthesis
    and filed with the Registrant's Registration Statement on Form S-3 (File No.
    33-97550). 

(5) Incorporated by reference to the exhibit shown in the preceding parenthesis
    and filed with the Registrant's Registration Statement on Form S-1 (File No.
    33-77792). 

(6) Incorporated by reference to the exhibit shown in the preceding parenthesis
    and filed with Registrant's Registration Statement on form 8-B filed on
    August 23, 1996 (File No. 000-21690). 

(7) Incorporated by reference to the exhibit shown in the preceding parenthesis
    and filed with the Registrant's Registration Statement on Form S-3 (File No.
    33-05093). 

(8) Incorporated by reference to the exhibit shown in the preceding parenthesis
    and filed with the Registrant's Registration Statement on Form S-8 (File No.
    333-20107). 
</FN>
</TABLE>

     (b) Reports on Form 8-K 

     No reports on Form 8-K were filed during the last quarter of the period
covered by this report. 

     (c) Exhibits Required by Item 601 of Regulation S-K 

     The index to exhibits that are listed in Item 14(a)(3) of this report and
not incorporated by reference follows the "Signatures" section hereto and is
incorporated herein by reference. 

     (d) Financial Statement Schedules Required by Regulation S-X 

     Reference is made to Item 14(a)2.


                                       37

<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized. 

                                 SUNGLASS HUT INTERNATIONAL, INC. 

                                 By: /s/      LARRY G. PETERSEN      
                                     ------------------------------------------
                                     Larry G. Petersen, Senior Vice President-
                                        Finance and Chief Executive Officer 

Dated: April   , 1997

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

<TABLE>
<CAPTION>
          SIGNATURES                           TITLE                       DATE      
          ----------                           -----                       ----
<S>                                <C>                                <C>             
/s/     JACK B. CHADSEY             President, Chief Executive         April 30, 1997
--------------------------------     Officer and Director                            
       Jack B. Chadsey              (principal executive officer)                    

/s/    LARRY G. PETERSEN            Senior Vice President-Finance      April 30, 1997
--------------------------------     and Chief Financial Officer                     
      Larry G. Petersen             (principal financial officer)                    

/s/     GEORGE L. PITA              Vice President-Finance             April 30, 1997
--------------------------------    (principal accounting officer)                   
        George L. Pita                                                               

/s/    JAMES N. HAUSLEIN            Chairman of the Board              April 30, 1997
--------------------------------
      James N. Hauslein                                                              

/s/     ROHIT M. DESAI              Director                           April 30, 1997
--------------------------------
        Rohit M. Desai                                                               

/s/     JOHN H. DUERDEN             Director                           April 30, 1997
--------------------------------
       John H. Duerden                                                               

/s/     WILLIAM S. FIELD            Director                           April 30, 1997
--------------------------------
       William S. Field                                                              

/s/    ROBERT C. CRAYSON            Director                           April 30, 1997
--------------------------------
      Robert C. Crayson                                                              

/s/    WILLIAM E. PHILLIPS          Director                           April 30, 1997
--------------------------------
     William E. Phillips
</TABLE>

                                       38

<PAGE>

<TABLE>
<CAPTION>
INDEX TO EXHIBITS

                                                                                                    SEQUENTIALLY
EXHIBIT                                                                                               NUMBERED
NUMBER     DESCRIPTION                                                                                 PAGE
-------    -----------                                                                              ------------
<S>        <C>                                                                                         <C>
10.9       Amendment No. 4 to Amended and Restated Revolving Credit and Reimbursement
           Agreement, effective as of February 1, 1997, dated as of March 20, 1997, among the
           Registrant, NationsBank, N.A. and the other Lenders named therein

21.1       Subsidiaries of the Registrant

23.1       Consent of Arthur Andersen LLP

23.2       Consent of Coopers & Lybrand L.L.P.

27         Financial Data Schedule

99         Report of Coopers & Lybrand L.L.P.
</TABLE>