##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, DC 20549


Form 10-K


|   |  |                                                                                                 
|-- |  | ------------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|   |  | For the fiscal year ended March 31,
    2002                                                    
|or
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|   |  | For the transition period
    from           to                                                 

Commission File Number: 1-13606

Sola International Inc.

(Exact name of registrant as specified in its
charter)


|                                                                                                     |  |                                                   
|---------------------------------------------------------------------------------------------------- |  | --------------------------------------------------
|Delaware(State or other jurisdiction of
    incorporation or organization)                           |  | 94-3189941(I.R.S. employer identification
    no.)
|                                                                                                    
|10590 West Ocean Air Drive, Suite 300,
    San Diego, CA(Address of principal executive
    offices) |  | 92130(Zip Code)                                   

Registrants telephone number, including
area code: (858) 509-9899

Securities registered pursuant to
Section 12(b) of the Act:

|                                                  |  |                                                             
|------------------------------------------------- |  | ------------------------------------------------------------
|Title of Each Class:Common Stock, Par Value $0.01 |  | Name of Exchange on Which Registered:New York Stock Exchange

Securities registered pursuant to
Section 12(g) of the Act:

None


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
þ          No
o

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 a
definitive proxy or information statement incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K.     o

As of June 12, 2002, the aggregate market
value of Common Stock held by non-affiliates was approximately
$282,342,781. For purposes of this computation, shares held by
directors and executive officers of the registrant have been
excluded. Such exclusion of shares held by directors and
executive officers is not intended, nor shall it be deemed, to
be an admission that such persons are affiliates of the
registrant.

As of June 12, 2002, 24,541,650 shares of
the registrants common stock, par value $0.01 per share,
which is the only class of common stock of the registrant, were
outstanding. The registrants stock is traded on the New
York Stock Exchange under the symbol SOL.

Documents Incorporated by Reference: Portions of
the registrants proxy statement for its 2002 Annual
Meeting of Stockholders are incorporated by reference into
Part III of this report.



---






---

TABLE OF CONTENTS



|                  |                                                                                                         |  |  |  |  |  |  | 
|----------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I           
|                  | Item 1.Business                                                                                        
|                  | Item 2. Properties                                                                                     
|                  | Item 3. Legal Proceedings                                                                              
|                  | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II          
|                  | Item 5. Market for the Registrants Common Equity and Related Stockholder Matters                      
|                  | Item 6. Selected Financial Data                                                                        
|                  | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|                  | Item 7A. Quantitative and Qualitative Disclosures about Market Risk                                    
|                  | Item 8. Financial Statements and Supplementary Data                                                    
|                  | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|PART III         
|                  | Item 10. Directors and Executive Officers of the Registrant                                            
|                  | Item 11. Executive Compensation                                                                        
|                  | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|                  | Item 13. Certain Relationships and Related Transactions                                                
|PART IV          
|                  | Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K                                
|SIGNATURES       
|INDEX OF EXHIBITS
|EXHIBIT 10.23    
|EXHIBIT 10.24    
|EXHIBIT 10.25    
|EXHIBIT 12.1     
|EXHIBIT 21.1     
|EXHIBIT 23.1     



---



##### Table of Contents



SOLA INTERNATIONAL INC.

ANNUAL REPORT ON FORM 10-K

For the Fiscal Year Ended March 31,
2002


|         |  |                                                                                                    |  |      |    | 
|-------- |  | -------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                                    |  | Page
|         |  |                                                                                                    |  |     
|PART I  
|        
|Item 1.  |  | Business                                                                                           |  |      | 2  | 
|Item 2.  |  | Properties                                                                                         |  |      | 11 | 
|Item 3.  |  | Legal Proceedings                                                                                  |  |      | 12 | 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                            |  |      | 12 | 
|PART II 
|        
|Item 5.  |  | Market for the Registrants Common Equity
    and Related Stockholder Matters                      |  |      | 13 | 
|Item 6.  |  | Selected Financial Data                                                                            |  |      | 14 | 
|Item 7.  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations          |  |      | 15 | 
|Item 7A. |  | Quantitative and Qualitative Disclosures About
    Market Risk                                     |  |      | 36 | 
|Item 8.  |  | Financial Statements and Supplementary Data                                                        |  |      | 39 | 
|Item 9.  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure           |  |      | 39 | 
|PART III
|        
|Item 10. |  | Directors and Executive Officers of the Registrant                                                 |  |      | 39 | 
|Item 11. |  | Executive Compensation                                                                             |  |      | 41 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters |  |      | 41 | 
|Item 13. |  | Certain Relationships and Related Transactions                                                     |  |      | 41 | 
|PART IV 
|        
|Item 14. |  | Exhibits, Financial Statement Schedule and
    Reports on Form 8-K                                 |  |      | 42 | 

Our trademarks, service marks and trade names
include AO bActive, AO Compact, Contour Optics,
Finalite 1.6, Percepta, SOLAMax, Spectralite, Visuality and
ViZio, among others. This report also contains trademarks,
service marks, copyrights and trade name of other companies.

1



---



##### Table of Contents






PART I




Item 1.Business

The Company

We commenced operations in 1960 and were
incorporated in Delaware in 1993. We are a leading global
designer, manufacturer and distributor of a broad range of
plastic and glass eyeglass lenses and hold a leading
manufacturing and technology position in the growing plastic
lens segment of the global spectacle lens market. We have sales
offices in 28 countries worldwide and operate in most major
regions of the world. We believe that we hold a top three market
position in terms of volume of plastic eyeglass lenses sold in
each major region where we operate  North America,
Europe and Rest of World (consisting primarily of Australia,
Asia and South America). We focus our efforts on value-added
products, including products with advanced design
characteristics, lens coatings and treatments and thin and light
weight materials (e.g., polycarbonate).
Approximately 74% of our annual net sales are represented
by value-added products.

We market our spectacle lens products globally
under the brands SOLA and American Optical (AO) and
distribute them globally through four primary channels:
(1) direct to national retail chain, (2) direct to
retail outlets, (3) wholesale distributors (e.g.,independent processing laboratories), and (4) managed
care organizations in the United States, a growing segment of
the spectacle lens market.

Our business is organized into three primary
markets: North America, Europe and Rest of World. For the fiscal
year ended March 31, 2002, we generated
approximately 45% of our net sales from North America, 35%
from Europe and 20% from Rest of World.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | North America is currently our largest market.
    Our net sales in North America for the fiscal year ended
    March 31, 2002 were $236.8 million compared to
    $245.4 million in the prior year, a decrease of 3.5%.
    Using constant exchange rates, net sales decreased by 3.6%.
    The sales decline in the North American region was due primarily
    to decreased sales to laboratory customers that are owned by and
    aligned with two principal competitors.
|
| |  | Europe is currently our second largest market.
    Our net sales in Europe for the fiscal year ended March 31,
    2002 were $185.8 million compared to $182.9 million in
    the prior year, an increase of 1.6%. Using constant
    exchange rates, net sales increased by 4.1%. Net sales in
    the European region increased due primarily to the organic
    growth of our prescription laboratory network.                                                             
|
| |  | Rest of World is currently our third largest
    market. Our net sales in Rest of World for the year ended
    March 31, 2002 were $106.9 million compared to
    $117.1 million in the prior period, a decrease
    of 8.7%. Using constant exchange rates, net sales increased
    by 2.0%. Net sales in the Rest of World region were
    negatively impacted by our efforts to concentrate on higher
    margin value-added sales.                                        

For more information concerning our geographic
areas, see Note 20 of Notes to Consolidated Financial
Statements and Risk Factors  Risk Factors
Relating to Sola and the Industry  We are subject to
certain risks associated with our foreign operations,
 We concentrate a large part of our
manufacturing operations in Tijuana, Mexico and
 We conduct all of our foreign operations
through subsidiaries and the payment of dividends by these
entities may be restricted.

Strategic Initiatives

Our organization has historically been managed on
a decentralized basis with each operating unit having its own
manufacturing facilities, distribution centers and inventory
management systems. This decentralized approach resulted in
excess manufacturing capacity, redundant facilities in high cost
regions and excessive distribution centers. In the third quarter
of fiscal 1999, we initiated a strategic operating review
designed to streamline manufacturing and distribution, reduce
operating costs worldwide and write-off inventory SKUs that are
no longer being manufactured. In April 2000, Jeremy Bishop was
appointed President and Chief Executive Officer. Following his
appointment, Mr. Bishop expanded the scope of our strategic
review program and accelerated the implementation of our
strategic initiatives begun in 1999.

2



---



##### Table of Contents



The charges recorded for these initiatives from
fiscal 1999 through the end of fiscal 2002, net of gains on
asset sales, totaled approximately $167.7 million,
including $39.5 million of associated inventory write-offs
classified in cost of sales. The non-cash charges related
primarily to the write-off of equipment and other assets, as
well as the impairment of goodwill. The cash charges related
primarily to severance expenses and facility closures. Operating
expenses for fiscal 2002 have declined $30.4 million from
fiscal 1999 in addition to significant unit cost decreases, and
we expect to generate additional savings in fiscal 2003 as a
result of the actions taken in fiscal 2001 and 2002. In fiscal
2002 and 2001, we realized cash proceeds from sales of land and
buildings made redundant by these initiatives of approximately
$5.5 million and $7.8 million, respectively.

In addition to special charges, we incurred
transition costs associated with executing our strategic
initiatives. These transition costs totaled $20.6 million
and $17.5 million in fiscal 2002 and 2001, respectively,
and were largely related to: (1) expenditures to execute
the strategic actions (e.g., certain employee and
facility costs) and (2) expenses incurred that will be
eliminated upon completion of the strategic actions
(e.g., manufacturing variances resulting from the
inefficiencies encountered during the product migration and
consolidation of manufacturing facilities).

Competitive Strengths

We believe that our strong competitive position
is attributable to a number of factors, including the following:

Global
Scope

We currently sell our products to customers in
over 50 countries worldwide and operate in most major
regions of the world. Our geographically diverse customer base
limits our dependence upon any particular customer or geographic
region. With the completion of our strategic initiatives, our
operations consist of four primary and six specialized
manufacturing facilities, two primary research and development
centers, 12 primary prescription laboratories and five
primary distribution centers. In addition, we have sales offices
in 28 countries worldwide. Our global scope, combined with
our manufacturing and logistics capabilities, enables us to meet
customer demand for delivery of a broad range of products
efficiently, cost effectively and in a timely manner. Our
primary brands, SOLA and AO, are recognized throughout the
world. We believe global brand recognition is a significant
advantage in the highly competitive spectacle lens market.

Leading
Market Position

We believe that we hold a top three market
position in terms of volume of plastic eyeglass lenses sold in
most major regions of the world, including the leading market
positions in Australia, Brazil, France, Italy, the United
Kingdom, and the U.S.

Significant
Sales of Valued-Added Products

We focus our efforts on value-added products,
which currently represent approximately 74% of our net
sales. Value-added products are products with advanced design
characteristics, lens coatings and treatments and thin and light
weight materials (e.g., polycarbonate). We believe our
value-added products enable us to strengthen relationships with
existing customers and develop relationships with new customers.
Many of our value-added products are sold under global brand
names developed under our two primary brands, SOLA and AO.

Research and
Development Expertise

We believe that we are a technological leader in
the plastic lens segment of the spectacle lens industry, with
particular expertise in the development of new lens materials
and designs. We have devoted significant resources to the
research and development of new products and technology, with
expenditures of $13.1 million in fiscal 2002,
$14.9 million in fiscal 2001, and $20.0 million in
fiscal 2000. The $1.8 million, or 12.1%, decrease in our
research and development expenses in fiscal 2002 was due in part
to headcount reductions associated with the strategic
initiatives as well as the impact of the strong U.S. dollar
against non-U.S. dollar

3



---



##### Table of Contents



expenses. Over the last ten years, we have
successfully developed and marketed a number of innovative
products. Most notable are our progressive lens designs (lenses
that have a continuous gradient of corrective power), including
Percepta, Visuality, AO Compact and VIP, and our
proprietary thin and light weight materials, Spectralite and
Finalite. These products incorporate complex design features
that differentiate them from our competitors products.
Sales of new products generally have experienced a higher growth
rate and generated an above average gross profit per pair
compared to other plastic lenses sold by us. Our technical
expertise is demonstrated by our receipt of numerous Optical
Laboratory Association awards for technical design excellence.


Leading
Position in the Growing Chain Retail and Managed Care
Channels

We believe that we hold the leading market
position in terms of volume of plastic lenses sold in the North
American chain retail and managed care distribution channels. We
have established our strong position in these channels by
providing differentiated new products, timeliness of delivery
and a commitment to product quality, technical support and
product education. We work with most major retail chains in
North America, including Wal-Mart Stores, Inc., LensCrafters and
U.S. Vision, Inc. Our commitment to quality and customer
service is evidenced by Wal-Mart selecting us as category
manager for its optical lens business and as the only lens maker
to be awarded the title Supplier of the Year for 2000. In
addition, our managed care customers include Kaiser Permanente
and Vision Service Plan (VSP). Our managed care customers
select us as their preferred spectacle lens supplier primarily
because of our broad product portfolio and superior marketing
support services.

Strong Direct
to Retail Business in Europe

Although the U.S. market is the single largest
spectacle market in the world, we benefit from our global
diversity, and most specifically, from our strong operations in
Europe. European operations have generated average annual sales
growth of more than 9% over the past three fiscal years on a
constant dollar basis. The significant growth of our direct to
retail business is driven by highly experienced commercial teams
across Europe that are supported by our vertically integrated
network of prescription laboratories. We have five primary
prescription laboratories in Europe, which allow us to directly
meet the needs of the eyecare professionals in markets where an
independent wholesale channel generally does not exist.
Additionally, we believe that these laboratories will enable us
to penetrate new markets as we introduce new products that
require advanced technical processing capabilities. Main
supplier status with many retail chains and independent
practices alike is built on the cornerstone of a partnership
approach and the successful introduction of highly
differentiated products. Our European market share in terms of
volume of plastic eyeglass lenses sold has consistently been
strong over the past five years, and we believe that we maintain
the leading market share positions in France, Ireland, Italy,
Portugal and the United Kingdom.

Experienced
Management Team

Our senior management team, led by President and
Chief Executive Officer Jeremy C. Bishop, has over
100 years of combined vision care industry experience.
Prior to his appointment as President and Chief Executive
Officer in April 2000, Mr. Bishop served as President of
American Optical Lens Company, a subsidiary of ours since its
acquisition in 1996. Mr. Bishop joined American Optical in
1990 as Vice President of European Operations. Under
Mr. Bishops leadership, we have reduced operating
expenses by more than $30.4 million since fiscal 1999,
completed a number of key strategic initiatives and improved our
financial performance. Mr. Bishop and his senior management
team have fostered a new culture geared towards continued cost
reduction, cash flow generation, marketing and new product
development.

Increased
Emphasis on Driving Demand Through Wholesale
Market

Through outright purchases of labs and
restrictive distribution contracts, our competitors have made
significant strides in controlling access to independent eye
care professionals (ECPs). We have launched multiple initiatives
to combat this trend and strengthen our position in this
channel. In the past year, we have significantly increased
hiring of sales representatives, and created a comprehensive
training program for them

4



---



##### Table of Contents



to increase their optical and selling skills. The
addition of these salespeople has increased our reach in the
channel.


Innovative,
Need-Specific Products

As the market becomes increasingly saturated with
products, especially in the progressive addition lens category,
it becomes necessary to do more to differentiate a new product.
We have accomplished this with lens designs meeting specific
needs of a significant number of lens wearers that are not
ideally met by general-purpose lenses already
established in the market. SOLAMax, the latest progressive lens
in the SOLA line, is an excellent example of this. SOLAMax has
the largest near vision area of any progressive lens. This,
combined with its exceptionally high adaptation rate, makes it
the ideal choice for new presbyopes, former bifocal wearers, and
any presbyope who has a near vision emphasis. Presbyopia is a
natural aging process that limits the eyes ability to
focus on near objects and is the principal driver behind the
need for multi-focal vision correction. SOLAMax has enjoyed
strong sales and won the Optical Laboratory Associations
2001 Best in Lens Design award.

Business Strategy

Our strategy is to enhance our strong market
position and to increase net sales and cash flow by capitalizing
on our position as a leading manufacturer and distributor of
plastic eyeglass lenses.

Capitalize on
Positive Demographic Trends Affecting the Vision Care
Industry

We believe that we are well positioned to benefit
from the positive demographic changes expected to take place in
our markets. According to the U.S. Census, middle series
projections, the number of people in the age group 45-60 is
growing at 3% per year, peaking in 2015. This age group is the
group primarily affected by presbyopia. Our leading position in
the design and manufacture of progressive lenses positions us
favorably to realize the benefit of this demographic trend. We
plan to focus on the further development and enhancement of our
progressive lens designs.

Focus on
Marketing and Sales

We develop and manage our marketing strategy on a
centralized basis while employing local sales and marketing
implementation and tactics. We differentiate our products from
those of our competitors through lens designs, materials and
coatings targeted to meet customer needs. We seek to expand our
market share by developing brand recognition for our products,
continuing to develop partnerships with chain retailers,
expanding our direct to retail business through our prescription
laboratories and through independent laboratories, focusing
marketing expenditures on target markets and accounts, and
marketing to customers the advantage of higher margin,
value-added products. We continue to market our two primary
brands, SOLA and AO, and to position them throughout the world.
Our marketing efforts are intended to help us compete on the
basis of quality and service rather than price.

Introduce New
Products

We invest significant resources in the
development of new and innovative products. Since 1998, we have
successfully developed and marketed proprietary lens designs,
including Visuality and AO Compact. In fiscal year 2001, we
successfully introduced additional new products including
SOLAMax and AO bActive progressive lenses. In April
2001, we opened SOLA Technologies, our first prescription
laboratory in the U.S., with the introduction of our initial
product, Enigma, in our Contour Optics category. In April 2002,
we announced a global licensing agreement with DuPont
Fluoroproducts where we will market a newly developed coating
for ophthalmic lenses using the Dupont Teflon® brand.

5



---



##### Table of Contents



Improve Cash
Flow Performance

A primary focus of ours is executing key business
fundamentals and managing our business for improved financial
performance, including cash flow generation. We have implemented
strategic initiatives aimed at streamlining and standardizing
our operations globally. The initiatives had the following major
objectives:



| |   |                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | to shift production of high-volume, standard
    products from higher-cost manufacturing facilities in the United
    States, Australia and Ireland to low-cost manufacturing sites in
    Mexico, China and Brazil;
|
| |  | to consolidate manufacturing expertise at fewer
    production facilities;                                                                                                                                          
|
| |  | to standardize product specifications globally;
    and                                                                                                                                                             
|
| |  | to streamline distribution and logistics
    operations.                                                                                                                                                            

We believe that these initiatives have resulted
in cost reductions, lower working capital investment, a more
efficient distribution network and improved cash flow while
maintaining or improving our customer service levels. Other
actions to improve profitability included developing global
information technologies that enable us to manage global
inventories and demand and monitor manufacturing performance.

Products

We manufacture lenses using both plastic and
glass materials, with plastic lenses currently accounting for
approximately 94% of our net lens sales. Approximately 43% of
our sales of plastic prescription lenses are sales of
conventional hard resin plastic lenses, with the balance derived
from advanced lens materials with thin and light weight
features. Our plastic lens materials are comprised of the
following:



| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | Conventional hard resin plastic;                                                      
|
| |  | Spectralite, Finalite and other non-proprietary
    thin and light weight plastic; and
|
| |  | Polycarbonate, a thin and lightweight material
    with greater impact resistance.    

We market and produce a variety of lens coatings
and treatments that significantly enhance the performance of our
lens products. These coatings and treatments include the
following:



| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | Anti-scratch coatings that prolong the life of
    our lenses;                                      
|
| |  | Anti-reflective coatings that allow more light to
    pass through the lens for improved vision; and
|
| |  | Photochromic treatments that darken the lens when
    exposed to direct sunlight.                   

The penetration of coated and treated lenses
varies significantly from market to market and represents a
significant growth opportunity for us. Photochromic lenses are
processed by a third party using technology that is proprietary
to the third party.

Most of the materials necessary to produce our
products and coatings are readily available from a number of
potential sources at competitive prices. In order to reduce
materials costs, we coordinate centrally the purchasing of raw
materials, including monomers. For more information regarding
the availability of polycarbonate and monomer raw materials, see
Risk Factors  Risks Relating to Sola and the
Industry  We are dependent on a small number of
suppliers for raw materials.

Marketing and Sales

Our sales offices are located in
28 countries worldwide. As of March 31, 2002, there
were approximately 680 employees involved in our sales and
marketing efforts. Our sales and marketing expenditures for
fiscal 2002 were $101.7 million, representing 19.2% of net
sales. We differentiate our products from those of our
competitors through lens designs, materials and coatings
targeted to meet customer needs. We seek to expand our market
share by developing brand recognition for our products,
continuing to develop partnerships with chain retailers,
expanding our direct to retail business through our prescription
laboratories and through independent laboratories, focusing our
marketing expenditures on target markets and accounts and
marketing

6



---



##### Table of Contents



to customers the advantage of higher margin,
value-added products. Our marketing efforts are intended to help
us compete on the basis of product breadth, quality and service
rather than price.


We continue to develop our two primary brands,
SOLA and AO, and to position them throughout the world. Under
each of these brands, we will continue to market a portfolio of
products designed to meet the lifestyle needs of consumers
worldwide. Key brands of ours recognized throughout the world
include VIP, Percepta, Visuality, AO Compact, SOLAMax and
AO bActive.

Distribution

Most multifocal lenses and some single vision
lenses require secondary processing at a laboratory before they
can be dispensed to a consumer. In some cases, lens
manufacturers operate their own laboratories, while in other
instances they sell semi-finished lenses to independent labs
that handle the final processing and distribute the products to
eyecare practitioners. Many retail chains operate their own
laboratories, either inside the retail location or at a separate
site.

The final stage in distribution takes place in
either a retail store or an independent eyecare
practitioners office. Although dispensing regulations
differ from market to market, prescription lenses still require
the involvement of an optician, optometrist or ophthalmologist,
in most instances before they can be sold to a consumer. Chain
retailers have an increased presence in all regions of the world
and are gradually replacing the medical/ healthcare orientation
of the industry with more consumer-oriented approaches.

The four primary channels that are used for
distribution of our prescription lenses are the following:



| |   |                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | National chain retail, super optical retail
    stores and retail buying groups, many of which have on-site lens
    processing capability. This is a growing distribution channel
    for us in each of our major regions;
|
| |  | Direct distribution to small- and medium-sized
    retail outlets, including distribution direct to eyecare
    professionals through our processing laboratories;                                                         
|
| |  | Wholesale distributors or independent processing
    laboratories that process our lenses and then resell them to
    retail outlets and eyecare practitioners; and                                                        
|
| |  | Managed care organizations in the United States,
    many of which have on-site lens processing capability.                                                                                                                

Our plano lenses (lenses with no corrective
power) are sold primarily direct to sunglass manufacturers.

Prior to the strategic initiatives, we operated
numerous distribution centers worldwide. As a result of our
strategic initiatives, our distribution and logistics operations
will consist of five primary distribution centers. The five
primary distribution centers are located in North
America (2), Europe, Asia and South America. For more
information regarding our North American chain retail channel,
see Risk Factors  Risks Relating to Sola and
the Industry  We are dependent upon the North
American chain retail channel.

Customers

During fiscal 2002, our ten largest customers
accounted for 23.8% of net sales, and our largest customer
accounted for less than 6% of net sales. During fiscal 2002, six
of our ten largest customers were located in North America and
accounted for 14.1% of net sales. For the year ended
March 31, 2002, sales to our top 20 customers,
excluding competitors, increased by 7.9% as compared to the
prior year.

Manufacturing Operations

At the beginning of fiscal 2000, we
operated 16 manufacturing facilities worldwide. We
currently operate 10 facilities, including the Oracle
operations acquired in fiscal 2001. With the completion of our
strategic initiatives, we have four primary and six specialized
manufacturing facilities worldwide. These initiatives included
shifting production of high-volume, standard products from the
U.S., Australia and Ireland to low-cost manufacturing sites in
Mexico, China and Brazil while maintaining complex production at
the Australian

7



---



##### Table of Contents



and Irish sites. This transfer of production is
facilitated by the global product standard specifications
project, which commenced 18 months ago, allowing us to
source products globally.


Research and Development

We continue to invest heavily in research and
development in order to introduce new and innovative products
and to improve the efficiency of our manufacturing process. As
of March 31, 2002, there were 154 employees involved
in our research and development efforts. Our research and
development expenditures for fiscal 2002 were
$13.1 million, representing 2.5% of net sales, for fiscal
2001 were $14.9 million, representing 2.7% of net sales,
and for fiscal 2000 were $20.0 million, representing 3.7%
of net sales. We have our research and development centers in
Petaluma, California; Southbridge, Massachusetts; and Lonsdale,
Australia.

Our research and development focuses on the
design and development of higher margin, value-added products,
on new materials with superior characteristics, on technology
that will deliver products to the market more efficiently and on
technologies to improve productivity in the manufacture of
existing products. Recent research and development programs
include the successful development of our Finalite and
Spectralite materials; Percepta, Visuality and AO Compact
progressive designs; and ViZio polycarbonate lenses.

In April 2001, we launched a new single vision
product, Enigma, featuring an innovative design that matches the
contours of the lens to the shape of the eye, thus providing
superior optical performance. This proprietary technology has
created a new product category for Sola and for the spectacle
lens industry. The product is being distributed through our
wholly owned prescription laboratory, SOLA Technologies, located
in Hebron, Kentucky.

Competition

The spectacle lens industry is highly
competitive. We compete principally on the basis of customer
service, quality and breadth of product offerings, innovation
and price. Our largest global competitors are Essilor
International SA and Hoya Corporation. The spectacle lens
industry is characterized by price competition, which can be
severe in certain markets, particularly for high-volume,
standard products.

We attempt, to the extent possible, to counter
competition on the basis of price by focusing on providing a
rapid response to orders, maintaining high fill rates,
developing differentiated new products and educating processing
laboratories and eyecare practitioners on the benefits of our
lenses and coatings. Since recently developed products comprise
a substantial portion of our sales, our performance is dependent
on our continuing ability to develop and market new products.

In addition to direct competition from other
manufacturers of eyeglass lenses, we compete indirectly with
manufacturers of contact lenses and providers of medical
procedures for the correction of visual impairment. Contact
lenses are not, however, perfect substitutes for eyeglasses
because of the difficulty of developing progressive or bifocal
contact lenses. In addition, contact lens wearers also tend to
own eyeglasses. A number of companies have developed, or are
developing, surgical equipment or implants used to correct
refractive error, including myopia, hyperopia and astigmatism.
These procedures are currently ineffective at correcting
presbyopia. Presbyopia affects the vast majority of people above
the age of 45 and is a major source of demand for our
progressive and other multifocal lenses. However, current
medical procedures, or ones developed in the future, could
materially impact demand for our lenses.

Patents, Trademarks & Licenses

We seek to protect our intellectual property
throughout the world. As of March 31, 2002, we had filed,
or applied for, patents for 109 discrete inventions or
technologies. Many of our patents have been filed in multiple
countries, and they include 71 patents, or patent
applications, filed in the United States. We have been granted,
or are licensed to use, 920 trademarks in various
countries, representing rights to 233 discrete names. These
include 80 trademarks granted in the United States.
Further, there are 70 trade names under application by us.
We do not believe that we are dependent on any particular
patent, trade secret or similar

8



---



##### Table of Contents



intellectual property. Because of our
manufacturing, marketing and distribution strengths, we believe
that the loss of any individual trademark, trade secret or
patent would not have a material adverse effect on our results
of operations or financial condition.


Employees

As of March 31, 2002, we had
6,983 employees throughout the world. The majority of our
employees are not represented by labor unions. We consider our
labor relations to be good and there have been no significant
labor disputes in the past ten years.

Environmental Matters

We must comply with United States and foreign
environmental laws and regulations concerning emissions to the
air, waste water discharges and the generation, handling,
storage, transportation and disposal of hazardous wastes, and
with other federal, state and foreign laws and regulations. We
believe that we possess all material permits and licenses
necessary for the continuing operation of our business and
believe that our operations are in substantial compliance with
the terms of all applicable environmental laws. It is impossible
to predict accurately what effect these laws and regulations
will have on us in the future.

Our manufacturing processes generally use
non-hazardous chemicals where feasible. Certain processes use a
variety of volatile and other hazardous substances. Where
practical, we have been reducing the use of these chemicals.
Where the use of hazardous materials is essential, manufacturing
processes are developed which minimize the use of these
chemicals and which comply with relevant safety and
environmental standards. We have also developed programs to
eliminate use of chlorinated hydrocarbons and
chlorofluorocarbons, or CFCs, in our manufacturing processes.
Our current use of these substances is minimal in our operations.

Since 1988, we have operated a ground water
remediation system at our Petaluma, California manufacturing
facility in accordance with a consent order issued by the
U.S. EPA under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980. The system is designed
to remediate a pre-1982 release of hazardous substances.
Analytical results indicate that contamination levels have
decreased significantly over the past few years. Since March
1997, we have curtailed clean-up activities, while continuing to
monitor contamination levels. In 1997, we submitted to the EPA a
report on contamination levels and the impact of curtailed
activities that indicates no significant impact on the site from
the curtailed activities. The EPA has consented to continued
curtailment of clean-up activities. We expect continued
reduction of clean-up activities due to relatively low levels of
contamination existing at the site. In connection with the
acquisition from Pilkington, Pilkington has agreed to indemnify
us with respect to environmental losses relating to certain then
existing facts, events, conditions, matters or issues, for
(1) 50% of the losses to the extent they exceed
$1 million but are less than or equal to $5 million,
and (2) 100% of the losses in excess of $5 million. In
March 2001, we completed the sale of the affected property and
indemnified the buyer with respect to certain then-existing
facts, events, conditions, matters or issues.

It is possible that we may be involved in other
similar investigations and actions under state, federal or
foreign laws in the future. Based on currently available
information, we do not believe that our share of costs at the
existing sites is likely to result in a liability that will have
a material adverse effect on our results of operations,
financial condition or cash flows.

Our policy is to meet or exceed all applicable
environmental, health and safety laws and regulations. The
complexity and continuing evolution of environmental regulation,
including certain programs for which implementing regulations
have not yet been finalized, preclude precise estimation of
future environmental expenditures.

Regulation

To satisfy Food and Drug Administration safety
requirements for sale of lenses in the U.S., all of our lenses,
like those of our competitors, must comply with the
drop-ball impact test. This test involves dropping

9



---



##### Table of Contents



a steel ball of diameter  5/8 inches
onto the surface of the lens from a height of 50 inches.
The lens is held in place and the steel ball must impact the
lens near its center. The central region of the lens deflects as
the ball strikes, and cracks may form, which could lead to the
fracture of the lens. The lens passes the test if it does not
break.


There is a similar European ISO/CEN test for
spectacle lenses, which involves a static load,
rather than an impact. In this case, force is applied to the
convex side of the lens through a steel ball. The load is
applied for 10 seconds and then removed. The lens passes if
it does not break.

There are several factors that could contribute
to whether our lenses pass these tests, including the nature of
the lens material, coatings applied to the lenses and lens power
and curvature. While our manufacturing processes are designed
for our lenses to pass these tests, we cannot guarantee that
they will continue to pass these tests.

10



---



##### Table of Contents






Item 2.     Properties

Our principal properties are set forth in the
following table:

|                         |  |          |        |                      |  |                                                                                                                       
|------------------------ |  | -------- | ------ | -------------------- |  | ----------------------------------------------------------------------------------------------------------------------
|                         |  | Owned or |        |                     
|Region and Location      |  | Leased   |        | Principal Operations
|                         |  |          |        |                     
|North America            |  |          |        |                      |  |                                                                                                                       
|San Diego, CA            |  |          | Leased |                      |  | Corporate Offices; Marketing Headquarters;
    Distribution Center                                                    
|Petaluma, CA             |  |          | Leased |                      |  | Research and Development; Sales and Marketing;
    Administrative Offices                                             
|Hebron, KY               |  |          | Leased |                      |  | Distribution Center and Laboratory                                                                                    
|Southbridge, MA          |  |          | Leased |                      |  | Research and Development                                                                                              
|Portland, OR             |  |          | Owned  |                      |  | Laboratory                                                                                                            
|Warwick, RI              |  |          | Leased |                      |  | Manufacturing; Sales and Administrative Offices                                                                       
|Tijuana, Mexico          |  |          | Leased |                      |  | Manufacturing and Distribution Center                                                                                 
|Mexico City, Mexico      |  |          | Leased |                      |  | Laboratory, Sales office and Distribution Center                                                                      
|Ontario, Canada          |  |          | Leased |                      |  | Distribution Center                                                                                                   
|Europe                   |  |          |        |                      |  |                                                                                                                       
|Ghent, Belgium           |  |          | Leased |                      |  | Laboratory                                                                                                            
|Goetzenbruck, France     |  |          | Owned  |                      |  | Manufacturing                                                                                                         
|Fougeres, France         |  |          | Both   |                      |  | Laboratory; Marketing and Distribution Center                                                                         
|Wexford, Ireland         |  |          | Owned  |                      |  | Manufacturing; Laboratory                                                                                             
|Oberursel, Germany       |  |          | Leased |                      |  | Distribution Center                                                                                                   
|Varese, Italy            |  |          | Leased |                      |  | Laboratory; Manufacturing; Marketing and
    Distribution Center                                                      
|Setubal, Portugal        |  |          | Leased |                      |  | Laboratory and Distribution Center                                                                                    
|Birmingham, UK           |  |          | Leased |                      |  | Laboratory; Marketing and Distribution Center                                                                         
|London, UK               |  |          | Leased |                      |  | Sales and Marketing; Distribution Center;
    Administrative offices                                                  
|Basel, Switzerland       |  |          | Owned  |                      |  | Distribution Center                                                                                                   
|Barcelona, Spain         |  |          | Leased |                      |  | Sales office                                                                                                          
|South America            |  |          |        |                      |  |                                                                                                                       
|Buenos Aires, Argentina  |  |          | Owned  |                      |  | Distribution Center                                                                                                   
|Petropolis, Brazil       |  |          | Owned  |                      |  | Manufacturing; Sales and Marketing; Distribution
    Center                                                           
|Villa de Cura, Venezuela |  |          | Owned  |                      |  | Manufacturing; Distribution Center                                                                                    
|Asia                     |  |          |        |                      |  |                                                                                                                       
|Hong Kong                |  |          | Leased |                      |  | Laboratory and Sales office                                                                                           
|Guangzhou, China         |  |          | Both(1 | )                    |  | China Corporate Offices and Manufacturing                                                                             
|Osaka, Japan             |  |          | Leased |                      |  | Laboratory; Marketing and Distribution Center                                                                         
|Singapore                |  |          | Leased |                      |  | Manufacturing; Marketing and Distribution Center;
    Laboratory                                                      
|Selangor, Malaysia       |  |          | Leased |                      |  | Marketing and Distribution Center; Laboratory                                                                         
|Australia                |  |          |        |                      |  |                                                                                                                       
|Lonsdale, Australia      |  |          | Both   |                      |  | Manufacturing; Research and Development;
    Laboratory; Marketing and Distribution Center; Administrative
    offices
|Auckland, New Zealand    |  |          | Leased |                      |  | Laboratory and Distribution Center                                                                                    
|Africa                   |  |          |        |                      |  |                                                                                                                       
|Harare, Zimbabwe         |  |          | Owned  |                      |  | Laboratory                                                                                                            

11



---



##### Table of Contents





---



|    |                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We maintain two sites in Guangzhou; the
    manufacturing site is owned and the corporate offices are
    leased. The manufacturing site is owned by a joint venture in
    which we own a 76% ownership interest.

A portion of our research and development
activities, our corporate headquarters and certain of our
manufacturing and distribution operations are located near major
earthquake faults. Operating results could be materially
affected in the event of a major earthquake. We are
predominantly self-insured for losses and interruptions caused
by earthquakes.

For further information concerning our leased
properties, see Note 17 of Notes to Consolidated Financial
Statements included elsewhere herein. Our operating leases have
expirations ranging from 2003 to 2014. While we do not
anticipate any difficulties in renewing or replacing such leases
as they expire, we cannot be certain that we can do so. We
believe that our manufacturing capacity is sufficient for our
current needs.




Item 3.     Legal
Proceedings

In addition to the proceedings described under
Business  Environmental Matters, we are
involved in routine litigation incidental to our business. We
believe that this routine litigation will not have a material
adverse effect on our results of operations, financial
condition, or cash flows. See Note 19 of Notes to Consolidated
Financial Statements included elsewhere herein.




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

No matters were submitted to a vote of our
security holders during the last quarter of fiscal 2002.

12



---



##### Table of Contents






PART II




Item 5.     Market
for the Registrants Common Equity and Related Stockholder
Matters

Our common stock has been listed on the New York
Stock Exchange since February 23, 1995 under the symbol
SOL. The following table sets forth on a per share
basis the closing high and low sales prices for consolidated
trading in our common stock as reported on the New York Stock
Exchange Composite Tape for the fiscal quarters indicated.

|                                  |                                         |      |   |       |  |  |   |       | 
|--------------------------------- | --------------------------------------- | ---- | - | ----- |  |  | - | ----- | 
|                                  |                                         | High |   | Low  
|                                  |                                         |      |   |      
|Fiscal Year Ended March 31, 2002: |                                         |      |   |       |  |  |   |      
|                                  | First Quarter ended June 30, 2001       |      | $ | 14.52 |  |  | $ | 9.01  | 
|                                  | Second Quarter ended September 30, 2001 |      |   | 16.65 |  |  |   | 11.75 | 
|                                  | Third Quarter ended December 31, 2001   |      |   | 19.89 |  |  |   | 14.20 | 
|                                  | Fourth Quarter ended March 31, 2002     |      |   | 20.10 |  |  |   | 10.80 | 
|Fiscal Year Ended March 31, 2001: |                                         |      |   |       |  |  |   |      
|                                  | First Quarter ended June 30, 2000       |      | $ | 6.50  |  |  | $ | 4.00  | 
|                                  | Second Quarter ended September 30, 2000 |      |   | 8.00  |  |  |   | 4.88  | 
|                                  | Third Quarter ended December 31, 2000   |      |   | 6.19  |  |  |   | 3.63  | 
|                                  | Fourth Quarter ended March 31, 2001     |      |   | 9.86  |  |  |   | 4.50  | 

On June 12, 2002, the closing price per
share of our common stock on the New York Stock Exchange was
$11.72. As of June 12, 2002, we had 320 holders of record
of our common stock, which excludes beneficial owners of common
stock held in street name.

We have not declared or paid any cash dividends
on our common stock since December 1993. The Indentures
governing our 6 7/8% Senior Notes and our 11% Notes
restrict and limit the payment of dividends on our common stock.
We do not anticipate paying any cash dividends in the
foreseeable future and intend to retain future earnings for the
development and expansion of our business.

13



---



##### Table of Contents






Item 6.     Selected
Financial Data

We derived the following selected statement of
operations data for the five fiscal years in the period ended
March 31, 2002 and the balance sheet data as of
March 31, 2002, 2001, 2000, 1999 and 1998 from our audited
consolidated financial statements. You should read the financial
data set forth below in conjunction with the consolidated
financial statements and related notes and
Managements Discussion and Analysis of Financial
Condition and Results of Operations. We have reclassified
certain prior year items to conform with the current years
presentation. The reclassifications had no impact on total
assets or net income.

|                                            |                                                                 |                                       |   |         |  |         |   |         |     |      |   |         |  |  |   |         |  |  |   |         |     
|------------------------------------------- | --------------------------------------------------------------- | ------------------------------------- | - | ------- |  | ------- | - | ------- | --- | ---- | - | ------- |  |  | - | ------- |  |  | - | ------- | ----
|                                            |                                                                 |                                      
|                                            |                                                                 | Fiscal Year Ended March 31,          
|                                            |                                                                 |                                      
|                                            |                                                                 | 2002                                  |   | 2001(1) |  | 2000(2) |   | 1999(3) |     | 1998
|                                            |                                                                 |                                       |   |         |  |         |   |         |     |     
|                                            |                                                                 |                                      
|                                            |                                                                 | (In thousands, except per share data)
|Statements of Operations Data               |                                                                 |                                       |   |         |  |         |   |         |     |      |   |         |  |  |   |         |  |  |   |        
|                                            | Net sales                                                       |                                       | $ | 529,505 |  |         | $ | 545,432 |     |      | $ | 543,445 |  |  | $ | 534,103 |  |  | $ | 552,380 |     
|                                            |                                                                 |                                       |   |         |  |         |   |         |     |      |   |         |  |  |   |         |  |  |   |        
|                                            | Income/(loss) before extraordinary item                         |                                       | $ | 19,118  |  |         | $ | (67,999 | )   |      | $ | 741     |  |  | $ | 12,521  |  |  | $ | 51,092  |     
|                                            | Extraordinary item, net of taxes                                |                                       |   |        |  |         |   | 1,471   | (4) |      |   |        |  |  |   |        |  |  |   | (5,939  | )(5)
|                                            |                                                                 |                                       |   |         |  |         |   |         |     |      |   |         |  |  |   |         |  |  |   |        
|                                            | Net income/(loss)                                               |                                       | $ | 19,118  |  |         | $ | (66,528 | )   |      | $ | 741     |  |  | $ | 12,521  |  |  | $ | 45,153  |     
|                                            |                                                                 |                                       |   |         |  |         |   |         |     |      |   |         |  |  |   |         |  |  |   |        
|                                           
|Earnings/(Loss) Per Share Data,
    Basic   |                                                                 |                                       |   |         |  |         |   |         |     |      |   |         |  |  |   |         |  |  |   |        
|                                            | Income/(loss) before extraordinary item                         |                                       | $ | 0.79    |  |         | $ | (2.83   | )   |      | $ | 0.03    |  |  | $ | 0.51    |  |  | $ | 2.09    |     
|                                            | Extraordinary item                                              |                                       |   |        |  |         |   | 0.06    |     |      |   |        |  |  |   |        |  |  |   | (0.24   | )   
|                                            |                                                                 |                                       |   |         |  |         |   |         |     |      |   |         |  |  |   |         |  |  |   |        
|                                            | Net income/(loss)                                               |                                       | $ | 0.79    |  |         | $ | (2.77   | )   |      | $ | 0.03    |  |  | $ | 0.51    |  |  | $ | 1.85    |     
|                                            |                                                                 |                                       |   |         |  |         |   |         |     |      |   |         |  |  |   |         |  |  |   |        
|                                            | Weighted average common shares outstanding                      |                                       |   | 24,067  |  |         |   | 24,049  |     |      |   | 24,887  |  |  |   | 24,794  |  |  |   | 24,400  |     
|                                            |                                                                 |                                       |   |         |  |         |   |         |     |      |   |         |  |  |   |         |  |  |   |        
|                                           
|Earnings/(Loss) Per Share Data,
    Diluted |                                                                 |                                       |   |         |  |         |   |         |     |      |   |         |  |  |   |         |  |  |   |        
|                                            | Income/(loss) before extraordinary item                         |                                       | $ | 0.78    |  |         | $ | (2.83   | )   |      | $ | 0.03    |  |  | $ | 0.49    |  |  | $ | 2.00    |     
|                                            | Extraordinary item                                              |                                       |   |        |  |         |   | 0.06    |     |      |   |        |  |  |   |        |  |  |   | (0.23   | )   
|                                            |                                                                 |                                       |   |         |  |         |   |         |     |      |   |         |  |  |   |         |  |  |   |        
|                                            | Net income/(loss)                                               |                                       | $ | 0.78    |  |         | $ | (2.77   | )   |      | $ | 0.03    |  |  | $ | 0.49    |  |  | $ | 1.77    |     
|                                            |                                                                 |                                       |   |         |  |         |   |         |     |      |   |         |  |  |   |         |  |  |   |        
|                                            | Weighted average common and dilutive securities
    outstanding |                                       |   | 24,583  |  |         |   | 24,049  |     |      |   | 25,069  |  |  |   | 25,412  |  |  |   | 25,547  |     
|                                            |                                                                 |                                       |   |         |  |         |   |         |     |      |   |         |  |  |   |         |  |  |   |        

|                   |                                      |                 |   |         |  |      |   |         |  |      |   |         |  |  |   |         |  |  |   |         | 
|------------------ | ------------------------------------ | --------------- | - | ------- |  | ---- | - | ------- |  | ---- | - | ------- |  |  | - | ------- |  |  | - | ------- | 
|                   |                                      |                
|                   |                                      | As of March 31,
|                   |                                      |                
|                   |                                      | 2002            |   | 2001    |  | 2000 |   | 1999    |  | 1998
|                   |                                      |                 |   |         |  |      |   |         |  |     
|Balance Sheet Data |                                      |                 |   |         |  |      |   |         |  |      |   |         |  |  |   |         |  |  |   |        
|                   | Total assets                         |                 | $ | 713,065 |  |      | $ | 662,375 |  |      | $ | 715,033 |  |  | $ | 699,299 |  |  | $ | 684,058 | 
|                   | Long-term debt, less current portion |                 |   | 278,245 |  |      |   | 254,910 |  |      |   | 209,234 |  |  |   | 208,414 |  |  |   | 196,386 | 
|                   | Total shareholders equity           |                 |   | 261,362 |  |      |   | 235,375 |  |      |   | 327,802 |  |  |   | 332,362 |  |  |   | 327,022 | 



---



|    |                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In fiscal 2001, we recorded special charges of
    $91.1 million and inventory write-offs of
    $25.6 million, or $79.3 million net of tax or $3.30
    per diluted share. See Note 13 of Notes to Consolidated
    Financial Statements.
|   
|(2) | In fiscal 2000, we recorded special charges of
    $22.3 million and inventory write-offs of
    $7.2 million, or $20.4 million net of tax or $0.82 per
    diluted share. See Note 13 of Notes to Consolidated Financial
    Statements. 
|   
|(3) | In fiscal 1999, we recorded special charges of
    $14.8 million and inventory write-offs of
    $6.6 million, or $14.6 million net of tax or $0.60 per
    diluted share. See Note 13 of Notes to Consolidated
    Financial Statements. 
|   
|(4) | Consists of a gain resulting from the repurchase
    of senior notes, net of tax.                                                                                                                                                         
|   
|(5) | Consists of a loss resulting from the repurchase
    of senior subordinated notes, net of tax.                                                                                                                                            

14



---



##### Table of Contents






Item 7.     Managements
Discussion and Analysis of Financial Condition and Results of
Operations

You should read the following discussion and
analysis together with our consolidated financial statements and
related notes included in this report. This discussion contains
forward-looking statements that involve risks, uncertainties and
assumptions. You should read the cautionary statements made in
this report as applying to related forward-looking statements
wherever they appear in this report. Our actual results may be
materially different from the results we discuss in the
forward-looking statements due to various factors, including
those discussed in the Risk Factors and other
sections of this report.

Overview

We are a leading global designer, manufacturer
and distributor of a broad range of plastic and glass eyeglass
lenses and hold a leading manufacturing and technology position
in the fast growing plastic lens segment of the global spectacle
lens market. We have sales offices in 28 countries
worldwide and operate in most major regions of the world. We
believe that we hold a top three market position in terms of
volume of plastic eyeglass lenses sold in each major region
where we operate- North America, Europe and Rest of World
(consisting primarily of Australia, Asia and South America). We
focus our efforts on value-added products, including products
with advanced design characteristics, lens coatings and
treatments and thin and light weight materials (e.g.,polycarbonate). Approximately 74% of our annual net sales
are represented by value-added products.

We market our spectacle lens products globally
under the brands SOLA and American Optical (AO) and
distribute them globally through four primary channels:
(1) direct to national retail chain, (2) direct to
retail outlets, (3) wholesale distributors (e.g.,independent processing laboratories), and (4) managed
care organizations in the United States, a growing segment of
the spectacle lens market.

Our business is organized into three primary
markets: North America, Europe and Rest of World. For the fiscal
year ended March 31, 2002, we generated approximately 45%
of our net sales from North America, 35% from Europe and 20%
from Rest of World.

Our organization has historically been managed on
a decentralized basis with each operating unit having its own
manufacturing facilities, distribution centers and inventory
management systems. This decentralized approach resulted in
excess manufacturing capacity, redundant facilities in high cost
regions and excessive distribution centers. In the third quarter
of fiscal 1999, we initiated a strategic operating review
designed to streamline manufacturing and distribution, reduce
operating costs worldwide and write-off inventory SKUs that are
no longer being manufactured. In April 2000, we appointed Jeremy
Bishop as our new President and Chief Executive Officer.
Following his appointment, Mr. Bishop expanded the scope of
our strategic cost cutting program and accelerated the
implementation of our strategic initiatives begun in 1999. With
the completion of the strategic initiatives, our operations
consist of four primary and six specialized manufacturing
facilities, two primary research and development centers,
12 primary prescription laboratories and five primary
distribution centers.

The charges recorded for these initiatives from
fiscal 1999 through the end of fiscal 2002, net of gains on
asset sales, totaled approximately $167.7 million,
including $39.5 million of associated inventory write-offs
classified in cost of sales. The non-cash charges related
primarily to the write-off of equipment and other assets, as
well as the impairment of goodwill. The cash charges related
primarily to severance expenses and facility closures. Operating
expenses for fiscal 2002 have declined $30.4 million from
fiscal 1999 in addition to significant unit cost decreases, and
we expect to generate additional savings in fiscal 2003 as a
result of the actions taken in fiscal 2001 and 2002. In fiscal
2002 and 2001, we realized cash proceeds from sales of land and
buildings made redundant by these initiatives of approximately
$5.5 million and $7.8 million, respectively.

In addition to special charges, we incurred
transition costs associated with executing our strategic
initiatives. These transition costs totaled $20.6 million and
$17.5 million in fiscal 2002 and 2001, respectively, and
largely related to: (1) expenditures to execute the
strategic actions (e.g.,certain employee and facility
costs) and (2) expenses incurred that will be eliminated
upon completion of the strategic actions (e.g.,

15



---



##### Table of Contents



manufacturing variances resulting from the
inefficiencies encountered during product migration and
consolidation of manufacturing facilities).


Our business is somewhat seasonal, with fiscal
third quarter results generally weaker than the other three
quarters as a result of lower sales during the holiday season.
Fiscal fourth quarter results are generally the strongest.

Critical Accounting Policies and
Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Our estimates, judgments and assumptions are continually
evaluated based on available information and experience;
however, actual amounts could differ from those estimates. Our
significant accounting policies are described in Note 2 of the
Notes to Consolidated Financial Statements.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts
for losses that we estimate will arise from our customers
inability to make required payments. We make our estimates of
the uncollectibility of our accounts receivable by analyzing
historical bad debts, specific customer creditworthiness and
current economic trends. At March 31, 2002, the allowance
for doubtful accounts was $8.4 million and, at March 31,
2001, it was $9.2 million. If the financial condition of
our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be
required. In fiscal 2002, our bad debt expense was
$2.3 million compared to $3.0 million in fiscal 2001.

Valuation of Inventory

We write down our inventory for estimated
obsolescence or unmarketable inventory equal to the difference
between cost of inventory and the estimated market value based
upon assumptions about future demand, selling prices and market
conditions. Our inventories include components that may be
subject to rapid technological obsolescence and that are sold in
a highly competitive industry. If actual product demand or
selling prices are less favorable than we estimate, we may be
required to record additional inventory write-downs in the
future. Significant unanticipated changes in demand or
technological development could have a material and significant
impact on the future value of our inventory and reported
operating results.

Accounting for Income Taxes

As part of the process of preparing our
consolidated financial statements we are required to estimate
our income taxes in each of the jurisdictions in which we
operate. This process involves us estimating our actual current
tax exposure together with assessing temporary differences
resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax
assets and liabilities, which are included within our
consolidated balance sheet. We must then assess the likelihood
that our deferred tax assets will be recovered from future
taxable income and, to the extent we believe that recovery is
not likely, we must establish a valuation allowance. To the
extent we establish a valuation allowance or increase this
allowance in a period, we must reflect this adjustment within
the tax provision in the statement of operations.

Significant management judgment is required in
determining our provision for income taxes, our deferred tax
assets and liabilities and any valuation allowance recorded
against our net deferred tax assets. We have recorded a
valuation allowance of $16.3 million as of March 31,
2002, due to uncertainties related to our ability to utilize
some of our deferred tax assets, primarily consisting of certain
foreign net operating losses carried forward, before they
expire. The valuation allowance is based on our estimates of
taxable income by jurisdiction in which we operate and the
period over which our deferred tax assets will be recoverable.
In the event that actual results differ from these estimates or
we adjust these estimates in future periods we may need to
establish an additional valuation allowance, which could impact
our financial position and results of operations.

16



---



##### Table of Contents



The net deferred tax asset as of March 31,
2002 was $76.5 million, net of a valuation allowance of
$16.3 million.

Valuation of Goodwill and Intangible
Assets

At March 31, 2002, goodwill amounted to
$190.3 million and identifiable intangible assets amounted
to $0.4 million.

We assess the impairment of identifiable
intangibles and goodwill whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. Factors we consider important that could trigger an
impairment review include the following:



| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | Significant underperformance relative to expected
    historical or projected future operating results;          
|
| |  | Significant changes in the manner of our use of
    the acquired assets or the strategy for our overall business;
|
| |  | Significant negative industry or economic trends;                                                                
|
| |  | Significant decline in our stock price for a
    sustained period; and                                           
|
| |  | Our market capitalization relative to net book
    value.                                                        

If we were to determine that the carrying value
of intangibles or goodwill may not be recoverable based upon the
existence of one or more of the above indicators of impairment,
we would measure an impairment based on a projected discounted
cash flow method using a discount rate determined by our
management to be commensurate with the risk inherent in our
current business model.

In fiscal 2002, Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other
Intangible Assetsbecame effective and, as a result, we
ceased to amortize our goodwill. We had recorded
$6.6 million of amortization on these amounts during fiscal
2001 and would have recorded approximately $6.8 million of
amortization during fiscal 2002. In lieu of amortization, we
have performed an initial impairment review of our goodwill in
fiscal 2002 and an impairment review is required at least
annually.

We currently do not expect to record an
impairment charge, however, there can be no assurance that a
material impairment charge will not be recorded in future
periods.

Retirement Benefits

Our employee pension and other postretirement
benefit costs and obligations are dependent on our assumptions
used by actuaries in calculating such amounts. These assumptions
include discount rates, health care cost trends rates,
inflation, salary growth, long-term return on plan assets,
retirement rates, mortality rates and other factors. We base the
discount rate assumptions on investment yields available at
year-end on AA-rated corporate long-term bond yields. Our health
care cost trend assumptions are developed based on historical
cost data, the near-term outlook, and an assessment of likely
long-term trends. Our inflation assumption is based on an
evaluation of external market indicators. The salary growth
assumptions reflect our long-term actual experience, the
near-term outlook, and assumed inflation. Retirement and
mortality rates are based primarily on actual plan experience.
Actual results that may differ from our assumptions are
accumulated and amortized over future periods and, therefore,
generally affect our recognized expense and recorded obligation
in those future periods. While we believe that the assumptions
used are appropriate, significant differences in actual
experience or significant changes in assumptions would affect
our pension and other postretirement benefits costs and
obligations. See Note 15 of Notes to our Consolidated Financial
Statements for more information regarding costs and assumptions
for employee retirement benefits.

Determining Functional Currencies for the
Purpose of Consolidation

We have several foreign subsidiaries which
together account for approximately 58% of our net revenues and
48% of our assets as of March 31, 2002.

17



---



##### Table of Contents



In preparing our consolidated financial
statements, we are required to translate the financial
statements of the foreign subsidiaries from the currency in
which they keep their accounting records, generally the local
currency, into United States Dollars. This process results in
exchange gains and losses, which, under the relevant accounting
guidance, are either included within the statement of operations
or as a separate part of our net equity under the caption
cumulative comprehensive loss.

Under the relevant accounting guidance, the
treatment of these translation gains or losses is dependent upon
our managements determination of the functional currency
of each subsidiary. The functional currency is determined based
on managements judgment and involves consideration of all
relevant economic facts and circumstances affecting the
subsidiary. Generally, the currency in which the subsidiary
transacts a majority of its transactions, including billings,
financing, payroll and other expenditures would be considered
the functional currency, but any dependency upon the parent and
the nature of the subsidiarys operations must also be
considered.

If any subsidiarys functional currency is
deemed to be the local currency, then any gain or loss
associated with the translation of that subsidiarys
financial statements is included in cumulative comprehensive
loss. However, if the functional currency is deemed to be the
United States Dollar or a currency other than the local
currency, then any gain or loss associated with the translation
of these financial statements would be included within our
statement of operations. If we dispose of any of our
subsidiaries, any cumulative translation gains or losses would
be realized into our statement of operations. If we determine
that there has been a change in the functional currency of a
subsidiary to the United States Dollar, any translation gains or
losses arising after the date of change would be included within
our statement of operations.

Based on our assessment of the factors discussed
above, we generally consider the relevant subsidiarys
local currency to be the functional currency for our
international subsidiaries. Accordingly, we had cumulative
translation losses of approximately $46.3 million and
$43.1 million that were included as part of accumulated
other comprehensive loss within our balance sheet at
March 31, 2002 and 2001, respectively. During 2002, 2001
and 2000, translation adjustments of $3.3 million,
$17.9 million and $6.3 million, respectively, were
included under accumulated other comprehensive loss. Had we
determined that the functional currency of our subsidiaries was
the United States Dollar or a currency other than the local
currency, these losses would have increased our loss for each of
the years presented.

The magnitude of these gains or losses is
dependent upon movements in the exchange rates of the foreign
currencies in which we transact business against the United
States Dollar. These currencies include the Japanese Yen, the
Euro, the United Kingdom Pound Sterling and Australian and
Canadian Dollars. Any future translation gains or losses could
be significantly higher than those noted in each of these years.
In addition, if we determine that a change in the functional
currency of one of our subsidiaries has occurred at any point in
time, we would be required to include any translation gains or
losses from the date of change in our statement of operations.

Revenue Recognition

Our policy is to recognize revenue from sales to
customers when the rights and risks of ownership have passed to
the customer, when persuasive evidence of an arrangement exists,
the price is fixed and determinable and the collection of the
resulting receivable is reasonably assured. Under specific
conditions, we permit our customers to return or exchange
products. The provision for estimated returns is recorded
concurrently with the recognition of revenue based on historical
sales returns and analysis of credit memo data.

Warranty Costs

We provide for the estimated cost of product
warranties at the time revenue is recognized. While we engage in
product quality programs and processes, including actively
monitoring and evaluating the quality of our suppliers, our
warranty obligation is affected by product failure rates,
material usage and service delivery costs incurred in correcting
a product failure. Should actual product failure rates, material
usage or service delivery costs differ from our estimates,
revisions to the estimated warranty liability would be required.

18



---



##### Table of Contents



Financial Risk Management and
Derivatives

The purpose of our foreign currency hedging
activities is to protect us from the risk that the eventual cash
flows resulting from interest payments on our Euro-denominated
debt will be adversely affected by changes in exchange rates. In
addition, we seek to manage the impact of foreign currency
fluctuations related to the repayment of intercompany
transactions, including intercompany borrowings. We do not hold
or issue financial instruments for trading purposes. It is our
policy to utilize derivative financial instruments to reduce
foreign exchange risks where internal netting strategies cannot
be effectively employed. Fluctuations in the value of hedging
instruments are offset by fluctuations in the value of the
underlying exposures being hedged.

We use forward exchange contracts to hedge
certain purchases and sales commitments and the related payables
and receivables, including other third party or intercompany
foreign currency transactions. Hedged transactions are
denominated primarily in European currencies and Japanese yen.
Gains and losses due to rate fluctuations on these transactions
are recognized in the same period as the items being hedged and
are recorded as a foreign currency gain or loss. Realized and
unrealized foreign currency gains resulting from these hedges
were approximately $0.1 million during fiscal 2002. Cash
flows related to these gains and losses are reported as
operating or financing activities in the accompanying
consolidated statements of cash flows depending on the nature of
the hedged item. The counterparties to these contracts are
substantial and credit worthy multinational commercial banks.
The risks of counterparty nonperformance associated with these
contracts are not considered to be significant.

Contingent Liabilities

We establish reserves for estimated loss
contingencies when it is managements assessment that a
loss is probable and the amount of the loss can be reasonably
estimated. Revisions to contingent liabilities are reflected in
income in the period in which circumstances change or different
facts or information become known that affect the previous
assumptions with respect to the likelihood or amount of loss.
Reserves for contingent liabilities are based upon
managements assumptions and estimates, as well as the
advice of legal counsel or other third parties regarding the
probable outcomes of the matter. Should the outcome differ from
the assumptions and estimates, revisions to the estimated
reserves for contingent liabilities would be required.

19



---



##### Table of Contents



Results of Operations

The following table shows the results of our
operations for fiscal years 2002, 2001 and 2000.

|                                                                                                            |                         |                             |         |         |  |      |          |         |   |   |         |         | 
|----------------------------------------------------------------------------------------------------------- | ----------------------- | --------------------------- | ------- | ------- |  | ---- | -------- | ------- | - | - | ------- | ------- | 
|                                                                                                            |                         |                            
|                                                                                                            |                         | Fiscal Year Ended March 31,
|                                                                                                            |                         |                            
|                                                                                                            |                         | 2002                        |         | 2001    |  | 2000
|                                                                                                            |                         |                             |         |         |  |     
|                                                                                                            |                         |                            
|                                                                                                            |                         | (In thousands)             
|Net sales(1)                                                                                                |                         | $                           | 529,505 |         |  | $    | 545,432  |         |   | $ | 543,445 |        
|Cost of sales                                                                                               |                         |                             | 315,213 |         |  |      | 349,556  |         |   |   | 310,340 |        
|                                                                                                            | Gross profit            |                             |         | 214,292 |  |      |          | 195,876 |   |   |         | 233,105 | 
|                                                                                                            |                         |                             |         |         |  |      |          |         |   |   |         |        
|Research and development expenses                                                                           |                         |                             | 13,053  |         |  |      | 14,857   |         |   |   | 20,010  |        
|Selling and marketing expenses                                                                              |                         |                             | 101,735 |         |  |      | 105,623  |         |   |   | 106,102 |        
|General and administrative expenses                                                                         |                         |                             | 47,683  |         |  |      | 52,006   |         |   |   | 56,927  |        
|Amortization                                                                                                |                         |                             | 44      |         |  |      | 6,610    |         |   |   | 5,957   |        
|Special charges                                                                                             |                         |                             | 28      |         |  |      | 91,065   |         |   |   | 22,319  |        
|                                                                                                            |                         |                             |         |         |  |      |          |         |   |   |         |        
|Operating expenses                                                                                          |                         |                             | 162,543 |         |  |      | 270,161  |         |   |   | 211,315 |        
|                                                                                                            |                         |                             |         |         |  |      |          |         |   |   |         |        
|                                                                                                            | Operating income/(loss) |                             |         | 51,749  |  |      |          | (74,285 | ) |   |         | 21,790  | 
|Interest income                                                                                             |                         |                             | 2,302   |         |  |      | 2,123    |         |   |   | 1,451   |        
|Interest expense                                                                                            |                         |                             | (30,875 | )       |  |      | (25,575  | )       |   |   | (20,760 | )      
|Foreign currency gain/(loss)                                                                                |                         |                             | 1,859   |         |  |      | (2,755   | )       |   |   | (1,416  | )      
|                                                                                                            |                         |                             |         |         |  |      |          |         |   |   |         |        
|Income (loss) before provision
    (benefit) for income taxes, minority interest and
    extraordinary item |                         |                             | 25,035  |         |  |      | (100,492 | )       |   |   | 1,065   |        
|Provision (benefit) for income taxes                                                                        |                         |                             | 7,010   |         |  |      | (32,206  | )       |   |   | 894     |        
|Minority interest                                                                                           |                         |                             | 1,093   |         |  |      | 287      |         |   |   | 570     |        
|                                                                                                            |                         |                             |         |         |  |      |          |         |   |   |         |        
|Income (loss) before extraordinary item                                                                     |                         |                             | 19,118  |         |  |      | (67,999  | )       |   |   | 741     |        
|Extraordinary item, net of tax                                                                              |                         |                             |        |         |  |      | 1,471    |         |   |   |        |        
|                                                                                                            |                         |                             |         |         |  |      |          |         |   |   |         |        
|                                                                                                            | Net income (loss)       |                             | $       | 19,118  |  |      | $        | (66,528 | ) |   | $       | 741     | 
|                                                                                                            |                         |                             |         |         |  |      |          |         |   |   |         |        



---



|    |                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Using constant currency exchange rates, fiscal
    2002 sales increased 0.2% compared with fiscal 2001 and
    increased 4.9% (2.4% compound annual growth) compared with
    fiscal 2000.

20



---



##### Table of Contents



The following table shows certain items expressed
as a percentage of our net sales for the periods indicated:

|                                                                                                            |                         |                   |       |      |  |      |       |       |   |  |       |      | 
|----------------------------------------------------------------------------------------------------------- | ----------------------- | ----------------- | ----- | ---- |  | ---- | ----- | ----- | - |  | ----- | ---- | 
|                                                                                                            |                         |                  
|                                                                                                            |                         | Fiscal Year Ended
|                                                                                                            |                         | March 31,        
|                                                                                                            |                         |                  
|                                                                                                            |                         | 2002              |       | 2001 |  | 2000
|                                                                                                            |                         |                   |       |      |  |     
|Net sales                                                                                                   |                         |                   | 100.0 |      |  |      | 100.0 |       |   |  | 100.0 |     
|Cost of sales                                                                                               |                         |                   | 59.5  |      |  |      | 64.1  |       |   |  | 57.1  |     
|                                                                                                            |                         |                   |       |      |  |      |       |       |   |  |       |     
|                                                                                                            | Gross profit            |                   |       | 40.5 |  |      |       | 35.9  |   |  |       | 42.9 | 
|                                                                                                            |                         |                   |       |      |  |      |       |       |   |  |       |     
|Research and development expenses                                                                           |                         |                   | 2.5   |      |  |      | 2.7   |       |   |  | 3.7   |     
|Selling and marketing expenses                                                                              |                         |                   | 19.2  |      |  |      | 19.4  |       |   |  | 19.5  |     
|General and administrative expenses                                                                         |                         |                   | 9.0   |      |  |      | 9.5   |       |   |  | 10.5  |     
|Amortization                                                                                                |                         |                   |      |      |  |      | 1.2   |       |   |  | 1.1   |     
|Special charges                                                                                             |                         |                   |      |      |  |      | 16.7  |       |   |  | 4.1   |     
|                                                                                                            |                         |                   |       |      |  |      |       |       |   |  |       |     
|Operating expenses                                                                                          |                         |                   | 30.7  |      |  |      | 49.5  |       |   |  | 38.9  |     
|                                                                                                            |                         |                   |       |      |  |      |       |       |   |  |       |     
|                                                                                                            | Operating income (loss) |                   |       | 9.8  |  |      |       | (13.6 | ) |  |       | 4.0  | 
|Interest expense, net                                                                                       |                         |                   | (5.4  | )    |  |      | (4.3  | )     |   |  | (3.6  | )   
|Foreign currency gain/(loss)                                                                                |                         |                   | 0.3   |      |  |      | (0.5  | )     |   |  | (0.2  | )   
|                                                                                                            |                         |                   |       |      |  |      |       |       |   |  |       |     
|Income (loss) before provision
    (benefit) for income taxes, minority interest and
    extraordinary item |                         |                   | 4.7   |      |  |      | (18.4 | )     |   |  | 0.2   |     
|Provision (benefit) for income taxes                                                                        |                         |                   | 1.3   |      |  |      | (5.9  | )     |   |  | 0.2   |     
|Minority interest                                                                                           |                         |                   | 0.2   |      |  |      | 0.1   |       |   |  | 0.1   |     
|Extraordinary item, net of tax                                                                              |                         |                   |      |      |  |      | 0.3   |       |   |  |      |     
|                                                                                                            |                         |                   |       |      |  |      |       |       |   |  |       |     
|                                                                                                            | Net income (loss)       |                   |       | 3.6  |  |      |       | (12.1 | ) |  |       | 0.1  | 
|                                                                                                            |                         |                   |       |      |  |      |       |       |   |  |       |     

Fiscal 2002 Compared to Fiscal 2001

Net
Sales.

Our net sales were $529.5 million in fiscal
2002, reflecting a decrease of $15.9 million or 2.9% from
$545.4 million in fiscal 2001. Using constant exchange
rates, net sales increased by 0.2%. The decrease in net sales
was primarily due to reduced sales in the Rest of World and
North America regions. Net sales in the Rest of World region
decreased due to our efforts to concentrate on higher margin
value-added sales. The decrease in North America was due
primarily to decreased sales to laboratory customers that are
owned and aligned with two principal competitors. Net sales
performances by region were as follows:



| |   |                                                      
| | - | -----------------------------------------------------
| |  | North America decreased by $8.6 million or
    3.5%; 
|
| |  | Europe increased by $2.9 million or 1.6%; and        
|
| |  | Rest of World decreased by $10.2 million or
    8.7%.

Using constant exchange rates, the regional
performances were as follows:



| |   |                                 
| | - | --------------------------------
| |  | North America decreased by 3.6%;
|
| |  | Europe increased by 4.1%; and   
|
| |  | Rest of World increased by 2.0%.

Our value-added products accounted for
$363.5 million or 74% of net lens sales in fiscal 2002
compared to $359.4 million or 68% of net lens sales in
fiscal 2001. This increase was led by growth in polycarbonate
lens sales with a year over year increase of $8.3 million
or 27% and increased sales of Finalite lenses of
$1.5 million or 14%.

21



---



##### Table of Contents



Gross Profit
and Gross Margin.

Our gross profit totaled $214.3 million for
fiscal 2002 compared to gross profit of $195.9 million for
fiscal 2001, an increase of $18.4 million or 9.4%.
Gross profit as a percentage of net sales or gross margin
increased to 40.5% for fiscal 2002 from 35.9% for
fiscal 2001. Fiscal 2002 gross profit was adversely impacted by
lower sales levels while fiscal 2001 gross profit included
inventory write-offs of $25.6 million. We recorded
transition costs related to our strategic initiatives of
$12.2 million and $11.2 million in fiscal 2002 and
2001, respectively.

Operating
Expenses.

Our operating expenses in fiscal 2002 totaled
$162.5 million compared to $270.2 million for fiscal
2001. Operating expenses included special charges of
$91.1 million in fiscal 2001 and transition costs related
to our strategic initiatives of $8.4 million and
$6.3 million in fiscal 2002 and 2001, respectively.
Research and development expenses were $13.1 million or
2.5% of net sales in fiscal 2002 and were $14.9 million or
2.7% of net sales for fiscal 2001. The decrease of
$1.8 million or 12.1% in our research and development
expenses was due in part to headcount reductions associated with
the strategic initiatives. Selling and marketing expenses were
$101.7 million or 19.2% of net sales in fiscal 2002
and were $105.6 million or 19.4% of net sales in
fiscal 2001. The decrease in selling and marketing expenses was
primarily due to lower costs as a result of centralizing product
management and marketing activities. Our general and
administrative expenses were $47.7 million in fiscal 2002
and $52.0 million in fiscal 2001, a decrease of
$4.3 million or 8.3%. As a percentage of net sales,
general and administrative expenses decreased to 9.0% for
fiscal 2002 compared to 9.5% for fiscal 2001. The decrease
in general and administrative expenses is the result of lower
costs associated with the consolidation of our corporate
functions, as well as consolidating our North American
commercial administrative activities into one primary location.
Included in general and administrative expenses for fiscal 2001
are charges associated with the devaluation of the Brazilian
Real of $3.1 million. Included in operating expenses for
fiscal 2001 was goodwill amortization of $6.6 million. Due
to the adoption of SFAS No. 142, we are no longer required
to amortize goodwill as a charge to earnings; however, we are
required on an annual basis to review goodwill for potential
impairment. If an impairment is found to exist, a charge will be
recorded against earnings.

Primarily as a result of our strategic
initiatives, which commenced in the third quarter of fiscal
1999, during fiscal 2002, we recorded net pretax special charges
comprised of $0.8 million associated with additional
facility closure costs, offset by a gain on the sale of land in
North America of $0.8 million, also associated with
facility closures.

We recorded pretax special charges of
$91.1 million in fiscal 2001. We incurred
$19.7 million of expense associated with workforce
reductions in North America, Europe and Australia. Included in
the workforce reductions were 780 employees from
manufacturing, 91 employees from sales and marketing,
75 employees from administration, and 46 employees
from research and development. At March 31, 2002,
$25.1 million cash had been paid related to workforce
reductions incurred since fiscal 1999. The special charges
included $24.3 million related to the write-off of molds,
which were discontinued as a result of our efforts to
standardize product specifications on a global basis. Also, we
continued to transfer high-volume production to low-cost
manufacturing locations and to consolidate manufacturing
expertise into fewer production facilities. As a result, we
incurred special charges of $28.2 million related to
redundant equipment write-offs and facility closure costs in
fiscal 2001. Additionally, as a result of our discontinuation of
the development of the polycarbonate Matrix product line, we
incurred $7.6 million in asset write-offs, including
equipment ($7.0 million) and related commitments
($0.6 million). We recognized a gain on the sale of land in
North America of $5.8 million associated with facility
closures in fiscal 2001. Also included in special charges is
$17.0 million related to the impairment of goodwill
associated with a prior acquisition of a lens manufacturing
business. This impairment was recorded pursuant to
SFAS 121, Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of, as we decided
to discontinue and cease operations of this lens manufacturing
business and completely close-down the facility. For more
information, see Note 13 of Notes to Consolidated Financial
Statements.

22



---



##### Table of Contents



Details of the special charges are as follows:

|                                                        |          |            |        |            |   |            |        |          |   |            |       |              |   |         |        |         |   |   |        |         |   |   |       |        |   |   |        |       |  |   |        |         |  
|------------------------------------------------------- | -------- | ---------- | ------ | ---------- | - | ---------- | ------ | -------- | - | ---------- | ----- | ------------ | - | ------- | ------ | ------- | - | - | ------ | ------- | - | - | ----- | ------ | - | - | ------ | ----- |  | - | ------ | ------- | -
|                                                        |          |            |        |            |   |            |        |          |   |            |       | Asset        |   |         |        |        
|                                                        |          |            |        |            |   |            |        |          |   |            |       | Write-offs   |   |         |        |        
|                                                        |          |            |        |            |   |            |        |          |   |            |       | Associated   |   |         |        |        
|                                                        |          |            |        |            |   |            |        |          |   |            |       | with         |   |         |        |        
|                                                        |          |            |        |            |   | Accounts   |        |          |   |            |       | Discontinued |   | Gain on |        |        
|                                                        |          | Workforce  |        | Mold       |   | Receivable |        | Facility |   | Goodwill   |       | Product      |   | Sale of |        |        
|                                                        |          | Reductions |        | Write-offs |   | Write-offs |        | Closures |   | Impairment |       | Line         |   | Land    |        | Total  
|                                                        |          |            |        |            |   |            |        |          |   |            |       |              |   |         |        |        
|Strategic initiative liability as of
    March 31, 1999 |          | $          | 1,751  |            |   | $          |       |          |   | $          |      |              |   | $       |       |         |   | $ |       |         |   | $ |      |        |   | $ |       |       |  | $ | 1,751  |        
|Fiscal 2000 Charge to operations                        |          |            | 6,650  |            |   |            | 10,200 |          |   |            | 2,500 |              |   |         | 2,969  |         |   |   |       |         |   |   |      |        |   |   |       |       |  |   | 22,319 |        
|Utilized:                                               |          |            |        |            |   |            |        |          |   |            |       |              |   |         |        |         |   |   |        |         |   |   |       |        |   |   |        |       |  |   |        |        
|                                                        | Non-cash |            |        |           |   |            |        | (10,200  | ) |            |       | (2,500       | ) |         |        | (2,969  | ) |   |        |        |   |   |       |       |   |   |        |      |  |   |        | (15,669 | )
|                                                        | Cash     |            |        | (2,133     | ) |            |        |         |   |            |       |             |   |         |        |        |   |   |        |        |   |   |       |       |   |   |        |      |  |   |        | (2,133  | )
|                                                        |          |            |        |            |   |            |        |          |   |            |       |              |   |         |        |         |   |   |        |         |   |   |       |        |   |   |        |       |  |   |        |        
|Strategic initiative liability as of
    March 31, 2000 |          |            | 6,268  |            |   |            |       |          |   |            |      |              |   |         |       |         |   |   |       |         |   |   |      |        |   |   |       |       |  |   | 6,268  |        
|Fiscal 2001 Charge to operations                        |          |            | 19,681 |            |   |            | 24,256 |          |   |            |      |              |   |         | 28,235 |         |   |   | 17,057 |         |   |   | 7,690 |        |   |   | (5,854 | )     |  |   | 91,065 |        
|Utilized:                                               |          |            |        |            |   |            |        |          |   |            |       |              |   |         |        |         |   |   |        |         |   |   |       |        |   |   |        |       |  |   |        |        
|                                                        | Non-cash |            |        |           |   |            |        | (24,256  | ) |            |       |             |   |         |        | (25,286 | ) |   |        | (17,057 | ) |   |       | (7,690 | ) |   |        |      |  |   |        | (74,289 | )
|                                                        | Cash     |            |        | (12,267    | ) |            |        |         |   |            |       |             |   |         |        | (510    | ) |   |        |        |   |   |       |       |   |   |        | 5,854 |  |   |        | (6,923  | )
|                                                        |          |            |        |            |   |            |        |          |   |            |       |              |   |         |        |         |   |   |        |         |   |   |       |        |   |   |        |       |  |   |        |        
|Strategic initiative liability as of
    March 31, 2001 |          |            | 13,682 |            |   |            |       |          |   |            |      |              |   |         | 2,439  |         |   |   |       |         |   |   |      |        |   |   |       |       |  |   | 16,121 |        
|Fiscal 2002 Charge to operations                        |          |            |       |            |   |            |       |          |   |            |      |              |   |         | 28     |         |   |   |       |         |   |   |      |        |   |   |       |       |  |   | 28     |        
|Utilized:                                               |          |            |        |            |   |            |        |          |   |            |       |              |   |         |        |         |   |   |        |         |   |   |       |        |   |   |        |       |  |   |        |        
|                                                        | Non-cash |            |        |           |   |            |        |         |   |            |       |             |   |         |        | (767    | ) |   |        |        |   |   |       |       |   |   |        |      |  |   |        | (767    | )
|                                                        | Cash     |            |        | (8,812     | ) |            |        |         |   |            |       |             |   |         |        | (274    | ) |   |        |        |   |   |       |       |   |   |        |      |  |   |        | (9,086  | )
|                                                        |          |            |        |            |   |            |        |          |   |            |       |              |   |         |        |         |   |   |        |         |   |   |       |        |   |   |        |       |  |   |        |        
|Strategic initiative liability as of
    March 31, 2002 |          | $          | 4,870  |            |   | $          |       |          |   | $          |      |              |   | $       | 1,426  |         |   | $ |       |         |   | $ |      |        |   | $ |       |       |  | $ | 6,296  |        
|                                                        |          |            |        |            |   |            |        |          |   |            |       |              |   |         |        |         |   |   |        |         |   |   |       |        |   |   |        |       |  |   |        |        

At March 31, 2002, our strategic initiatives
have been substantially completed and we do not anticipate any
additional special charges related to our current strategic
initiatives. The liability associated with the strategic
initiatives as of March 31, 2002 is included in accrued
liabilities. We anticipate that substantially all of the accrued
liability will be paid in fiscal 2003 and will be funded
primarily through cash provided by operations.

Operating expenses have declined by
$30.4 million from fiscal 1999. Additionally, unit costs
have decreased significantly from fiscal 1999. We expect to
generate additional savings in fiscal 2003 as a result of the
actions taken in fiscal 2001 and 2002.

During fiscal 2002, we incurred transition costs
of $20.6 million associated with executing our strategic
initiatives. These costs were primarily related to interim
workforce expenses, manufacturing variances and out-of-pocket
expenditures that we expect to be eliminated due to the
completion of our strategic initiatives. Of these costs,
$12.2 million are reflected in cost of sales,
$0.7 million in research and development expenses,
$3.3 million in selling and marketing expenses and
$4.4 million in general and administrative expenses. During
the second half of fiscal 2001, we incurred transition costs of
$17.5 million associated with executing our strategic
initiatives. These costs were primarily related to interim
workforce expenses, manufacturing variances and out-of-pocket
expenditures. Of these costs, $11.2 million are reflected
in cost of sales, $0.8 million in research and development
expenses, $2.4 million in selling and marketing expenses
and $3.1 million in general and administrative expenses.

23



---



##### Table of Contents



Net Interest
Expense and Foreign Currency Gain/(Loss).

Our net interest expense totaled
$28.6 million for fiscal 2002 compared to
$23.5 million for fiscal 2001, an increase of
$5.1 million. The increase was due primarily to increased
average borrowing rates and increased borrowing levels in fiscal
2002 compared to fiscal 2001. In fiscal 2002, we recorded a net
foreign exchange gain of $1.9 million compared to a
$2.8 million net foreign exchange loss for fiscal 2001.
Exchange gains on external and intercompany notes of
$2.7 million were recorded in fiscal 2002 due primarily to
the strengthening of the U.S. Dollar to the Euro and the
weakening of the U.S. Dollar to the Brazilian Real and the
impact this had on our Euro denominated Senior Notes and
U.S. Dollar denominated notes with our Brazilian subsidiary.

Provision for
Income Taxes.

Our combined state, federal and foreign tax rate
was approximately 28.0% for fiscal 2002 compared to 32.0% for
fiscal 2001. We have net deferred tax assets on our balance
sheet as of March 31, 2002 amounting to approximately
$83.3 million. The utilization of these deferred tax assets
depends upon our ability to generate taxable income in the
future.

Minority
Interest.

Our minority interest income totaled
$1.1 million for fiscal 2002 compared to $0.3 million
for fiscal 2001, an increase of $0.8 million. The increase
was due primarily to increased losses during fiscal 2002 from
several of our joint venture entities whose results are included
in the consolidated statements of operations.

Extraordinary
Item.

In June 2000, we purchased $5.0 million of
our 6 7/8% Senior Notes due 2008. As a result, we recorded
an extraordinary gain of $1.5 million, net of tax of
$0.9 million, resulting from the difference between the
carrying value of the notes and the purchase price. The purchase
was funded by our credit facility and resulted in a decline in
net borrowings.

Management
Assessment of Operating Results

Management believes that fiscal 2002 and 2001
operating results are best understood when costs associated with
implementing our strategic initiatives and the impact of
currency devaluation in Brazil are excluded from recorded
operating results. In the following paragraphs, we present gross
profit and gross margin, operating expenses, operating income/
(loss), and net income/ (loss) as adjusted to exclude the
charges associated with our strategic initiatives, including the
transition costs associated with executing our strategic
initiatives, and the currency devaluation in Brazil. We consider
these measures to be useful as they provide an additional basis
upon which to evaluate our ability to fund our operations,
growth and other capital expenditures. However, these measures
are not indicators of performance under generally accepted
accounting principles and may not be comparable to information
reported by other companies. Further, these measures do not
replace gross profit, total operating expenses, operating income
(loss) and net income (loss) as indicators of our
operating performance or cash flow as a measure of liquidity.

Gross Profit and Gross Margin.In calculating gross profit, we
wrote-off $25.6 million of inventory in fiscal 2001 and
recorded transition costs of $12.2 million in fiscal 2002
and $11.2 million in fiscal 2001 associated with our
strategic initiatives. If these inventory write-offs and
transition costs were excluded, gross profit would have been
$226.5 million in fiscal 2002 and $232.7 million in
fiscal 2001, a decrease of 2.7%. Gross profit as a percentage of
net sales, or gross margin, after adjusting for the inventory
write-offs and transition costs, increased marginally to 42.8%
for fiscal 2002 from 42.7% for fiscal 2001.

Operating Expenses.In fiscal 2002, transition costs of $8.4 million were
included in operating expenses. In fiscal 2001, special charges
of $91.1 million, transition costs of $6.3 million and
charges associated with the devaluation of the Brazilian Real of
$3.1 million were included in operating expenses. If these
special charges, transition costs and currency devaluation were
excluded from operating expenses, operating expenses would

24



---



##### Table of Contents



have been $154.1 million in fiscal 2002 and
$169.7 million in fiscal 2001, a decrease of
$15.6 million or 9.2%. Operating expenses as a percentage
of net sales, excluding the special charges, transition costs
and currency devaluation were 29.1% for fiscal 2002 as compared
to 31.1% for fiscal 2001.


Operating Income/(Loss).Operating income, excluding transition
costs of $20.6 million in fiscal 2002 and excluding special
charges of $91.1 million, transition costs of
$17.5 million, Brazilian Real currency devaluation of
$3.1 million and inventory write-offs of $25.6 million
in fiscal 2001, would have been $72.3 million in fiscal
2002 and $63.0 million in fiscal 2001, an increase of
$12.4 million, or 20.7%.

Net Income/(Loss).In fiscal 2002, if the transition
costs of $20.6 million and net foreign exchange gains on
external and intercompany notes of $2.7 million, net of the
related tax effect, were excluded, our net income would have
been $32.0 million. In fiscal 2001, if the special charges
of $91.1 million, transition costs of $17.5 million,
inventory write-offs of $25.6 million, amortization of goodwill
of $6.6 million, foreign currency devaluation charge of
$3.1 million, and extraordinary gain of $1.5 million
and associated tax benefit of $45.6 million were excluded,
our net income would have been $30.3 million. As a result,
our adjusted net income increased $1.7 million, or 5.6%,
from fiscal 2001 to fiscal 2002.

Fiscal 2001 Compared to Fiscal 2000

Net
Sales.

Our net sales were $545.4 million in fiscal
2001, reflecting an increase of $2.0 million or 0.4% from
$543.4 million in fiscal 2000. Using constant exchange
rates, the percentage increase was 5.5%. The increase in net
sales was primarily due to an increase in net sales in the
European and Rest of World regions offset in part by a decrease
in net sales in the North American region. Net sales in the
European region increased despite slowdowns in the United
Kingdom and Germany. This sales growth represents significant
market share gains across the continent. These gains are
attributable to strong sales of progressive lenses, particularly
AO Compact, strengthened sales and marketing strategies and the
robust relationships developed by our prescription laboratories
with customers in Italy, France and Belgium. Net sales in the
Rest of World region increased as a result of the continued
market recovery in Asia and South America, partially offset by
lower sales in China and Southeast Asia. The sales decline in
the North American region occurred mostly in the second quarter
due to temporarily limited distribution opportunities as a
result of competitors acquisitions of independent
processing laboratories. Net sales performances by region were
as follows:



| |   |                                                       
| | - | ------------------------------------------------------
| |  | North America decreased by $12.7 million or
    4.9%; 
|
| |  | Europe increased by $3.9 million or 2.2%; and         
|
| |  | Rest of World increased by $10.8 million or
    10.2%.

Using constant exchange rates, the regional
performances were as follows:



| |   |                                  
| | - | ---------------------------------
| |  | North America decreased by 4.8%; 
|
| |  | Europe increased by 13.6%; and   
|
| |  | Rest of World increased by 15.1%.

Our value-added products accounted for
$359.4 million or 68% of net lens sales in fiscal 2001
compared to $344.5 million or 68% of net lens sales in
fiscal 2000. This increase was led by growth in polycarbonate
lens sales with a year over year increase of $6.6 million
or 27% and increased sales in Finalite of $5.3 million.

Gross Profit
and Gross Margin.

Our gross profit totaled $195.9 million for
fiscal 2001 compared to gross profit of $233.1 million for
fiscal 2000, a decrease of $37.2 million or 16.0%. Gross
profit as a percentage of net sales, or gross margin, decreased
to 35.9% for fiscal 2001 from 42.9% for fiscal 2000. Fiscal 2001
gross profit was adversely impacted by the underabsorption of
overhead of $7.4 million caused by reduced production
levels and product mix changes. In

25



---



##### Table of Contents



calculating gross profit, we wrote-off inventory
of $25.6 million and $7.2 million in fiscal 2001 and
2000, respectively, and recorded transition costs related to out
strategic initiatives of $11.2 million in fiscal 2001.


Operating
Expenses.

Our operating expenses in fiscal 2001 totaled
$270.2 million compared to $211.3 million for fiscal
2000. Operating expenses included special charges of
$91.1 million in fiscal 2001 and $22.3 million in
fiscal 2000. We also recorded $6.3 million of transition
costs related to our strategic initiatives in fiscal 2001.
Research and development expenses were $14.9 million or
2.7% of net sales in fiscal 2001 and were $20.0 million or
3.7% of net sales for fiscal 2000. The $5.1 million or
25.5% decrease in our research and development expenses was due
in part to headcount reductions associated with the strategic
initiatives as well as the impact of the strong U.S. Dollar
against non-U.S. Dollar expenses. Selling and marketing expenses
decreased to $105.6 million or 19.4% of net sales in fiscal
2001 from $106.1 million or 19.5% of net sales in fiscal
2000, despite increased costs associated with the initial launch
of Contour Optics and SOLA Technologies in fiscal 2001. Our
general and administrative expenses were $52.0 million in
fiscal 2001 and $57.0 million in fiscal 2000, a decrease of
$5.0 million or 8.8%. As a percentage of net sales, general
and administrative expenses decreased to 9.5% for fiscal 2001
compared to 11.6% for fiscal 2000. Included in general and
administrative expenses are charges associated with the
devaluation of the Brazilian Real of $3.1 million in fiscal
2001 and $0.3 million in fiscal 2000. Also included in
fiscal 2000 general and administrative expenses is a
$1.3 million charge related to the write-off of accounts
receivable due to the bankruptcy of a customer in North America.
The decrease in our general and administrative expenses
primarily relates to headcount reductions associated with the
strategic initiatives as well as additional reductions in
overall spending levels.

Primarily as a result of our strategic
initiatives, which commenced in the third quarter of fiscal
1999, we recorded pretax special charges of $91.1 million
in fiscal 2001. We incurred $19.7 million of expense
associated with workforce reductions in North America, Europe
and Australia. Included in the workforce reductions were
780 employees from manufacturing, 91 employees from
sales and marketing, 75 employees from administration, and
46 employees from research and development. At
March 31, 2001, $14.5 million cash had been paid
related to workforce reductions incurred since fiscal 1999. The
special charges include $24.3 million related to the
write-off of molds, which were discontinued as a result of our
efforts to standardize product specifications on a global basis.
Also, we continued to transfer high-volume production to
low-cost manufacturing locations and to consolidate
manufacturing expertise into fewer production facilities. As a
result, we incurred special charges of $28.2 million
related to redundant equipment write-offs and facility closure
costs in fiscal 2001. Additionally, as a result of our
discontinuation of the development of the polycarbonate Matrix
product line, we incurred $7.6 million in asset write-offs,
including equipment ($7.0 million) and related commitments
($0.6 million). We recognized a gain on the sale of land in
North America of $5.8 million associated with facility
closures in fiscal 2001. Also included in special charges is
$17.0 million related to the impairment of goodwill
associated with a prior acquisition of a lens manufacturing
business. This impairment was recorded pursuant to SFAS 121,
Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of, as we decided to
discontinue and cease operations of this lens manufacturing
business and completely close-down the facility. For more
information, see Note 13 of Notes to Consolidated Financial
Statements.

In fiscal 2000, primarily during the fourth
quarter, we recorded pretax special charges of
$22.3 million. We commenced consolidation of our Mexican
manufacturing operations in fiscal 1999 and completed the
consolidation in fiscal year 2000. Included in the Mexican
manufacturing facilities consolidation charge of
$4.0 million are write-offs of molds ($1.4 million)
and costs associated with combining the two manufacturing
operations ($2.6 million). The special charge amount
includes $6.7 million relating to workforce reductions in
North America, Europe and Australia. Included in the workforce
reductions were 143 employees from manufacturing, 19
employees from sales and marketing, 19 employees from
administration and 9 employees from research and
development. We recorded a charge of $2.5 million for
provision against collection of accounts receivable in Asia as a
result of the economic slow-down in the region during fiscal
1999. During fiscal 2000, we commenced the transfer of
high-volume production to low-cost manufacturing locations and

26



---



##### Table of Contents



the consolidation of certain manufacturing
expertise into fewer production facilities. As a result, we
incurred charges of $8.8 million related to the write-off
of molds and $0.3 million related to facility closure costs.


Net Interest
Expense and Foreign Currency Gain/(Loss).

Our net interest expense totaled
$23.5 million for fiscal 2001 compared to
$19.3 million for fiscal 2000, an increase of
$4.2 million. The increase was due primarily to increased
borrowing rates, waiver fees and borrowing levels in fiscal 2001
compared to fiscal 2000.

Provision for
Income Taxes.

Our combined state, federal and foreign tax rate
was approximately 32.0% for fiscal 2001 compared to 83.9% for
fiscal 2000.. We had net deferred tax assets on our balance
sheet as of March 31, 2001 amounting to approximately
$46.7 million.

Minority
Interest.

Our minority interest income totaled
$0.3 million for fiscal 2001 compared to $0.6 million
for fiscal 2000, a decrease of $0.3 million. The decrease
was due primarily to lower operating losses incurred during
fiscal 2001 by several of our joint venture entities whose
results are included in the consolidated statements of
operations.

Extraordinary
Item.

In June 2000, we purchased $5.0 million of
our 6 7/8% Senior Notes due 2008. As a result, we recorded
an extraordinary gain of $1.5 million, net of tax of
$0.9 million, resulting from the difference between the
carrying value of the notes and the purchase price. The purchase
was funded by our credit facility and resulted in a decline in
net borrowings.

Management
Assessment of Operating Results

Management believes that fiscal 2001 and 2000
operating results are best understood when costs associated with
implementing our strategic initiatives and the impact of
currency devaluation in Brazil are excluded from recorded
operating results. In the following paragraphs, we present gross
profit and gross margin, operating expenses, operating income/
(loss), and net income/ (loss) as adjusted to exclude the
charges associated with our strategic initiatives, including the
transition costs associated with executing our strategic
initiatives, the currency devaluation in Brazil and accounts
receivable write-offs due to a customer bankruptcy. We consider
these measures to be useful as they provide an additional basis
upon which to evaluate our ability to fund our operations,
growth and other capital expenditures. However, these measures
are not indicators of performance under generally accepted
accounting principles and may not be comparable to information
reported by other companies. Further, these measures do not
replace gross profit, total operating expenses, operating income
(loss) and net income (loss) as indicators of our
operating performance or cash flow as a measure of liquidity.

Gross Profit and Gross Margin.In calculating gross profit, we
wrote-off $25.6 million of inventory in fiscal 2001 and
$7.2 million of inventory in fiscal 2000 and recorded
$11.3 million of transition costs in fiscal 2001 associated
with our strategic initiatives. If these inventory write-offs
and transition costs were excluded, gross profit would have been
$232.8 million in fiscal 2001 and $240.3 million in
fiscal 2000, a decrease of 3.1%. Gross profit as a percentage of
net sales, or gross margin, after adjusting for the inventory
write-offs and transition costs, decreased to 42.7% for fiscal
2001 from 44.2% for fiscal 2000. The gross margin decrease was
principally due to continued underabsorption of overhead of
$7.4 million caused by reduced production levels and
product mix changes. We experience price competition, which can
be severe in certain markets, particularly for our standard
products.

Operating Expenses.In fiscal 2001, special charges of
$91.1 million, transition costs of $6.3 million and
charges associated with the devaluation of the Brazilian Real of
$3.1 million were included in operating expenses. In fiscal
2000, special charges of $22.3 million, Brazilian Real
devaluation charges of $0.3 million

27



---



##### Table of Contents



and charges of $1.3 million related to the
write-off of accounts receivable due to the bankruptcy of a
customer in North America were included in operating expenses.
If these special charges, transition costs, currency devaluation
and receivable write-offs were excluded from operating expenses,
operating expenses would have been $169.7 million in fiscal
2001 and $187.4 million in fiscal 2000, a decrease of
$17.7 million or 9.4%. Operating expenses, excluding the
special charges, transition costs, currency devaluation and
receivable write-offs for fiscal 2001 as a percentage of net
sales were 31.1% as compared to 34.5% for fiscal 2000.


Operating Income/(Loss).Operating income, excluding the
special charges of $91.1 million, transition costs of
$17.5 million, inventory write-offs of $25.6 million,
and currency devaluation charges of $3.1 million in fiscal
2001 and excluding special charges of $22.3 million,
inventory write-offs of $7.2 million, currency devaluation
of $0.3 million and accounts receivable write-offs of
$1.3 million in fiscal 2000, would have been
$63.0 million in fiscal 2001 and $52.9 million in
fiscal 2000, an increase of $10.1 million, or 19.1%.

Net Income/(Loss).In fiscal 2001, if the special charges
of $91.1 million, transition costs of $17.5 million,
inventory write-offs of $25.6 million, foreign currency
devaluation charge of $3.1 million, extraordinary gain of
$1.5 million and associated taxes of $43.6 million
were excluded, our net income would have been
$25.7 million. In fiscal 2000, if the special charges of
$22.3 million, inventory write-offs of $7.2 million,
foreign currency devaluation charge of $0.3 million,
receivable write-offs of $1.3 million and associated taxes
of $9.1 million were excluded, our net income would have
been $22.7 million. As a result, our adjusted net income
increased $3.0 million, or 13.3%, from fiscal 2000 to
fiscal 2001.

Liquidity and Capital Resources

Our operating activities generated
$21.9 million in cash in fiscal 2002 compared to
$31.8 million in fiscal 2001 and $23.5 million in
fiscal 2000. The decrease in cash flows from operations in
fiscal 2002 resulted from the reduction in liabilities
associated with strategic initiatives and financing costs
associated with debt refinancings. The increase in cash flows
from operations in fiscal 2001 compared to fiscal 2000 was
primarily the result of decreased investments in working capital.

Our inventories as a percentage of annualized net
sales for fiscal 2002, fiscal 2001, and fiscal 2000 were 15.0%,
16.2%, and 23.2%, respectively. The decrease in fiscal 2002 was
a result of the strategic initiatives implemented during fiscal
2001 to reduce inventory levels. The decrease in fiscal 2001 was
a result of the strategic initiatives and $25.6 million
inventory write-off. Accounts receivable as a percentage of
annualized net sales for fiscal 2002, fiscal 2001, and fiscal
2000 were 20.9%, 21.8%, and 21.9%, respectively. The decrease in
fiscal 2002 was a result of improved collections. Fiscal 2001
was consistent with fiscal 2000.

During fiscal 2002, net cash expended on
investing activities amounted to $15.6 million. Included in
this amount was $17.1 million of capital expenditures and
$5.9 million related to investments in molds, offset in
part, by proceeds from the disposal of a $1.2 million trade
investment and $5.5 million from the sale of a building in
Petaluma, California. During fiscal 2001, net cash expended on
investing activities amounted to $37.6 million. Included in
this amount was $20.9 million of capital expenditures,
$15.4 million for the acquisition of Oracle Lens
Manufacturing Corporation, a polycarbonate lens manufacturer in
Rhode Island, and $2.5 million for the acquisition of the
remaining 65% interest in a wholesale laboratory group located
in Australia and New Zealand. Partially offsetting these
expenditures was $6.4 million of net proceeds received from
the sale of land in Petaluma, California. During fiscal 2000,
net cash expended on investing activities amounted to
$32.8 million. Of this amount, $20.1 million
represented capital expenditures, $5.6 million related to
investment in a joint venture in India and other trade
investments, and $4.1 million was for the acquisition of a
wholesale laboratory in Portugal in December 1999.

We anticipate capital expenditures, including
molds, of approximately $31 to $36 million in fiscal 2003.

Our net cash provided by financing activities
amounted to $36.2 million in fiscal 2002, primarily as a
result of the net impact of our issuance of 11% Senior Notes,
the proceeds of which were primarily used to repay our credit
facility. Net cash provided by financing activities amounted to
$13.9 million in fiscal 2001, primarily from borrowings on
our credit facilities. Cash outflows in fiscal 2001 included
$8.2 million related to a stock buy back under our stock
repurchase program. Additionally, in the first quarter of fiscal
2001, we

28



---



##### Table of Contents



purchased $5.0 million of our 6 7/8%
Senior Notes due 2008 for $2.7 million, resulting in an
extraordinary gain of $1.5 million, net of tax. Net cash
provided by financing activities amounted to $7.1 million
in fiscal 2000, primarily from borrowings on our credit
facilities.


On April 17, 2001, we completed the sale of
205 million
($182.0 million at date of sale) of 11% Senior Notes due
March 15, 2008 through a private placement to qualified
institutional buyers pursuant to Rule 144A and to persons
outside of the United States in compliance with
Regulation S. The notes are senior unsecured obligations
and rank equally with all of our existing and future unsecured
debt. Interest on the notes is payable semi-annually on each
September 15 and March 15.

We may redeem these Senior Notes in whole or in
part, at any time, on or after March 15, 2005, at a
redemption price equal to 100% of their principal amount plus a
premium declining ratably to par plus accrued and unpaid
interest and liquidation damages, if any. Prior to
March 15, 2004, we may redeem up to 35% of the original
aggregate principal amount of these Senior Notes with the
proceeds of qualified equity offerings at a redemption price of
111% of their principal amount plus accrued and unpaid interest
and liquidation damages, if any. The indenture governing the
notes contains certain covenants that, among other things, limit
our ability to incur additional indebtedness or liens, make
investments, sell assets, pay dividends or make other
distributions.

In addition to our outstanding 6 7/8% Senior
Notes and 11% Senior Notes, our foreign subsidiaries maintain
local credit facilities to provide credit for overdraft, working
capital and some fixed asset investment purposes. As of
March 31, 2002, the total borrowing capacity available to
our foreign subsidiaries under such local facilities was
approximately $13.6 million, of which $0.2 million had
been utilized.

On July 26, 2001, we entered into a
three-year $45 million secured revolving credit facility
(Credit Agreement) maturing on July 27, 2004.
Borrowings under the Credit Agreement may be made as either
U.S. Dollar Alternate Base Rate (ABR) loans or
Eurodollar loans. ABR loans bear interest at a rate per annum
equal to the greater of (a) the Prime Rate in effect on
such day, or (b) the Federal Funds Effective Rate in effect
on such day plus 0.5%, plus in either case, an applicable
percentage based on our adjusted leverage ratio. The Eurodollar
loans bear interest at a rate per annum equal to the LIBOR Rate
plus an applicable percentage based on our adjusted leverage
ratio. At March 31, 2002, there was no debt outstanding
under this agreement and the borrowing base amounted to
$43.6 million.

The Credit Agreement contains a number of
covenants, including, among others, covenants restricting us and
our subsidiaries with respect to the incurrence of indebtedness,
the creation of liens, the making of certain investments and
loans, the payment of dividends, and our ability to enter into
certain transactions with affiliates. In addition, the Credit
Agreement requires us to maintain certain interest coverage, net
worth and leverage ratios and places certain restrictions on
capital expenditures. As of March 31, 2002, we were in
compliance with all covenants.

In connection with the Credit Agreement, we
entered into a Security Agreement that grants a security
interest in and pledges the rights to certain of our assets,
including domestic accounts receivable, domestic inventory, and
65% of the pledged stock of certain significant foreign
subsidiaries, for the payment and performance of our obligations
under the Credit Agreement.

In order to continue our operations and meet our
significant liquidity requirements, we must achieve profitable
operations or obtain additional funds through equity or debt
financing, bank financing, and other sources. We believe that
our existing cash balances, foreign credit facilities,
internally generated funds and other potential financing
alternatives will be sufficient to meet our capital, operating
and debt service requirements for at least the next twelve
months. If we are unable to generate adequate cash flow from
sales of our products, we may need to seek additional sources of
capital. However, we cannot be certain that we will be able to
obtain additional debt or equity financing on terms acceptable
to us, or at all. If adequate funds are not available, we could
be required to delay development or commercialization of certain
products, or reduce the marketing, customer support, or other
resources devoted to product development. Accordingly, our
failure to obtain sufficient funds on acceptable terms when
needed could have a material adverse effect on our business,
results of operations and financial condition.

29



---



##### Table of Contents



Contractual Obligations and Commercial
Commitments

The following table summarizes our contractual
obligations at March 31, 2002, and the effect these
obligations are expected to have on our liquidity and cash flow
in future periods:

|                                         |  |                |         |      |  |      |        |      |  |      |       |            |  |   |       |  |  |   |       |  |  |   |         | 
|---------------------------------------- |  | -------------- | ------- | ---- |  | ---- | ------ | ---- |  | ---- | ----- | ---------- |  | - | ----- |  |  | - | ----- |  |  | - | ------- | 
|Contractual Obligations                  |  | Total          |         | 2003 |  | 2004 |        | 2005 |  | 2006 |       | Thereafter
|                                         |  |                |         |      |  |      |        |      |  |      |       |           
|                                         |  |               
|                                         |  | (In thousands)
|Notes payable                            |  | $              | 170     |      |  | $    | 170    |      |  | $    |      |            |  | $ |      |  |  | $ |      |  |  | $ |        | 
|Long-term debt, including capital leases |  |                | 9,182   |      |  |      | 4,140  |      |  |      | 1,661 |            |  |   | 1,070 |  |  |   | 1,020 |  |  |   | 1,291   | 
|Senior notes                             |  |                | 273,203 |      |  |      |       |      |  |      |      |            |  |   |      |  |  |   |      |  |  |   | 273,203 | 
|Operating leases                         |  |                | 10,312  |      |  |      | 2,965  |      |  |      | 2,600 |            |  |   | 1,829 |  |  |   | 1,236 |  |  |   | 1,682   | 
|Unconditional purchase obligations       |  |                | 4,092   |      |  |      | 4,092  |      |  |      |      |            |  |   |      |  |  |   |      |  |  |   |        | 
|                                         |  |                |         |      |  |      |        |      |  |      |       |            |  |   |       |  |  |   |       |  |  |   |         | 
|Total contractual obligations            |  | $              | 296,959 |      |  | $    | 11,367 |      |  | $    | 4,261 |            |  | $ | 2,899 |  |  | $ | 2,256 |  |  | $ | 276,176 | 
|                                         |  |                |         |      |  |      |        |      |  |      |       |            |  |   |       |  |  |   |       |  |  |   |         | 

As of March 31, 2002, we had no debt
outstanding under our Bank Credit Agreement. We have two standby
letters of credit amounting to $2.7 million, of which
$2.1 million expires April 23, 2003 and
$0.6 million expires May 31, 2003.

Currency Exchange Rates

As a result of our worldwide operations, currency
exchange rate fluctuations tend to affect our results of
operations and financial position. The principal effect of
currency exchange rates on our results of operations and
financial position is the impact on our Euro-denominated debt
and translation adjustments for subsidiaries where the local
currency is the functional currency. Translation adjustments for
functional local currencies have been recorded to
shareholders equity.

Certain countries have been determined to be
hyperinflationary in fiscal 2002 as defined under the provisions
of Emerging Issues Task Force (EITF) Issue No. D-55,
Determining a Highly Inflationary Economy under FASB
Statement No. 52and EITF Issue No. D-56,
Accounting for a Change in Functional Currency and Deferred
Taxes When an Economy Becomes Highly Inflationary.Accordingly, the results of our entities located in those
countries are being accounted for in accordance with the
provisions of these pronouncements.

Because a portion of our debt and associated
interest is non-U.S. Dollar denominated, we may hedge
against certain currency fluctuations by entering into currency
swaps or forward contracts. Since July 27, 2001, we have
transacted four foreign exchange contracts to hedge our interest
expense exposure associated with the semi-annual coupon payments
due September 15, 2001, March 15, 2002,
September 15, 2002 and March 15, 2003 on our
205 million
11% Notes. In addition, we have entered into other foreign
exchange contracts to hedge portions of our accounts payable
exposure. As of March 31, 2002, we had the
September 15, 2002 and March 15, 2003 foreign exchange
contracts, in addition to the other foreign exchange contracts,
outstanding as described above. We do not hold derivative
financial instruments for speculative or trading purposes.

Seasonality

Our business is somewhat seasonal, with fiscal
third quarter results generally weaker than the other three
quarters as a result of lower sales during the holiday season.
Fiscal fourth quarter results are generally the strongest.

Inflation

Inflation continues to affect our cost of the
goods and services that we use. The competitive environment in
many markets limits our ability to recover higher costs through
increased selling prices, and we are subject to price erosion in
many of our standard product lines. We seek to mitigate the
adverse effects of inflation through cost containment and
productivity and manufacturing process improvements. For a
description of the

30



---



##### Table of Contents



effects of inflation on our reported revenues and
profits and the measures taken by us in response to inflationary
conditions, see Currency Exchange Rates above.


European Union Conversion to the
Euro

We had instituted a Euro conversion
team in preparation for the conversion of twelve member states
of the European Monetary Union by January 1, 2002 to a
common currency, the Euro. The financial impact of
the conversion to a Euro based currency was not material to our
consolidated financial position, results of operations or cash
flows.

Impact of Recently Issued Accounting
Standards

We adopted SFAS No. 133 Accounting for
Derivative Instruments and Hedging Activities, as amended by
SFAS No. 137 and 138, as of April 1, 2001. SFAS
No. 133 requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial
position and measures those instruments at fair value. It
further provides criteria for derivative instruments to be
designated as fair value, cash flow and foreign currency hedges
and establishes respective accounting standards for reporting
changes in the fair value of the instruments. Since
July 27, 2001, we have transacted four foreign exchange
contracts to hedge our interest expense exposure associated with
the semi-annual coupon payments due September 15, 2001,
March 15, 2002, September 15, 2002 and March 15,
2003 on our
205 million
11% Notes. In addition, we have entered into other foreign
exchange contracts to hedge portions of our accounts payable
exposure. As of March 31, 2002, we had the
September 15, 2002 and March 15, 2003 foreign exchange
contracts, in addition to the other foreign exchange contracts,
outstanding as described above. We recognize the gain or loss on
our foreign exchange contracts in the period incurred. The
transition adjustments upon adoption of SFAS No. 133 were
not material. We do not hold derivative financial instruments
for speculative or trading purposes.

In July 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 141 Business
Combinations,which establishes financial accounting and
reporting for business combinations and supersedes Accounting
Principles Board (APB) Opinion No. 16,
Business Combinations,and FASB Statement No. 38,
Accounting for Preacquisition Contingencies of Purchased
Enterprises.It requires that all business combinations in
the scope of this Statement are to be accounted for using one
method, the purchase method. The provisions of this Statement
apply to all business combinations initiated after June 30,
2001, and also apply to all business combinations accounted for
using the purchase method for which the date of acquisition is
July 1, 2001 or later. We have adopted SFAS No. 141
with the first quarter of fiscal 2002, and the adoption of SFAS
No. 141 had no material impact on our financial reporting
and related disclosures.

In July 2001, the FASB issued SFAS No. 142
Goodwill and Other Intangible Assets, which establishes
financial accounting and reporting for acquired goodwill and
other intangible assets and supersedes APB Opinion No. 17,
Intangible Assets.It addresses how intangible assets
that are acquired individually or with a group of other assets
(but not those acquired in a business combination) should be
accounted for in financial statements upon their acquisition,
and after they have been initially recognized in the financial
statements. We have elected to early adopt SFAS No. 142
beginning with the first quarter of fiscal 2002 and have
disclosed the impact of adopting SFAS No. 142 on our
consolidated financial statements in Note 4 of Notes to the
Consolidated Financial Statements.

In August 2001, the FASB issued SFAS No. 144
Accounting for the Impairment or Disposal of Long-Lived
Assets, which establishes financial accounting and reporting
for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Ofand APB Opinion No. 30, Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions.In addition, SFAS No. 144
amends Accounting Research Bulletin No. 51, Consolidated
Financial Statements.SFAS No. 144 addresses the
accounting for a segment of a business accounted for as a
discontinued operation not previously addressed by SFAS
No. 121. In addition, SFAS No. 144 also resolves
significant implementation issues related to SFAS No. 121.
The provisions of this Statement are effective starting with
fiscal years beginning after December 15, 2001. We believe
that the adoption of SFAS No. 144 will have no material
impact on our financial reporting and related disclosures.

31



---



##### Table of Contents



In April 2002, the FASB issued SFAS 145
Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS
13, and Technical Corrections. SFAS 145 rescinds FASB
Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement,
FASB Statement No. 64, Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements, as well as FASB Statement
No. 44, Accounting for Intangible Assets of Motor
Carriers.This Statement amends FASB Statement No. 13,
Accounting for Leases, to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the
required accounting for certain lease modifications that have
economic effects that are similar to sale-leaseback
transactions. This Statement also amends other existing
authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability
under changed conditions. The provisions of SFAS 145 will be
adopted during fiscal year 2003. We do not anticipate that
adoption of this statement will have a material impact on our
consolidated balance sheets or consolidated statements of
operations.

In May 2000, the Emerging Issues Task Force
(EITF) issued EITF Issue No. 00-14, Accounting for
Certain Sales Incentives.EITF Issue No. 00-14
addresses the recognition, measurement, and income statement
classification for sales incentives that a vendor voluntarily
offers to customers (without charge), which the customer can use
in, or exercise as a result of, a single exchange transaction.
Sales incentives that fall within the scope of EITF Issue
No. 00-14 include offers that a customer can use to receive
a reduction in the price of a product or service at the point of
sale. The EITF agreed to change the transition date for
Issue 00-14, dictating that a company should apply this
consensus no later than its annual or interim financial
statements for the periods beginning after December 15,
2001. In June 2001, the EITF issued EITF Issue No. 00-25,
Vendor Income Statement Characterization of Consideration
Paid to a Reseller of the Vendors Products, effective
for periods beginning after December 15, 2001. EITF Issue
No. 00-25 addresses whether consideration from a vendor to
a reseller is an adjustment of the selling prices of the
vendors products and, therefore, should be deducted from
revenue when recognized in the vendors statement of
operations or a cost incurred by the vendor for assets or
services received from the reseller and, therefore, should be
included as a cost or expense when recognized in the
vendors statement of operations. In September of 2001, the
EITF issued EITF Issue No. 01-09, Accounting for
Consideration Given by Vendor to a Customer or a Reseller of the
Vendors Products, which is a codification of EITF
Issues No. 00-14, No. 00-25 and No. 00-22
Accounting for Points and Certain Other Time- or
Volume-Based Sales Incentive Offers and Offers for Free Products
or Services to be Delivered in the Future.The adoption of
the elements pertaining to EITF Issue No. 00-25 and 01-09
did not have a material impact on our consolidated financial
position or results of operations.

Risk Factors

Certain of the matters discussed in this report
or in the information incorporated by reference may constitute
forward-looking statements. Forward-looking statements can
generally be identified by the use of forward-looking
terminology such as believes, expects,
may, will, should,
seeks, approximately,
intends, plans, estimates,
or anticipates or the negative of these terms or
other comparable terminology, or by discussions of strategy,
plans or intentions. Statements contained in this report that
are not historical facts are forward-looking statements. Without
limiting the generality of the preceding statement, all
statements in this report concerning or relating to estimated
and projected earnings, margins, costs, expenditures, cash
flows, growth rates and financial results are forward-looking
statements. In addition, we, through our senior management, from
time to time make forward-looking public statements concerning
our expected future operations and performance and other
developments. These forward-looking statements are necessarily
estimates reflecting our best judgment based upon current
information and involve a number of risks and uncertainties.
Other factors may affect the accuracy of these forward-looking
statements and our actual results may differ materially from the
results anticipated in these forward-looking statements. While
it is impossible to identify all relevant factors, factors that
could cause actual results to differ materially from those
estimated by us include, but are not limited to, those factors
or conditions described below, as well as changes in the
regulation of the spectacle lens industry at either or both of
the federal and state levels, competitive pressures in the
spectacle lens industry and our response to these factors, and
general conditions in the economy and capital markets.

32



---



##### Table of Contents



All subsequent written and oral forward-looking
statements attributable to SOLA and persons acting on our behalf
are qualified in their entirety by the cautionary statements
contained in this section and elsewhere in this report.

Risks Relating to Sola and the
Industry

We operate in the highly competitive
spectacle lens industry, and we may not be able to compete
effectively with entities with more established operating
histories and greater financial resources.

We operate in the highly competitive spectacle
lens industry. We compete primarily on the basis of customer
service, quality and breadth of product offerings, innovation
and price. The spectacle lens industry is characterized by price
competition, which can be severe in some of our markets,
particularly for standard products. We attempt, to the extent
possible, to counter competition on the basis of price by
focusing on providing a rapid response to orders, maintaining
high fill rates, developing differentiated new products and
educating processing laboratories and eyecare practitioners on
the benefits of our lenses and coatings. Our competitors may
develop products or services that are more effective or less
expensive than our products or that could render certain of our
products less competitive. Since recently developed products
comprise a substantial portion of our sales, our performance and
future growth are dependent upon our continuing ability to
develop and market new products.

Some of our competitors have significantly
greater financial resources than we do to fund expansion and
research and development. Within a particular market, certain of
our competitors may enjoy a home-country advantage
over foreign competition. We also face competition from a number
of our principal competitors, such as Essilor and Hoya, that are
vertically integrated with processing laboratories to a greater
extent than we are. This integration limits the number of
independent processing laboratories to which we can market
products. Since their acquisition by Essilor and Hoya, these
laboratories have decreased the purchase of our products. Our
sales to Essilor and Hoya owned laboratories were approximately
3.5% of net sales in fiscal 2002. We are vertically integrated
in Europe and Asia, but not in the United States.

We are subject to certain risks associated
with our foreign operations.

We have manufacturing and distribution sites in
three major regions: North America (including Mexico), Europe
and Rest of World (comprised primarily of Australia, Asia and
South America). Approximately 58% of our net sales in the fiscal
year ended March 31, 2002 were derived from the sale of
products outside the United States. As a result, a significant
portion of our sales and operations are subject to the risks
inherent in international operations, including:



| |   |                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | developments in the foreign political and
    economic environment may have an adverse effect on operations in
    those countries;                                                                                            
|
| |  | tax rates in certain foreign countries may exceed
    those in the United States and foreign earnings may be subject
    to withholding requirements or the imposition of tariffs,
    exchange controls or other restrictions;
|
| |  | we may find it difficult to manage a large
    organization spread throughout various countries, including
    staffing and managing foreign operations;                                                                       
|
| |  | we may have difficulty enforcing agreements and
    collecting receivables through certain foreign legal systems;                                                                                                              
|
| |  | foreign customers may have longer payment cycles
    than customers in the United States; and                                                                                                                                  
|
| |  | we may find it difficult to comply with a variety
    of foreign laws and regulations.                                                                                                                                         

As we continue to expand our business globally,
our success will be dependent, in part, on our ability to
effectively manage these and other risks. These and other
factors could have a material adverse effect on our
international operations or our business as a whole. Our cash
flow is comprised of a variety of currencies. Although we may
enter into currency swap agreements with financial institutions
to reduce our exposure to

33



---



##### Table of Contents



fluctuations in foreign currency values relative
to our debt obligations, these hedging transactions, if entered
into, will not eliminate that risk entirely. As a result of our
worldwide operations, currency exchange rate fluctuations tend
to affect our results of operations and financial position. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Currency
Exchange Rates and  Inflation.


We may not be able to continually reduce
manufacturing costs.

To maintain and/or strengthen our competitive
position within the spectacle lens industry, we must continually
reduce our product manufacturing costs and operating expenses.
In addition to normal cost reduction activities, we have
initiated product migration and standardization activities and
reduced the number of people employed worldwide. These
reductions were necessary to help offset price decreases,
inflationary pressures and changes in product and regional mix.
To the extent our cost reduction activities are unsuccessful, in
part or in full, our ability to compete may be significantly
impacted.

We concentrate a large part of our
manufacturing operations in Tijuana, Mexico.

Currently, approximately 46% of our manufacturing
operations are based in three facilities in Tijuana, Mexico. A
fire, flood, earthquake, war, work stoppage, supply shortage or
disruption, adverse government action or other disaster or
condition could result in a loss of production capabilities and,
accordingly, impede our ability to meet our customers
requirements.

We must continue to develop new and
enhanced products.

We are continually developing new and enhanced
products in an effort to develop incremental sales and improved
gross margins. Our ability to develop new and enhanced products
successfully will be a significant factor in our ability to grow
and remain competitive. Some of our products may become
obsolete, and we may not achieve the technological advances
necessary for us to remain competitive. We are also subject to
the risks generally associated with new product introductions,
such as lack of market acceptance and delays in product
development. Our results may be affected by our ability to
generate sales from new products as anticipated and the costs of
such introductions.

We compete against alternative technologies
and treatments that provide a substitute for spectacle
lenses.

Spectacle lenses compete with other methods of
vision correction, including laser surgery and contact lenses.
As these technologies evolve, they may provide more competition
to the spectacle lens business and lead to declines in our net
sales.

We conduct all of our foreign operations
through subsidiaries and the payment of dividends by these
entities may be restricted.

We conduct all of our foreign operations through
subsidiaries. These operations contribute significantly to our
sales and profitability. The payment of dividends and the making
of loans and advances to us by our subsidiaries are in many
instances subject to statutory restrictions, are contingent upon
the results of operations of those subsidiaries and are subject
to various business considerations. Dividends and other payments
to us from subsidiaries in certain jurisdictions are subject to
legal restrictions and may have adverse tax consequences to us.
Management reviews the need for cash distributions to us from
our foreign subsidiaries on a case by case basis. If the need
for cash distributions from the subsidiaries should arise in the
future, there can be no assurance that the subsidiaries will be
permitted to make such cash distributions without legal
restrictions or adverse tax consequences to us.

We are dependent on a small number of
suppliers for raw materials.

Most of the raw materials used in our products
are readily available from a number of suppliers at competitive
prices, and we have not experienced any significant shortages in
obtaining raw materials. While there are currently multiple
suppliers of polycarbonate and monomer raw materials, we
purchase over 50% of those materials from three suppliers. The
loss of any of these suppliers, or a significant decrease in the
supply

34



---



##### Table of Contents



of polycarbonate or monomer, would require us to
obtain these raw materials elsewhere. If we were unable to
obtain polycarbonate or monomer from other suppliers at
acceptable prices, we might realize lower margins and experience
difficulty in meeting our customers requirements. In
addition, our photochromic lenses are processed by a third party
using technology that is proprietary to it.


We are dependent upon the North American
chain retail channel.

Distribution to national chain retail, super
optical retail stores and retail buying groups is a growing
distribution channel for spectacle lenses. We believe this
distribution channel will continue to be important to sustain
growth and profitability. While we are currently well positioned
in this distribution channel through relationships with key
retailers, these relationships could terminate or these
retailers could choose one or more of our competitors to provide
them with lenses in the future. Additionally, these retailers
could choose to process and distribute lenses themselves rather
than purchasing the lenses from us or any other third party.

We may be adversely affected by
environmental and safety regulations to which we are
subject.

We must comply with U.S. and foreign
environmental laws and regulations concerning emissions to the
air, waste water discharges and the generation, handling,
storage, transportation and disposal of hazardous wastes, and
with other federal, state and foreign laws and regulations. We
believe that we possess all material permits and licenses
necessary for the continuing operation of our business and
believe that our operations are in substantial compliance with
the terms of all applicable environmental laws. We cannot assure
you that we will operate at all times in complete compliance
with all such requirements. We could be subject to potentially
significant fines and penalties for any noncompliance that may
occur. It is impossible to predict accurately what effect these
laws and regulations will have on us in the future.

Our success depends on our key personnel
and we may not be able to retain sufficient qualified
personnel.

Our success depends in part on our ability to
attract personnel with spectacle industry experience. We may
face competition in recruiting this personnel and accordingly
experience difficulty in growing and succeeding. The loss of the
services of this personnel or the ability to retain such
personnel in the future could hinder the implementation of our
business strategy. We do not carry key man insurance on our
senior management team.

Our substantial level of indebtedness could
adversely affect our financial condition.

We have substantial indebtedness that may limit
our ability to respond to market conditions (including our
ability to satisfy capital expenditure requirements) or to meet
our contractual or financial obligations. In addition, the debt
instruments governing our indebtedness are subject to covenants
that could limit our ability to conduct our business.
Furthermore, our ability to satisfy our obligations depends on
our future performance. Our future performance is subject to
prevailing economic conditions and to financial, business and
other factors, including factors beyond our control. Interest on
our $100 million aggregate principal amount of 6 7/8%
Senior Notes due 2008 and
205 million
aggregate principal amount of 11% Notes due 2008 will be payable
in cash semi-annually through and including March 15, 2008.
Although we believe that cash flow from operations will be
sufficient to meet all of our debt service requirements and to
fund our capital expenditure requirements, we cannot guarantee
that this will be the case.

Our Charter and By-laws contain
antitakeover provisions that could make the acquisition of SOLA
more difficult.

Certain provisions of Delaware law and our
certificate of incorporation and by-laws could have the effect
of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control
of SOLA. For example, our by-laws include advance notice
procedures for stockholders to nominate candidates for election
as directors as well as to submit proposals for consideration at
stockholders meetings. We have also adopted a shareholder
rights plan that could have the effect of delaying or hindering
a possible takeover of SOLA. In addition, we are subject to the
anti-takeover provisions of Section 203 of the

35



---



##### Table of Contents



Delaware General Corporation Law, which could
have the effect of delaying or preventing a change in control of
SOLA.


Risks Relating to our Common Stock

The public market for our common stock has
been and may continue to be volatile.

The market price of our common stock is highly
volatile and could fluctuate significantly in response to
various factors, including:



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | actual or anticipated variations in our quarterly
    operating results;                
|
| |  | announcements of new products by us or our
    competitors;                             
|
| |  | changes in financial estimates by securities
    analysts;                              
|
| |  | trends in our business environment, including
    competitive and pricing pressures; and
|
| |  | general market conditions and other factors.                                            

In addition, the stock markets have experienced
extreme price and volume fluctuations that have affected the
market prices of equity securities. These fluctuations have
often been unrelated or disproportionate to operating
performance. These broad market factors may materially affect
the trading price of our common stock. General economic,
political and market conditions like recessions and interest
rate fluctuations may also have an adverse effect on the market
price of our common stock.

Our quarterly operating results may
vary.

Our quarterly operating results have varied in
the past, and we expect that our quarterly operating results
will continue to vary in future periods depending on a number of
factors, including seasonal variances in demand for our
products, the cost of product introductions, changes in product
mix, our ability to control costs, capital expenditures, working
capital requirements and other factors described in this
Risk Factors section of this report. For example,
all other factors aside, our results are generally weakest in
the third quarter as a result of lower sales during the holiday
season and strongest in the fourth quarter. For these and other
reasons, we may not meet the earnings estimates of securities
analysts or investors, and our stock price could suffer.




Item 7A.     Quantitative
and Qualitative Disclosures about Market Risk

Quantitative Disclosures

We are exposed to market risks inherent in our
operations, primarily related to interest rate risk and currency
risk. These risks arise from transactions and operations entered
into in the normal course of business.

Interest Rate Risk.We are subject to interest rate risk
on our existing long-term debt and any future financing
requirements. During fiscal 2002, fixed rate debt consisted
primarily of outstanding balances on Senior Notes.

36



---



##### Table of Contents



The following table presents the future principal
cash flows and weighted average interest rates expected on our
existing long-term debt instruments. Fair values have been
determined based on quoted market prices as of March 31,
2002:

|                |                                |                                               |   |        |   |        |   |        |   |        |   |            |   |       |   |            |   |  |   |      |   |  |   |         |   |  |   |         |   |  |   |         | 
|--------------- | ------------------------------ | --------------------------------------------- | - | ------ | - | ------ | - | ------ | - | ------ | - | ---------- | - | ----- | - | ---------- | - |  | - | ---- | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | 
|                |                                |                                              
|                |                                | Expected Maturity Date (as of March 31, 2002)
|                |                                |                                              
|                |                                | Fiscal                                        |   | Fiscal |   | Fiscal |   | Fiscal |   | Fiscal |   |           
|                |                                | 2003                                          |   | 2004   |   | 2005   |   | 2006   |   | 2007   |   | Thereafter |   | Total |   | Fair Value
|                |                                |                                               |   |        |   |        |   |        |   |        |   |            |   |       |   |           
|                |                                |                                              
|                |                                | (Dollars in thousands)                       
|Long-term debt: |                                |                                               |   |        |   |        |   |        |   |        |   |            |   |       |   |            |   |  |   |      |   |  |   |         |   |  |   |         |   |  |   |        
|                | Fixed rate debt                |                                               | $ | 3,635  |   |        | $ | 1,207  |   |        | $ | 644        |   |       | $ | 631        |   |  | $ | 699  |   |  | $ | 273,487 |   |  | $ | 280,303 |   |  | $ | 283,815 | 
|                | Weighted average interest rate |                                               |   | 6.28   | % |        |   | 5.74   | % |        |   | 4.29       | % |       |   | 4.49       | % |  |   | 2.39 | % |  |   | 9.53    | % |  |   | 9.44    | % |  |   |         | 
|Long-term debt: |                                |                                               |   |        |   |        |   |        |   |        |   |            |   |       |   |            |   |  |   |      |   |  |   |         |   |  |   |         |   |  |   |        
|                | Variable rate debt             |                                               | $ | 505    |   |        | $ | 454    |   |        | $ | 426        |   |       | $ | 389        |   |  | $ | 282  |   |  | $ | 26      |   |  | $ | 2,082   |   |  | $ | 2,082   | 
|                | Weighted average interest rate |                                               |   | 4.34   | % |        |   | 4.30   | % |        |   | 4.30       | % |       |   | 4.28       | % |  |   | 4.24 | % |  |   | 1.25    | % |  |   | 4.26    | % |  |   |         | 

Currency Rate Risk.We are exposed to currency exchange
rate fluctuations on our
205 million
11% Notes, due 2008. At March 31, 2002, we had outstanding
two forward exchange contracts to hedge our interest expense
exposure associated with the semi-annual coupon payments due
September 15, 2002 and March 15, 2003 on our
205 million
11% Notes. Our subsidiaries primarily operate in foreign markets
and predominantly have their local currencies as their
functional currencies. These subsidiaries do not have third
party borrowings in currencies other than their local
currencies. Accordingly, there are no quantitative disclosures
related to borrowings by our subsidiaries.

The following table presents the future principal
cash flows and weighted average interest rates expected on the
#205 million 11% Notes, due 2008 as well as the contract
amount and weighted average settlement price of the outstanding
forward exchange contracts. Fair values have been determined
based on quoted market prices as of March 31, 2002:

|                            |                                |                                               |   |             |  |             |  |             |  |             |  |            |  |       |  |            |  |  |  |   |  |  |   |         |   |  |   |         |   |  |   |         | 
|--------------------------- | ------------------------------ | --------------------------------------------- | - | ----------- |  | ----------- |  | ----------- |  | ----------- |  | ---------- |  | ----- |  | ---------- |  |  |  | - |  |  | - | ------- | - |  | - | ------- | - |  | - | ------- | 
|                            |                                |                                              
|                            |                                | Expected Maturity Date (as of March 31, 2002)
|                            |                                |                                              
|                            |                                | Fiscal 2003                                   |   | Fiscal 2004 |  | Fiscal 2005 |  | Fiscal 2006 |  | Fiscal 2007 |  | Thereafter |  | Total |  | Fair Value
|                            |                                |                                               |   |             |  |             |  |             |  |             |  |            |  |       |  |           
|                            |                                |                                              
|                            |                                | (Dollars in thousands)                       
|Long-term debt:             |                                |                                               |   |             |  |             |  |             |  |             |  |            |  |       |  |            |  |  |  |   |  |  |   |         |   |  |   |         |   |  |   |        
|                            | Fixed rate debt                |                                               |   |            |  |             |  |            |  |             |  |           |  |       |  |           |  |  |  |  |  |  | $ | 178,432 |   |  | $ | 178,432 |   |  | $ | 187,353 | 
|                            | Weighted average interest rate |                                               |   |            |  |             |  |            |  |             |  |           |  |       |  |           |  |  |  |  |  |  |   | 11      | % |  |   | 11      | % |  |   |         | 
|Forward exchange contracts: |                                |                                               |   |             |  |             |  |             |  |             |  |            |  |       |  |            |  |  |  |   |  |  |   |         |   |  |   |         |   |  |   |        
|                            | Contract amounts Due 4/12/02   |                                               | $ | 6,419       |  |             |  |            |  |             |  |           |  |       |  |           |  |  |  |  |  |  |   |        |   |  | $ | 6,419   |   |  | $ | 6,499   | 
|                            | Contract amounts Due 4/25/02   |                                               | $ | 420         |  |             |  |            |  |             |  |           |  |       |  |           |  |  |  |  |  |  |   |        |   |  | $ | 420     |   |  | $ | 413     | 
|                            | Contract amounts Due 5/24/02   |                                               | $ | 420         |  |             |  |            |  |             |  |           |  |       |  |           |  |  |  |  |  |  |   |        |   |  | $ | 420     |   |  | $ | 413     | 
|                            | Contract amounts Due 6/25/02   |                                               | $ | 420         |  |             |  |            |  |             |  |           |  |       |  |           |  |  |  |  |  |  |   |        |   |  | $ | 420     |   |  | $ | 414     | 
|                            | Contract amounts Due 7/25/02   |                                               | $ | 420         |  |             |  |            |  |             |  |           |  |       |  |           |  |  |  |  |  |  |   |        |   |  | $ | 420     |   |  | $ | 415     | 
|                            | Contract amounts Due 8/23/02   |                                               | $ | 420         |  |             |  |            |  |             |  |           |  |       |  |           |  |  |  |  |  |  |   |        |   |  | $ | 420     |   |  | $ | 416     | 
|                            | Contract amount due 9/15/02    |                                               | $ | 9,834       |  |             |  |            |  |             |  |           |  |       |  |           |  |  |  |  |  |  |   |        |   |  | $ | 9,834   |   |  | $ | 9,765   | 
|                            | Contract amounts Due 9/25/02   |                                               | $ | 420         |  |             |  |            |  |             |  |           |  |       |  |           |  |  |  |  |  |  |   |        |   |  | $ | 420     |   |  | $ | 417     | 
|                            | Contract amounts Due 10/25/02  |                                               | $ | 420         |  |             |  |            |  |             |  |           |  |       |  |           |  |  |  |  |  |  |   |        |   |  | $ | 420     |   |  | $ | 420     | 

37



---



##### Table of Contents



|                                  |  |                                               |       |             |  |             |   |             |  |             |   |            |  |       |   |            |  |  |   |  |  |  |   |  |  |   |       |  |  |   |       | 
|--------------------------------- |  | --------------------------------------------- | ----- | ----------- |  | ----------- | - | ----------- |  | ----------- | - | ---------- |  | ----- | - | ---------- |  |  | - |  |  |  | - |  |  | - | ----- |  |  | - | ----- | 
|                                  |  |                                              
|                                  |  | Expected Maturity Date (as of March 31, 2002)
|                                  |  |                                              
|                                  |  | Fiscal 2003                                   |       | Fiscal 2004 |  | Fiscal 2005 |   | Fiscal 2006 |  | Fiscal 2007 |   | Thereafter |  | Total |   | Fair Value
|                                  |  |                                               |       |             |  |             |   |             |  |             |   |            |  |       |   |           
|                                  |  |                                              
|                                  |  | (Dollars in thousands)                       
|Contract amounts Due 11/25/02     |  | $                                             | 420   |             |  |             |  |             |  |             |  |            |  |       |  |            |  |  |  |  |  |  |  |  |  | $ | 420   |  |  | $ | 422   | 
|Contract amounts Due 12/24/02     |  | $                                             | 420   |             |  |             |  |             |  |             |  |            |  |       |  |            |  |  |  |  |  |  |  |  |  | $ | 420   |  |  | $ | 423   | 
|Contract amounts Due 1/14/03      |  | $                                             | 420   |             |  |             |  |             |  |             |  |            |  |       |  |            |  |  |  |  |  |  |  |  |  | $ | 420   |  |  | $ | 421   | 
|Contract amount due 3/15/03       |  | $                                             | 9,832 |             |  |             |  |             |  |             |  |            |  |       |  |            |  |  |  |  |  |  |  |  |  | $ | 9,832 |  |  | $ | 9,737 | 
|Weighted average settlement price |  |                                               | .9430 |             |  |             |  |             |  |             |  |            |  |       |  |            |  |  |  |  |  |  |  |  |  |   | .9430 |  |  |   |       | 

Qualitative Disclosures

Interest Rate Risk.Our primary interest rate risk
exposures relate to:



| |   |                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our ability to pay or refinance long-term
    borrowings at maturity at market rates;                                                        
|
| |  | The impact of interest rate movements on our
    ability to meet interest expense requirements and financial
    covenants; and              
|
| |  | The impact of interest rate movements on our
    ability to obtain adequate financing to fund future operations
    or business acquisitions.

We manage interest rate risk on our outstanding
long-term borrowings through the use of fixed rate debt. While
we cannot predict our ability to refinance existing debt, or the
impact interest rate movements might have on existing debt, we
evaluate our financial position on an ongoing basis. Because the
majority of our debt is fixed rate in nature, an increase of 10%
in interest rates would not have a material increase in our
interest expense for the next 12 months.

Currency Rate Risk.Our primary currency rate risk
exposures relate to:



| |   |                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our global operations, whereby approximately 58%
    of our revenues are derived from operations outside the United
    States, denominated in currencies other than the U.S. Dollar;                                                                                         
|
| |  | The ability of our operations to satisfy cash
    flow requirements of predominantly Euro and U.S. Dollar
    denominated long-term debt without the need to repatriate
    earnings and profits, which are denominated in currencies other
    than the Euro and U.S. Dollar;
|
| |  | Our investments in foreign subsidiaries being
    primarily directly from the U.S. parent, resulting in U.S.
    Dollar investments in foreign currency functional companies; and                                                                                             
|
| |  | The location of our operating subsidiaries in a
    number of countries that have seen significant exchange rate
    changes against the U.S. Dollar, primarily downward in recent
    years, such as Brazil, Mexico, China, Venezuela and other Asian
    countries.         

We manage our currency rate risks through a
variety of measures. In certain limited instances, subsidiaries,
after obtaining approval from our head office, will enter into
forward exchange contracts in connection with inter-company
purchases and sales of products. These contracts do not extend
longer than one year and are immaterial to the overall
operations of the group. Subsidiaries operating in high
inflation environments protect margins by methods that include
increasing prices monthly at a rate appropriate to cover
anticipated inflation, compounding interest charges on sales
invoices daily and holding cash balances in U.S. dollar
denominated accounts where possible. We disclose constant
exchange rate net sales performances in the aggregate, as well
as by region, in Managements Discussion and Analysis of
Financial Condition and Results of Operations. For more
information, see  Currency Exchange Rates.

38



---



##### Table of Contents






Item 8.Financial
Statements and Supplementary Data

The response to this item is submitted as a
separate section of this report. See Item 14.




Item 9.Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.




PART III




Item 10.     Directors
and Executive Officers of the Registrant

The following table sets forth information with
respect to the executive officers and directors of Sola as of
June 17, 2002.

|                    |  |     |    |          |  |                                                                                        
|------------------- |  | --- | -- | -------- |  | ---------------------------------------------------------------------------------------
|Name                |  | Age |    | Position
|                    |  |     |    |         
|Maurice J. Cunniffe |  |     | 69 |          |  | Chairman of the Board                                                                  
|Jeremy C. Bishop    |  |     | 52 |          |  | President and Chief Executive Officer, Director                                        
|Douglas D. Danforth |  |     | 79 |          |  | Director                                                                               
|A. William Hamill   |  |     | 54 |          |  | Director                                                                               
|Neil E. Leach       |  |     | 63 |          |  | Director                                                                               
|Hamish Maxwell      |  |     | 75 |          |  | Director                                                                               
|Jackson L. Schultz  |  |     | 76 |          |  | Director                                                                               
|Steven M. Neil      |  |     | 50 |          |  | Executive Vice President, Finance, Chief
    Financial Officer, Secretary and Treasurer
|Barry J. Packham    |  |     | 55 |          |  | Executive Vice President, Manufacturing and
    Logistics                              
|Mark Ashcroft       |  |     | 40 |          |  | President, Europe and Americas                                                         
|Adrian Walker       |  |     | 49 |          |  | Vice President, Regional Director, Asia                                                
|Karen Roberts       |  |     | 39 |          |  | Vice President, Product Development                                                    
|Simon Edwards       |  |     | 35 |          |  | Vice President, Research & Development                                                 
|Wayne Rockall       |  |     | 46 |          |  | Vice President, Regional Director, Australasia                                         
|Gaetano Sciuto      |  |     | 34 |          |  | Vice President, Sunlens Division                                                       

Maurice J. Cunniffe was appointed Chairman of the
Board of Directors in November 2000. He has been a director
since December 1996. He is Chairman and Chief Executive Officer
of A.O. Capital Corporation.

Jeremy C. Bishop was appointed Chief Executive
Officer and President and a director in April 2000. Prior to his
appointment, he served as President of the American Optical
business, a position held since our purchase of American Optical
Corporations ophthalmic business in June 1996. He joined
American Optical Corporation in November 1990 as Vice President
of European Operations.

Douglas D. Danforth has been a director since
December 1994. He was Chairman and Chief Executive Officer of
Westinghouse Electric Corporation from 1983 to 1987. He is a
director of Atlantic Express Transportation Corp and
Enivosource. He was a former director of Travelers, PNC Bank,
PPG Industries, Rubbermaid, and The Whirlpool Corporation. He
also served as Chairman and CEO of the Pittsburgh Pirates
Baseball Club from 1987 to 1994.

A. William Hamill has been a director since
December 1996. Mr. Hamill is President of H3 Companies LLC,
an investments and advisory firm. From 1999 until May 2001, he
served as Executive Vice President and Chief Financial Officer
of United Dominion Realty Trust, Inc. Prior to joining Union
Dominion, he served as Executive Vice President and Chief
Financial Officer of Union Camp Corporation, from June 1996 to
April 1999, and previously served as managing director of Morgan
Stanley & Co. Incorporated. He is a director of
NTELOS Inc.

39



---



##### Table of Contents



Neil E. Leach has been a director since November
2000. He is Chairman of the Board and Chief Executive Officer of
Barnies Coffee and Tea Company (formerly a division of
Sara Lee). He is Managing Director of Coastal Development
Associates LLC since 1987 and has founded and led a number of
companies both in and outside the optical industry including
Multifocal Rx Lens Laboratory Inc. and affiliated laboratories
for the past 43 years. He is also past Chairman of
Microtool and Instruments, Inc. and a director of
Intercontinental Bank, which was acquired by Bank of America.

Hamish Maxwell has been a director since December
1994. Mr. Maxwell was Chairman of the Executive Committee
of the Board of Directors of Philip Morris Companies Inc. from
September 1991 through April 1995 and was Chairman and Chief
Executive Officer of such company from 1984 to 1991. He was a
director of Bankers Trust Corp. from 1984 to 1999 and a director
of News Corporation from 1992 to 1997.

Jackson L. Schultz has been a director since
November 1995. Following a career in the United States Navy,
where he retired as a Captain, Mr. Schultz joined Wells
Fargo Bank in 1970, retiring in 1990 as Senior Vice President
responsible for Public and Governmental Affairs. He is a past
Director of the Bank of San Francisco and the Cooper Development
Company. He was a member of the Advisory Board to the United
States Navy Exchange Command, and also serves as Vice Chairman
and a Governor of Claremont McKenna College Rose Institute of
State and Local Government.

Steven M. Neil was appointed Executive Vice
President, Finance, Chief Financial Officer, Secretary and
Treasurer in October 1997. Prior to joining SOLA, Mr. Neil
was Vice President-Finance, Treasurer and Chief Financial
Officer of Perrigo Company from May 1995 to September 1997. He
also served as President of Perrigo International, Inc. from
July 1996. Mr. Neil served as Vice President-Controller of
Perrigo Company from January 1993 to May 1995. Prior to that
time he served as Controller and Chief Accounting Officer with
Applied Magnetics Corporation, where he also served in other
positions of increasing responsibility since 1983.

Barry J. Packham was appointed Executive Vice
President, Manufacturing and Logistics in May 2000. He joined
Sola as Vice President, Manufacturing Development in February
1993. Mr. Packham was Managing Director of Ceramic Fuel
Cells Ltd., a research and development joint venture consortium
in Melbourne, Australia, from 1991 to 1993 and formerly held
manufacturing and general management positions with Kodak and
Leigh-Mardon Pty. Ltd.

Mark Ashcroft was appointed President, American
Commercial Operations in January 2002. He also is Vice
President, Europe, a position he has held since his appointment
in October 1999. He joined us in August 1998 as Managing
Director of Sola UK, based in Birmingham, England. From 1994 to
1998, he served as a Director of Applied Chemicals International
Pty Ltd., with responsibility for Strategy and Market
development, based in Melbourne, Australia.

Adrian P. Walker was appointed Vice President,
Asia and Middle East in October 1999. He joined Sola as Regional
Director, Asia in November 1996. Mr. Walker held a number
of general management positions with subsidiaries of BTR plc.
from March 1980 to November 1996. He was most recently General
Manager of ACI Laminates and Insulations, based in Melbourne,
Australia from July 1995 to October 1996. From August 1992 to
July 1995 he was Managing Director of Dunlop Slazenger (Far
East), in Malaysia, and from April 1985 to July 1992 was General
Manager, Serck Services (Gulf) Ltd., in the United Arab Emirates.

Karen Roberts was appointed Vice President,
Product Development in September 2000. Prior to that time, she
served as Vice President, Product Development for American
Optical, our subsidiary previously based in Del Mar, California,
since 1998. She served as New Products Manager for Sola based in
Lonsdale, South Australia from June 1992 until May 1998.

Simon Edwards was appointed Vice President,
Research & Technology in August 2001. He served as Technical
Director of Research Laboratories of Australia from 1999 to
2001. Previous to that he had joined Sola in 1989 and served
with Sola in the role of Director of Optical Lens Design from
1996 until 1998.

Wayne Rockall was appointed Vice President,
Australasia upon his joining Sola in October 1999. From 1992 to
1999, he served as Commercial Director of United Distillers and
Vintners division of Diageo Plc., with

40



---



##### Table of Contents



responsibility for key accounts, in addition to
field sales training and development, customer service and
export.


Gaetano Sciuto was appointed Vice President,
Sunlens Division in July 2001. Prior to that time, he served as
General Manager of the Sunlens Division. From 1998 to 2000, he
served as Director for Sunlens European operations. From
1996 to 1998, he was Vice President of Sales and Marketing for
Lotto Sport U.S.A.

Section 16(a) Beneficial Ownership
Reporting Compliance

Information regarding Section 16(a)
reporting compliance is included under the caption
Section 16(a) Beneficial Ownership Reporting
Compliance in our proxy statement for the 2002 Annual
Meeting of Stockholders and is incorporated by reference herein.




Item 11.     Executive
Compensation

Information regarding executive and director
compensation is included under the captions Executive
Compensation and Director Compensation in our
proxy statement for the 2002 Annual Meeting of Stockholders and
is incorporated by reference herein.






|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

Information regarding security ownership is
included under the caption Ownership of SOLA Common
Stock in our proxy statement for the 2002 Annual Meeting
of Stockholders and is incorporated by reference herein.
Information regarding equity compensation plans is included
under the caption Equity Compensation Plan
Information in our proxy statement for the 2003 Annual
Meeting of Stockholders and is incorporated by reference herein.




Item 13.     Certain
Relationships and Related Transactions

Information regarding certain relationships and
related party transactions is included under the caption
Certain Transactions in our proxy statement for the
2002 Annual Meeting of Stockholders and is incorporated by
reference herein.

41



---



##### Table of Contents






PART IV




Item 14.     Exhibits,
Financial Statement Schedule and Reports on
Form 8-K

(a) Documents Filed as Part of this Report:

|                                                                                                      |                                   |     |    
|----------------------------------------------------------------------------------------------------- | --------------------------------- | --- | ---
|                                                                                                      | 1.  Financial Statements.         |     |    
|Report of PricewaterhouseCoopers LLP, Independent
    Accountants                                     |                                   | F-2
|Consolidated Balance Sheets as of March 31,
    2002 and 2001                                         |                                   | F-3
|Consolidated Statements of Operations for the
    years ended March 31, 2002, 2001 and 2000           |                                   | F-4
|Consolidated Statements of Shareholders
    Equity for the years ended March 31, 2002, 2001 and 2000 |                                   | F-5
|Consolidated Statements of Cash Flows for the
    years ended March 31, 2002, 2001 and 2000           |                                   | F-6
|Notes to Consolidated Financial Statements                                                            |                                   | F-7
|                                                                                                     
|                                                                                                      | 2.  Supplemental Information.     |     |    
|Quarterly Financial Data                                                                              |                                   | S-1
|                                                                                                     
|                                                                                                      | 3.  Financial Statement Schedule. |     |    
|Valuation and Qualifying Accounts                                                                     |                                   | S-2
|                                                                                                     
|                                                                                                      | 4.  List of Exhibits              |     | E-1

(b) Reports on Form 8-K:

None.

42



---



##### Table of Contents






SIGNATURES

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



| |                        
| | -----------------------
| | SOLA INTERNATIONAL INC.
| | (Registrant)           

Date: June 17, 2002

| |     |                  
| | --- | -----------------
| | By: | /s/STEVEN M. NEIL

| |                                               
| | ----------------------------------------------
| |                                               
| | Steven M. Neil                                
| | Executive Vice President, Finance,
    Chief  
| | Financial Officer, Secretary and
    Treasurer

POWER OF ATTORNEY

Each person whose signature appears below
hereby appoints Jeremy C. Bishop and Steven M. Neil and each of
them severally, acting alone and without the other, his true and
lawful attorney-in-fact with authority to execute in the name of
each such person, and to file with the Securities and Exchange
Commission, together with any exhibits thereto and other
documents therewith, any and all amendments to this Annual
Report on Form 10-K for the fiscal year ended
March 31, 2002 necessary or advisable to enable Sola
International, Inc. to comply with the Securities Exchange Act
of 1934, any rules, regulations and requirements of the
Securities and Exchange Commission in respect thereof, which
amendments may make such other changes in the report as the
aforesaid attorney-in-fact executing the same deems
appropriate.

Pursuant to the requirements of the Securities
Exchange Act of 1934, as amended, this Annual Report on
Form 10-K has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.

|                                           |  |                                                                                                                                          |  |              
|------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------- |  | -------------
|Signature                                  |  | Title                                                                                                                                    |  | Date         
|                                           |  |                                                                                                                                          |  |              
|                                          
|/s/ MAURICE J. CUNNIFFEMaurice J. Cunniffe |  | Chairman of the Board                                                                                                                    |  | June 17, 2002
|                                          
|/s/ JEREMY C. BISHOPJeremy C. Bishop       |  | President and Chief Executive Officer, Director
    (Principal Executive Officer)                                                        |  | June 17, 2002
|                                          
|/s/ STEVEN M. NEILSteven M. Neil           |  | Executive Vice President, Finance, Chief
    Financial Officer, Secretary and Treasurer (Principal Financial
    and Accounting Officer) |  | June 17, 2002
|                                          
|/s/ DOUGLAS D. DANFORTHDouglas D. Danforth |  | Director                                                                                                                                 |  | June 17, 2002
|                                          
|/s/ A. WILLIAM HAMILLA. William Hamill     |  | Director                                                                                                                                 |  | June 17, 2002

43



---



##### Table of Contents



|                                         |  |          |  |              
|---------------------------------------- |  | -------- |  | -------------
|Signature                                |  | Title    |  | Date         
|                                         |  |          |  |              
|                                        
|/s/ NEIL E. LEACHNeil E. Leach           |  | Director |  | June 17, 2002
|                                        
|/s/ HAMISH MAXWELLHamish Maxwell         |  | Director |  | June 17, 2002
|                                        
|/s/ JACKSON L. SCHULTZJackson L. Schultz |  | Director |  | June 17, 2002

44



---



##### Table of Contents



SOLA INTERNATIONAL INC.

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                      |  |      |     | 
|----------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                      |  | Page
|                                                                                                      |  |     
|Report of PricewaterhouseCoopers LLP, Independent
    Accountants                                     |  |      | F-2 | 
|Consolidated Balance Sheets as of March 31,
    2002 and 2001                                         |  |      | F-3 | 
|Consolidated Statements of Operations for the
    years ended March 31, 2002, 2001 and 2000           |  |      | F-4 | 
|Consolidated Statements of Shareholders
    Equity for the years ended March 31, 2002, 2001 and 2000 |  |      | F-5 | 
|Consolidated Statements of Cash Flows for the
    years ended March 31, 2002, 2001 and 2000           |  |      | F-6 | 
|Notes to Consolidated Financial Statements                                                            |  |      | F-7 | 
|Supplemental Information                                                                              |  |      | S-1 | 

F-1



---



##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
SOLA International Inc.:

In our opinion, the consolidated financial
statements listed in the index appearing under
Item 14(a)(1) present fairly, in all material respects, the
financial position of SOLA International Inc. and its
subsidiaries at March 31, 2002 and 2001, and the results of
their operations and their cash flows for each of the three
years in the period ended March 31, 2002 in conformity with
accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 14(a)(3)
presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related
consolidated financial statements. These financial statements
and the financial statement schedule are the responsibility of
the Companys management; our responsibility is to express
an opinion on these financial statements and the financial
statement schedule based on our audits. We conducted our audits
of these statements in accordance with auditing standards
generally accepted in the United States of America, which
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, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated
financial statements, the Company changed its method of
accounting for goodwill in fiscal year 2002, so as to comply
with the Statement of Financial Accounting Standard 142
Goodwill and Other Intangible Assets.

PRICEWATERHOUSECOOPERS LLP

San Jose, California


May 24, 2002

F-2



---



##### Table of Contents



SOLA INTERNATIONAL INC.

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                                                                                  |                                                                                                                                       |                                            |         |         |         |  |         |         |         | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------- | ------- |  | ------- | ------- | ------- | 
|                                                                                                                                                                                                                                  |                                                                                                                                       |                                           
|                                                                                                                                                                                                                                  |                                                                                                                                       | March 31,                                 
|                                                                                                                                                                                                                                  |                                                                                                                                       |                                           
|                                                                                                                                                                                                                                  |                                                                                                                                       | 2002                                       |         | 2001   
|                                                                                                                                                                                                                                  |                                                                                                                                       |                                            |         |        
|                                                                                                                                                                                                                                  |                                                                                                                                       |                                           
|                                                                                                                                                                                                                                  |                                                                                                                                       | (In thousands, except                     
|                                                                                                                                                                                                                                  |                                                                                                                                       | per share data)                           
|ASSETS                                                                                                                                                                                                                            |                                                                                                                                       |                                            |         |         |         |  |         |        
|Current assets:                                                                                                                                                                                                                   |                                                                                                                                       |                                            |         |         |         |  |         |        
|                                                                                                                                                                                                                                  | Cash and cash equivalents                                                                                                             |                                            | $       | 68,419  |         |  | $       | 26,149  |        
|                                                                                                                                                                                                                                  | Trade accounts receivable, less allowance for
    doubtful accounts of $8,395 and $9,201 at March 31, 2002
    and 2001, respectively |                                            |         | 114,993 |         |  |         | 123,478 |        
|                                                                                                                                                                                                                                  | Inventories, net                                                                                                                      |                                            |         | 82,586  |         |  |         | 91,302  |        
|                                                                                                                                                                                                                                  | Deferred taxes, current                                                                                                               |                                            |         | 18,584  |         |  |         | 24,508  |        
|                                                                                                                                                                                                                                  | Prepaids and other current assets                                                                                                     |                                            |         | 15,509  |         |  |         | 15,589  |        
|                                                                                                                                                                                                                                  |                                                                                                                                       |                                            |         |         |         |  |         |        
|                                                                                                                                                                                                                                  |                                                                                                                                       | Total current assets                       |         |         | 300,091 |  |         |         | 281,026 | 
|Property, plant and equipment, net                                                                                                                                                                                                |                                                                                                                                       |                                            | 164,465 |         |         |  | 156,151 |        
|Goodwill and other intangibles, net                                                                                                                                                                                               |                                                                                                                                       |                                            | 190,719 |         |         |  | 190,443 |        
|Deferred taxes, long-term                                                                                                                                                                                                         |                                                                                                                                       |                                            | 33,760  |         |         |  | 22,191  |        
|Other long-term assets                                                                                                                                                                                                            |                                                                                                                                       |                                            | 24,030  |         |         |  | 12,564  |        
|                                                                                                                                                                                                                                  |                                                                                                                                       |                                            |         |         |         |  |         |        
|                                                                                                                                                                                                                                  |                                                                                                                                       | Total assets                               |         | $       | 713,065 |  |         | $       | 662,375 | 
|                                                                                                                                                                                                                                  |                                                                                                                                       |                                            |         |         |         |  |         |        
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                                                                                                                                                                         
|Current liabilities:                                                                                                                                                                                                              |                                                                                                                                       |                                            |         |         |         |  |         |        
|                                                                                                                                                                                                                                  | Notes payable to banks                                                                                                                |                                            | $       | 170     |         |  | $       | 402     |        
|                                                                                                                                                                                                                                  | Current portion of long-term debt                                                                                                     |                                            |         | 4,140   |         |  |         | 4,076   |        
|                                                                                                                                                                                                                                  | Accounts payable                                                                                                                      |                                            |         | 68,546  |         |  |         | 63,578  |        
|                                                                                                                                                                                                                                  | Accrued liabilities                                                                                                                   |                                            |         | 43,470  |         |  |         | 45,919  |        
|                                                                                                                                                                                                                                  | Accrued payroll and related compensation                                                                                              |                                            |         | 25,390  |         |  |         | 32,323  |        
|                                                                                                                                                                                                                                  | Other current liabilities                                                                                                             |                                            |         | 1,288   |         |  |         | 2,918   |        
|                                                                                                                                                                                                                                  |                                                                                                                                       |                                            |         |         |         |  |         |        
|                                                                                                                                                                                                                                  |                                                                                                                                       | Total current liabilities                  |         |         | 143,004 |  |         |         | 149,216 | 
|Long-term debt, less current portion                                                                                                                                                                                              |                                                                                                                                       |                                            | 5,042   |         |         |  | 10,180  |        
|Bank debt                                                                                                                                                                                                                         |                                                                                                                                       |                                            |        |         |         |  | 150,000 |        
|Senior notes                                                                                                                                                                                                                      |                                                                                                                                       |                                            | 273,203 |         |         |  | 94,730  |        
|Deferred taxes, long-term                                                                                                                                                                                                         |                                                                                                                                       |                                            | 14,973  |         |         |  | 8,950   |        
|Other long-term liabilities                                                                                                                                                                                                       |                                                                                                                                       |                                            | 15,481  |         |         |  | 13,924  |        
|                                                                                                                                                                                                                                  |                                                                                                                                       |                                            |         |         |         |  |         |        
|                                                                                                                                                                                                                                  |                                                                                                                                       | Total liabilities                          |         |         | 451,703 |  |         |         | 427,000 | 
|                                                                                                                                                                                                                                  |                                                                                                                                       |                                            |         |         |         |  |         |        
|Commitments and contingencies (Notes 17 and
    19)                                                                                                                                                                               |                                                                                                                                       |                                            |         |         |         |  |         |        
|Shareholders equity:                                                                                                                                                                                                             |                                                                                                                                       |                                            |         |         |         |  |         |        
|Preferred stock, $0.01 par value; 5,000 shares
    authorized; no shares issued                                                                                                                                                   |                                                                                                                                       |                                            |        |         |         |  |        |        
|Common stock, $0.01 par value; 50,000 shares
    authorized; 24,938 shares issued as of March 31, 2002 and
    March 31, 2001, and 24,532 and 23,709 shares outstanding as
    of March 31, 2002 and March 31, 2001, respectively |                                                                                                                                       |                                            | 249     |         |         |  | 249     |        
|Additional paid-in capital                                                                                                                                                                                                        |                                                                                                                                       |                                            | 286,169 |         |         |  | 281,434 |        
|Retained earnings                                                                                                                                                                                                                 |                                                                                                                                       |                                            | 23,909  |         |         |  | 4,791   |        
|Cumulative other comprehensive loss                                                                                                                                                                                               |                                                                                                                                       |                                            | (46,329 | )       |         |  | (43,069 | )      
|Common stock in treasury, at cost  406
    and 1,229 shares at March 31, 2002 and March 31, 2001,
    respectively                                                                                                               |                                                                                                                                       |                                            | (2,636  | )       |         |  | (8,030  | )      
|                                                                                                                                                                                                                                  |                                                                                                                                       |                                            |         |         |         |  |         |        
|                                                                                                                                                                                                                                  |                                                                                                                                       | Total shareholders equity                 |         |         | 261,362 |  |         |         | 235,375 | 
|                                                                                                                                                                                                                                  |                                                                                                                                       |                                            |         |         |         |  |         |        
|                                                                                                                                                                                                                                  |                                                                                                                                       | Total liabilities and shareholders equity |         | $       | 713,065 |  |         | $       | 662,375 | 
|                                                                                                                                                                                                                                  |                                                                                                                                       |                                            |         |         |         |  |         |        

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

F-3



---



##### Table of Contents



SOLA INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                |                                                                                                        |                                       |         |         |         |      |         |          |         |   |         |         |         | 
|--------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ------------------------------------- | ------- | ------- | ------- | ---- | ------- | -------- | ------- | - | ------- | ------- | ------- | 
|                                                                |                                                                                                        |                                      
|                                                                |                                                                                                        | Year Ended March 31,                 
|                                                                |                                                                                                        |                                      
|                                                                |                                                                                                        | 2002                                  |         | 2001    |         | 2000
|                                                                |                                                                                                        |                                       |         |         |         |     
|                                                                |                                                                                                        |                                      
|                                                                |                                                                                                        | (In thousands, except per share data)
|Net sales                                                       |                                                                                                        | $                                     | 529,505 |         |         | $    | 545,432 |          |         | $ | 543,445 |        
|Cost of sales                                                   |                                                                                                        |                                       | 315,213 |         |         |      | 349,556 |          |         |   | 310,340 |        
|                                                                |                                                                                                        |                                       |         |         |         |      |         |          |         |   |         |        
|                                                                |                                                                                                        | Gross profit                          |         |         | 214,292 |      |         |          | 195,876 |   |         |         | 233,105 | 
|                                                                |                                                                                                        |                                       |         |         |         |      |         |          |         |   |         |        
|Research and development expenses                               |                                                                                                        |                                       | 13,053  |         |         |      | 14,857  |          |         |   | 20,010  |        
|Selling and marketing expenses                                  |                                                                                                        |                                       | 101,735 |         |         |      | 105,623 |          |         |   | 106,102 |        
|General and administrative expenses                             |                                                                                                        |                                       | 47,683  |         |         |      | 52,006  |          |         |   | 56,927  |        
|Amortization                                                    |                                                                                                        |                                       | 44      |         |         |      | 6,610   |          |         |   | 5,957   |        
|Special charges                                                 |                                                                                                        |                                       | 28      |         |         |      | 91,065  |          |         |   | 22,319  |        
|                                                                |                                                                                                        |                                       |         |         |         |      |         |          |         |   |         |        
|                                                                | Operating expenses                                                                                     |                                       |         | 162,543 |         |      |         | 270,161  |         |   |         | 211,315 |        
|                                                                |                                                                                                        |                                       |         |         |         |      |         |          |         |   |         |        
|                                                                |                                                                                                        | Operating income/(loss)               |         |         | 51,749  |      |         |          | (74,285 | ) |         |         | 21,790  | 
|Interest income                                                 |                                                                                                        |                                       | 2,302   |         |         |      | 2,123   |          |         |   | 1,451   |        
|Interest expense                                                |                                                                                                        |                                       | (30,875 | )       |         |      | (25,575 | )        |         |   | (20,760 | )      
|Foreign currency gain/(loss)                                    |                                                                                                        |                                       | 1,859   |         |         |      | (2,755  | )        |         |   | (1,416  | )      
|                                                                |                                                                                                        |                                       |         |         |         |      |         |          |         |   |         |        
|                                                                | Income/(loss) before benefit/(provision)for
    income taxes, minority interest and extraordinary item |                                       |         | 25,035  |         |      |         | (100,492 | )       |   |         | 1,065   |        
|Benefit/(provision) for income taxes                            |                                                                                                        |                                       | (7,010  | )       |         |      | 32,206  |          |         |   | (894    | )      
|Minority interest                                               |                                                                                                        |                                       | 1,093   |         |         |      | 287     |          |         |   | 570     |        
|                                                                |                                                                                                        |                                       |         |         |         |      |         |          |         |   |         |        
|                                                                | Income/(loss) before extraordinary item                                                                |                                       |         | 19,118  |         |      |         | (67,999  | )       |   |         | 741     |        
|Extraordinary item, net of tax                                  |                                                                                                        |                                       |        |         |         |      | 1,471   |          |         |   |        |        
|                                                                |                                                                                                        |                                       |         |         |         |      |         |          |         |   |         |        
|Net income/(loss)                                               |                                                                                                        | $                                     | 19,118  |         |         | $    | (66,528 | )        |         | $ | 741     |        
|                                                                |                                                                                                        |                                       |         |         |         |      |         |          |         |   |         |        
|Net income/(loss) per share 
    basic:                        |                                                                                                        |                                       |         |         |         |      |         |          |         |   |         |        
|                                                                | Net income/(loss) per share before extraordinary
    item                                              |                                       | $       | 0.79    |         |      | $       | (2.83    | )       |   | $       | 0.03    |        
|                                                                | Extraordinary item                                                                                     |                                       |         |        |         |      |         | 0.06     |         |   |         |        |        
|                                                                |                                                                                                        |                                       |         |         |         |      |         |          |         |   |         |        
|                                                                | Net income/(loss) per share  basic                                                                    |                                       | $       | 0.79    |         |      | $       | (2.77    | )       |   | $       | 0.03    |        
|                                                                |                                                                                                        |                                       |         |         |         |      |         |          |         |   |         |        
|Weighted average common shares outstanding                      |                                                                                                        |                                       | 24,067  |         |         |      | 24,049  |          |         |   | 24,887  |        
|                                                                |                                                                                                        |                                       |         |         |         |      |         |          |         |   |         |        
|Net income/(loss) per share 
    diluted:                      |                                                                                                        |                                       |         |         |         |      |         |          |         |   |         |        
|                                                                | Net income/(loss) per share before extraordinary
    item                                              |                                       | $       | 0.78    |         |      | $       | (2.83    | )       |   | $       | 0.03    |        
|Extraordinary item                                              |                                                                                                        |                                       |        |         |         |      | 0.06    |          |         |   |        |        
|                                                                |                                                                                                        |                                       |         |         |         |      |         |          |         |   |         |        
|                                                                | Net income/(loss) per share  diluted                                                                  |                                       | $       | 0.78    |         |      | $       | (2.77    | )       |   | $       | 0.03    |        
|                                                                |                                                                                                        |                                       |         |         |         |      |         |          |         |   |         |        
|Weighted average common and dilutive securities
    outstanding |                                                                                                        |                                       | 24,583  |         |         |      | 24,049  |          |         |   | 25,069  |        
|                                                                |                                                                                                        |                                       |         |         |         |      |         |          |         |   |         |        

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

F-4



---



##### Table of Contents



SOLA INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

|                                             |                                          |                                       |        |            |  |        |     |          |  |               |         |                |  |               |     |       |  |        |        |         |   |   |         |         |   |  |        |   |  |   |        |   |  |   |         |         |         |  
|-------------------------------------------- | ---------------------------------------- | ------------------------------------- | ------ | ---------- |  | ------ | --- | -------- |  | ------------- | ------- | -------------- |  | ------------- | --- | ----- |  | ------ | ------ | ------- | - | - | ------- | ------- | - |  | ------ | - |  | - | ------ | - |  | - | ------- | ------- | ------- | -
|                                             |                                          |                                       |        | Additional |  |        |     |          |  | Cumulative    |         |                |  |              
|                                             |                                          | Common Stock                          |        | Paid-in    |  | Equity |     |          |  | Other         |         | Treasury Stock |  | Total        
|                                             |                                          |                                       |        | Capital    |  | Loans  |     | Retained |  | Comprehensive |         |                |  | Shareholders
|                                             |                                          | Shares                                |        | Value      |  | Value  |     | Value    |  | Earnings      |         | Loss           |  | Shares        |     | Value |  | Equity
|                                             |                                          |                                       |        |            |  |        |     |          |  |               |         |                |  |               |     |       |  |       
|                                             |                                          |                                      
|                                             |                                          | (In thousands, except per share data)
|Balances, March 31, 1999                     |                                          |                                       | 24,867 |            |  | $      | 249 |          |  | $             | 280,525 |                |  | $             | (50 | )     |  | $      | 70,578 |         |   | $ | (18,940 | )       |   |  |        |   |  | $ |       |   |  | $ | 332,362 |        
|Comprehensive loss:                          |                                          |                                       |        |            |  |        |     |          |  |               |         |                |  |               |     |       |  |        |        |         |   |   |         |         |   |  |        |   |  |   |        |   |  |   |         |        
|                                             | Net income                               |                                       |        |            |  |        |     |          |  |               |         |                |  |               |     |       |  |        |        | 741     |   |   |         |         |   |  |        |   |  |   |        |   |  |   |         | 741     |        
|                                             | Foreign currency translation adjustments |                                       |        |            |  |        |     |          |  |               |         |                |  |               |     |       |  |        |        |         |   |   |         | (6,283  | ) |  |        |   |  |   |        |   |  |   |         | (6,283  | )      
|                                             |                                          |                                       |        |            |  |        |     |          |  |               |         |                |  |               |     |       |  |        |        |         |   |   |         |         |   |  |        |   |  |   |        |   |  |   |         |        
|                                             |                                          | Comprehensive loss                    |        |            |  |        |     |          |  |               |         |                |  |               |     |       |  |        |        |         |   |   |         |         |   |  |        |   |  |   |        |   |  |   |         |         | (5,542  | )
|                                             |                                          |                                       |        |            |  |        |     |          |  |               |         |                |  |               |     |       |  |        |        |         |   |   |         |         |   |  |        |   |  |   |        |   |  |   |         |        
|Common stock issued under stock option plans |                                          |                                       | 70     |            |  |        |    |          |  |               | 686     |                |  |               |     |       |  |        |        |         |   |   |         |         |   |  |        |   |  |   |        |   |  |   | 686     |        
|Stock compensation                           |                                          |                                       |        |            |  |        |     |          |  |               | 200     |                |  |               |     |       |  |        |        |         |   |   |         |         |   |  |        |   |  |   |        |   |  |   | 200     |        
|Tax benefit from exercise of stock options   |                                          |                                       |        |            |  |        |     |          |  |               | 56      |                |  |               |     |       |  |        |        |         |   |   |         |         |   |  |        |   |  |   |        |   |  |   | 56      |        
|Repayment of equity participation loans      |                                          |                                       |        |            |  |        |     |          |  |               |         |                |  |               | 40  |       |  |        |        |         |   |   |         |         |   |  |        |   |  |   |        |   |  |   | 40      |        
|                                             |                                          |                                       |        |            |  |        |     |          |  |               |         |                |  |               |     |       |  |        |        |         |   |   |         |         |   |  |        |   |  |   |        |   |  |   |         |        
|Balances, March 31, 2000                     |                                          |                                       | 24,937 |            |  |        | 249 |          |  |               | 281,467 |                |  |               | (10 | )     |  |        | 71,319 |         |   |   | (25,223 | )       |   |  |        |   |  |   |       |   |  |   | 327,802 |        
|Comprehensive loss:                          |                                          |                                       |        |            |  |        |     |          |  |               |         |                |  |               |     |       |  |        |        |         |   |   |         |         |   |  |        |   |  |   |        |   |  |   |         |        
|                                             | Net loss                                 |                                       |        |            |  |        |     |          |  |               |         |                |  |               |     |       |  |        |        | (66,528 | ) |   |         |         |   |  |        |   |  |   |        |   |  |   |         | (66,528 | )      
|                                             | Foreign currency translation adjustments |                                       |        |            |  |        |     |          |  |               |         |                |  |               |     |       |  |        |        |         |   |   |         | (17,846 | ) |  |        |   |  |   |        |   |  |   |         | (17,846 | )      
|                                             |                                          |                                       |        |            |  |        |     |          |  |               |         |                |  |               |     |       |  |        |        |         |   |   |         |         |   |  |        |   |  |   |        |   |  |   |         |        
|                                             |                                          | Comprehensive loss                    |        |            |  |        |     |          |  |               |         |                |  |               |     |       |  |        |        |         |   |   |         |         |   |  |        |   |  |   |        |   |  |   |         |         | (84,374 | )
|                                             |                                          |                                       |        |            |  |        |     |          |  |               |         |                |  |               |     |       |  |        |        |         |   |   |         |         |   |  |        |   |  |   |        |   |  |   |         |        
|Purchase of common stock                     |                                          |                                       |        |            |  |        |     |          |  |               |         |                |  |               |     |       |  |        |        |         |   |   |         |         |   |  | (1,250 | ) |  |   | (8,166 | ) |  |   | (8,166  | )      
|Common stock issued under stock option plans |                                          |                                       | 1      |            |  |        |    |          |  |               | (60     | )              |  |               |     |       |  |        |        |         |   |   |         |         |   |  | 21     |   |  |   | 136    |   |  |   | 76      |        
|Tax benefit from exercise of stock options   |                                          |                                       |        |            |  |        |     |          |  |               | 27      |                |  |               |     |       |  |        |        |         |   |   |         |         |   |  |        |   |  |   |        |   |  |   | 27      |        
|Repayment of equity participation loans      |                                          |                                       |        |            |  |        |     |          |  |               |         |                |  |               | 10  |       |  |        |        |         |   |   |         |         |   |  |        |   |  |   |        |   |  |   | 10      |        
|                                             |                                          |                                       |        |            |  |        |     |          |  |               |         |                |  |               |     |       |  |        |        |         |   |   |         |         |   |  |        |   |  |   |        |   |  |   |         |        
|Balances, March 31, 2001                     |                                          |                                       | 24,938 |            |  |        | 249 |          |  |               | 281,434 |                |  |               |    |       |  |        | 4,791  |         |   |   | (43,069 | )       |   |  | (1,229 | ) |  |   | (8,030 | ) |  |   | 235,375 |        
|Comprehensive income:                        |                                          |                                       |        |            |  |        |     |          |  |               |         |                |  |               |     |       |  |        |        |         |   |   |         |         |   |  |        |   |  |   |        |   |  |   |         |        
|                                             | Net income                               |                                       |        |            |  |        |     |          |  |               |         |                |  |               |     |       |  |        |        | 19,118  |   |   |         |         |   |  |        |   |  |   |        |   |  |   |         | 19,118  |        
|                                             | Foreign currency translation adjustments |                                       |        |            |  |        |     |          |  |               |         |                |  |               |     |       |  |        |        |         |   |   |         | (3,260  | ) |  |        |   |  |   |        |   |  |   |         | (3,260  | )      
|                                             |                                          |                                       |        |            |  |        |     |          |  |               |         |                |  |               |     |       |  |        |        |         |   |   |         |         |   |  |        |   |  |   |        |   |  |   |         |        
|                                             |                                          | Comprehensive income                  |        |            |  |        |     |          |  |               |         |                |  |               |     |       |  |        |        |         |   |   |         |         |   |  |        |   |  |   |        |   |  |   |         |         | 15,858  |  
|                                             |                                          |                                       |        |            |  |        |     |          |  |               |         |                |  |               |     |       |  |        |        |         |   |   |         |         |   |  |        |   |  |   |        |   |  |   |         |        
|Common stock issued under stock option plans |                                          |                                       |       |            |  |        |    |          |  |               | 2,281   |                |  |               |     |       |  |        |        |         |   |   |         |         |   |  | 823    |   |  |   | 5,394  |   |  |   | 7,675   |        
|Tax benefit from exercise of stock options   |                                          |                                       |        |            |  |        |     |          |  |               | 2,454   |                |  |               |     |       |  |        |        |         |   |   |         |         |   |  |        |   |  |   |        |   |  |   | 2,454   |        
|                                             |                                          |                                       |        |            |  |        |     |          |  |               |         |                |  |               |     |       |  |        |        |         |   |   |         |         |   |  |        |   |  |   |        |   |  |   |         |        
|Balances, March 31, 2002                     |                                          |                                       | 24,938 |            |  | $      | 249 |          |  | $             | 286,169 |                |  | $             |    |       |  | $      | 23,909 |         |   | $ | (46,329 | )       |   |  | (406   | ) |  | $ | (2,636 | ) |  | $ | 261,362 |        
|                                             |                                          |                                       |        |            |  |        |     |          |  |               |         |                |  |               |     |       |  |        |        |         |   |   |         |         |   |  |        |   |  |   |        |   |  |   |         |        

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

F-5



---



##### Table of Contents



SOLA INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                 |                                                                                              |                                                                   |                                           |          |         |         |        |         |         |         |        |         |         |         |  
|---------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ----------------------------------------- | -------- | ------- | ------- | ------ | ------- | ------- | ------- | ------ | ------- | ------- | ------- | -
|                                                                 |                                                                                              |                                                                  
|                                                                 |                                                                                              | Year Ended March 31,                                             
|                                                                 |                                                                                              |                                                                  
|                                                                 |                                                                                              | 2002                                                              |                                           | 2001     |         | 2000   
|                                                                 |                                                                                              |                                                                   |                                           |          |         |        
|                                                                 |                                                                                              |                                                                  
|                                                                 |                                                                                              | (In thousands)                                                   
|Cash flows from operating
    activities:                        |                                                                                              |                                                                   |                                           |          |         |         |        |         |         |         |        |        
|                                                                 | Net income/(loss)                                                                            |                                                                   | $                                         | 19,118   |         |         | $      | (66,528 | )       |         | $      | 741     |        
|                                                                 | Adjustments to reconcile net income/(loss) to net
    cash provided by operating activities: |                                                                   |                                           |          |         |         |        |         |         |         |        |         |        
|                                                                 |                                                                                              | Minority interest in earnings                                     |                                           |          | (1,093  | )       |        |         | (287    | )       |        |         | (570    | )      
|                                                                 |                                                                                              | Depreciation                                                      |                                           |          | 18,542  |         |        |         | 19,998  |         |        |         | 21,009  |        
|                                                                 |                                                                                              | Amortization  goodwill and other
    intangibles                 |                                           |          | 44      |         |        |         | 6,610   |         |        |         | 5,957   |        
|                                                                 |                                                                                              | Amortization  debt issuance costs                                |                                           |          | 2,543   |         |        |         | 986     |         |        |         | 478     |        
|                                                                 |                                                                                              | Provision for excess and obsolete inventory                       |                                           |          | 3,976   |         |        |         | 19,369  |         |        |         | 3,293   |        
|                                                                 |                                                                                              | Provision for doubtful accounts                                   |                                           |          | 2,317   |         |        |         | 2,992   |         |        |         | 68      |        
|                                                                 |                                                                                              | Tax benefit from exercise of stock options                        |                                           |          | 2,454   |         |        |         | 27      |         |        |         | 56      |        
|                                                                 |                                                                                              | Non-cash portion of special charges                               |                                           |          | 767     |         |        |         | 74,289  |         |        |         | 15,669  |        
|                                                                 |                                                                                              | Deferred taxes                                                    |                                           |          | 1,155   |         |        |         | (30,923 | )       |        |         | 3,170   |        
|                                                                 |                                                                                              | Revaluation of senior notes                                       |                                           |          | (3,577  | )       |        |         |        |         |        |         |        |        
|                                                                 |                                                                                              | Gain on early extinguishment of debt                              |                                           |          |        |         |        |         | (2,306  | )       |        |         |        |        
|                                                                 |                                                                                              | (Gain)/loss on disposal/sale of property, plant
    and equipment |                                           |          | 167     |         |        |         | (5,812  | )       |        |         | (24     | )      
|                                                                 | Changes in assets and liabilities, net of
    acquisitions:                                  |                                                                   |                                           |          |         |         |        |         |         |         |        |         |        
|                                                                 |                                                                                              | Trade accounts receivable                                         |                                           |          | 3,931   |         |        |         | (8,916  | )       |        |         | (6,616  | )      
|                                                                 |                                                                                              | Inventories                                                       |                                           |          | 3,340   |         |        |         | 9,342   |         |        |         | (15,408 | )      
|                                                                 |                                                                                              | Prepaids and other assets                                         |                                           |          | (14,294 | )       |        |         | (1,992  | )       |        |         | (11,105 | )      
|                                                                 |                                                                                              | Accounts payable  trade                                          |                                           |          | (5,702  | )       |        |         | 3,354   |         |        |         | 4,306   |        
|                                                                 |                                                                                              | Accrued and other current liabilities                             |                                           |          | (12,558 | )       |        |         | 7,425   |         |        |         | 2,018   |        
|                                                                 |                                                                                              | Other long-term liabilities                                       |                                           |          | 721     |         |        |         | 4,207   |         |        |         | 484     |        
|                                                                 |                                                                                              |                                                                   |                                           |          |         |         |        |         |         |         |        |        
|                                                                 |                                                                                              |                                                                   | Net cash provided by operating activities |          |         | 21,851  |        |         |         | 31,835  |        |         |         | 23,526  |  
|                                                                 |                                                                                              |                                                                   |                                           |          |         |         |        |         |         |         |        |        
|Cash flows from investing
    activities:                        |                                                                                              |                                                                   |                                           |          |         |         |        |         |         |         |        |        
|                                                                 | Purchases of businesses                                                                      |                                                                   |                                           |         |         |         |        | (17,917 | )       |         |        | (4,059  | )      
|                                                                 | Disposal of/(investments in) joint ventures                                                  |                                                                   |                                           | 1,183    |         |         |        | (1,335  | )       |         |        | (5,591  | )      
|                                                                 | Capital expenditures                                                                         |                                                                   |                                           | (17,144  | )       |         |        | (20,923 | )       |         |        | (20,060 | )      
|                                                                 | Mold expenditures                                                                            |                                                                   |                                           | (5,865   | )       |         |        | (5,352  | )       |         |        | (4,078  | )      
|                                                                 | Divestitures and other asset dispositions                                                    |                                                                   |                                           | 5,500    |         |         |        | 7,816   |         |         |        |        |        
|                                                                 | Other investing activities                                                                   |                                                                   |                                           | 678      |         |         |        | 90      |         |         |        | 1,033   |        
|                                                                 |                                                                                              |                                                                   |                                           |          |         |         |        |         |         |         |        |        
|                                                                 |                                                                                              |                                                                   | Net cash used in investing activities     |          |         | (15,648 | )      |         |         | (37,621 | )      |         |         | (32,755 | )
|                                                                 |                                                                                              |                                                                   |                                           |          |         |         |        |         |         |         |        |        
|Cash flows from financing
    activities:                        |                                                                                              |                                                                   |                                           |          |         |         |        |         |         |         |        |        
|                                                                 | Proceeds from the exercise of stock options                                                  |                                                                   |                                           | 7,675    |         |         |        | 86      |         |         |        | 926     |        
|                                                                 | Net receipts/(payments) under notes payable to
    banks                                     |                                                                   |                                           | 2,426    |         |         |        | (22,101 | )       |         |        | 7,947   |        
|                                                                 | Borrowings on long-term debt                                                                 |                                                                   |                                           | 3,572    |         |         |        | 4,531   |         |         |        | 944     |        
|                                                                 | Payments on long-term debt                                                                   |                                                                   |                                           | (9,461   | )       |         |        | (2,599  | )       |         |        | (4,892  | )      
|                                                                 | Proceeds from bank debt                                                                      |                                                                   |                                           | 17,500   |         |         |        | 44,800  |         |         |        | 2,200   |        
|                                                                 | Repayment of bank debt                                                                       |                                                                   |                                           | (167,500 | )       |         |        |        |         |         |        |        |        
|                                                                 | Issuance of senior notes                                                                     |                                                                   |                                           | 182,009  |         |         |        |        |         |         |        |        |        
|                                                                 | Purchase of treasury stock                                                                   |                                                                   |                                           |         |         |         |        | (8,166  | )       |         |        |        |        
|                                                                 | Repurchase of senior subordinated notes                                                      |                                                                   |                                           |         |         |         |        | (2,678  | )       |         |        |        |        
|                                                                 |                                                                                              |                                                                   |                                           |          |         |         |        |         |         |         |        |        
|                                                                 |                                                                                              |                                                                   | Net cash provided by financing activities |          |         | 36,221  |        |         |         | 13,873  |        |         |         | 7,125   |  
|                                                                 |                                                                                              |                                                                   |                                           |          |         |         |        |         |         |         |        |        
|Effect of exchange rate changes on cash and cash
    equivalents |                                                                                              |                                                                   | (154                                      | )        |         |         | (790   | )       |         |         | (622   | )      
|                                                                 |                                                                                              |                                                                   |                                           |          |         |         |        |         |         |         |        |        
|Net increase (decrease) in cash and cash
    equivalents         |                                                                                              |                                                                   | 42,270                                    |          |         |         | 7,297  |         |         |         | (2,726 | )      
|Cash and cash equivalents at beginning of year                   |                                                                                              |                                                                   | 26,149                                    |          |         |         | 18,852 |         |         |         | 21,578 |        
|                                                                 |                                                                                              |                                                                   |                                           |          |         |         |        |         |         |         |        |        
|Cash and cash equivalents at end of year                         |                                                                                              | $                                                                 | 68,419                                    |          |         | $       | 26,149 |         |         | $       | 18,852 |        
|                                                                 |                                                                                              |                                                                   |                                           |          |         |         |        |         |         |         |        |        

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

F-6



---



##### Table of Contents



SOLA INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     Business and
Basis of Presentation

SOLA International Inc. (Company)
designs, manufactures and distributes a broad range of eyeglass
lenses, primarily focusing on the fast growing plastic lens
segment of the global market. The Company operates in one
business segment.

The accompanying consolidated financial
statements of the Company have been prepared in accordance with
accounting principles generally accepted in the United States.

In order to continue its operations and meet its
significant liquidity requirements, the Company must maintain
profitable operations or obtain additional funds through equity
or debt financing, bank financing, and other sources. Management
believes that its existing cash balances, foreign credit
facilities, internally generated funds and other potential
financing alternatives will be sufficient to meet the
Companys capital, operating and debt service requirements
for at least the next twelve months. If the Company is unable to
generate adequate cash flow from sales of its products, the
Company may need to seek additional sources of capital. There
can be no assurance that the Company will be able to obtain
additional debt or equity financing on terms acceptable to the
Company, or at all. If adequate funds are not available, the
Company could be required to delay development or
commercialization of certain products, or reduce the marketing,
customer support, or other resources devoted to product
development. Accordingly, the failure of the Company to obtain
sufficient funds on acceptable terms when needed could have a
material adverse effect on the Companys business, results
of operations and financial condition.

2.     Summary of
Significant Accounting Policies

Principles of
Consolidation:

The consolidated financial statements include the
accounts of the Company and all of its subsidiaries. All
significant transactions between the entities have been
eliminated in the consolidation.

Cash and Cash
Equivalents:

Cash equivalents consist primarily of highly
liquid short-term investments with an original maturity of three
months or less.

Inventories:

Inventories are stated at the lower of cost
(first-in, first-out) or market.

Property,
Plant and Equipment:

Property, plant and equipment are stated at cost
and are depreciated on a straight-line basis over the estimated
useful lives of the related assets (buildings  10 to
50 years; plant, molds and office equipment  2
to 10 years). Leasehold improvements and leased equipment
are amortized over the lesser of their useful lives or the
remaining term of the related leases. Gains and losses on sale
of assets are recorded in general and administrative expenses.
Repairs and maintenance costs are expensed when incurred.

Intangible
Assets:

In July 2001, the Financial Accounting Standards
Board issued SFAS No. 142 Goodwill and Other Intangible
Assets,which establishes financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes
APB Opinion No. 17, Intangible Assets.The Company
has elected to early adopt SFAS No. 142 beginning with the
first quarter of fiscal 2002 (see Note 4). SFAS 142
requires that goodwill and intangible assets that have
indefinite useful lives will not be amortized but rather they
will be tested at least annually for impairment. Intangible
assets that have finite useful lives will continue to be

F-7



---



##### Table of Contents



SOLA INTERNATIONAL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

amortized over their useful lives. The goodwill
test for impairment consists of a two-step process that begins
with an estimation of the fair value of a reporting unit.

Intangible assets with finite lives, including
trademarks, patents and licenses, are stated at cost and
amortized on a straight-line basis over their estimated useful
lives of 3 to 15 years. Legal costs incurred by the Company
in successfully defending its patents are capitalized to patent
costs and amortized over the remaining life of the patent.

Other
Assets:

Debt issuance costs are amortized to interest
expense over the respective lives of the debt instruments, which
range from 5 to 10 years. As of March 31, 2002 and
2001, accumulated amortization was $3.0 million and
$1.6 million, respectively. The Companys net debt
issuance amortization costs were approximately
$2.8 million, $0.3 million and $0.5 million for
fiscal 2002, 2001, and 2000, respectively.

Long-Lived
Assets:

The Company assesses potential impairments to its
long-lived assets periodically in accordance with the provisions
of SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of.An impairment review is performed whenever events or changes
in circumstances indicate that the carrying value may not be
recoverable. Factors the Company considers important that could
trigger an impairment review include, but are not limited to,
significant underperformance relative to expected historical or
projected future operating results, significant changes in the
manner of use of the acquired assets or the strategy for the
Companys overall business, significant negative industry
or economic trends, a significant decline in the Companys
stock price for a sustained period of time, and the
Companys market capitalization relative to net book value.
When the Company determines that the carrying value of a
long-lived asset may not be recoverable based upon the existence
of one or more of the above indicators of impairment, the
Company measures any permanent impairment based on projected
discounted cash flows using a discount rate commensurate with
the risk inherent in the Companys current business model.

Foreign
Currency Translation:

The assets and liabilities and revenue and
expense accounts of the Companys foreign subsidiaries have
been translated using the exchange rate at the balance sheet
date and the weighted average exchange rate for the period,
respectively.

The net effect of the translation of the accounts
of the Companys subsidiaries has been included in equity
as cumulative other comprehensive income (loss). Adjustments
that arise from exchange rate changes on transactions
denominated in a currency other than the local currency are
included in income as incurred.

Revenue
Recognition:

The Companys policy is to recognize revenue
from sales to customers when the rights and risks of ownership
have passed to the customer, when persuasive evidence of an
arrangement exists, the price is fixed and determinable and
collection of the resulting receivable is reasonably assured.
Under specific conditions, the Company permits its customers to
return or exchange products. The provision for estimated returns
is recorded concurrently with the recognition of revenue based
on historical sales returns and analysis of credit memo data. No
individual customer accounts for more than 10% of net sales. The
Company generally does not require collateral from its
customers, but performs on-going credit evaluations of its
customers.

Shipping and handling fees charged to customers
are included in net sales and the related costs are included in
selling and marketing expenses.

F-8



---



##### Table of Contents



SOLA INTERNATIONAL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Advertising
and Promotion Costs:

The Companys policy is to expense
advertising and promotion costs as they are incurred. The
Companys advertising and promotion expenses were
approximately $6.1 million, $6.2 million and
$7.5 million for fiscal 2002, 2001 and 2000, respectively.

Income
Taxes:

The Company accounts for income taxes under the
provisions of FASB Statement No. 109, Accounting for
Income Taxes(SFAS 109). Under
SFAS 109, deferred tax assets and liabilities are
determined based on the difference between the financial
statement and tax bases of assets and liabilities, using enacted
tax rates in effect for the year in which the differences are
expected to reverse. A valuation allowance is established when
necessary to reduce deferred tax assets to amounts expected to
be realized.

Comprehensive
Income/(Loss):

Comprehensive income includes all changes in
equity (net assets) during a period from non-owner sources. The
change in comprehensive income for all periods presented
resulted from foreign currency translation gains and losses.

Reclassifications:

Certain prior year items have been reclassified
to conform with the current years presentation. These
reclassifications had no impact on total assets, operating
income/(loss) or net income/(loss).

Use of
Estimates:

The preparation of the financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ
from those estimates.

Business Risk
and Concentration of Credit Risks:

The Company operates manufacturing and
distribution sites in all major regions of the world 
North America (including Mexico), Europe, and Rest of World. As
a result, a significant portion of the Companys sales and
operations are subject to certain risks, including adverse
developments in the foreign political and economic environment,
exchange rates, tariffs and other trade barriers, staffing and
managing foreign operations and potentially adverse tax
consequences. Although the Company and its predecessors have
been successfully conducting business outside of the United
States since its inception in 1960, there can be no assurance
that any of these factors will not have a material adverse
effect on the Companys financial condition, cash flows, or
results of operations in the future.

Cash and cash equivalents are invested in
deposits with major banks in the United States and in countries
where subsidiaries operate. Deposits in these banks may exceed
the amount of insurance provided on such deposits. The Company
has not experienced any losses on its deposits of cash and cash
equivalents.

During fiscal 2002, the Companys ten
largest customers accounted for 23.8% of net sales, and the
largest customer accounted for less than 6% of net sales. During
fiscal 2002, six of the ten largest customers were located in
North America and accounted for 14.1% of net sales. No single
customers accounts receivable balance was greater than 3%
of total accounts receivable.

While there are currently multiple suppliers of
polycarbonate and monomer raw materials, the Company purchases
over 50% of those materials from three suppliers. The loss of
any of these suppliers, or a significant decrease in the supply
of polycarbonate or monomer, would require the Company to obtain
these raw

F-9



---



##### Table of Contents



SOLA INTERNATIONAL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

materials elsewhere. If the Company was unable to
obtain polycarbonate or monomer from other suppliers at
acceptable prices, it might realize lower margins and experience
difficulty in meeting its customers requirements.

Derivative
Instruments:

The Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS Nos. 137 and 138 as of
April 1, 2001. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at
fair value. It further provides criteria for derivative
instruments to be designated as fair value, cash flow and
foreign currency hedges and establishes respective accounting
standards for reporting changes in the fair value of the
instruments. All of the Companys derivative instruments
are recorded at their fair value in other current assets or
other accrued liabilities. The transition adjustment upon
adoption of SFAS No. 133 was not material.

On the date a derivative contract is entered
into, the Company designates its derivative as either a hedge of
the fair value of a recognized asset or liability
(fair-value hedge), as a hedge of the variability of
cash flows to be received (cash-flow hedge), or as a
foreign-currency hedge. Changes in the fair value of a
derivative are recorded in current period earnings. The
Companys derivative instruments at March 31, 2002
were designated as foreign currency fair-value hedges.

Earnings/(Loss)
Per Share:

The following table sets forth the computation of
basic and diluted earnings/(loss) per share for the fiscal years
ended March 31, 2002, 2001 and 2000:

|                                                                   |                                                                        |                        |        |        |  |      |         |         |   |   |        |        | 
|------------------------------------------------------------------ | ---------------------------------------------------------------------- | ---------------------- | ------ | ------ |  | ---- | ------- | ------- | - | - | ------ | ------ | 
|                                                                   |                                                                        |                       
|                                                                   |                                                                        | Year Ended March 31,  
|                                                                   |                                                                        |                       
|                                                                   |                                                                        | 2002                   |        | 2001   |  | 2000
|                                                                   |                                                                        |                        |        |        |  |     
|                                                                   |                                                                        |                       
|                                                                   |                                                                        | (In thousands,        
|                                                                   |                                                                        | except per share data)
|Numerator:                                                         |                                                                        |                        |        |        |  |      |         |         |   |   |        |       
|Income/(loss) before extraordinary item                            |                                                                        | $                      | 19,118 |        |  | $    | (67,999 | )       |   | $ | 741    |       
|Extraordinary gain on early extinguishment of
    debt, net of tax |                                                                        |                        |       |        |  |      | 1,471   |         |   |   |       |       
|                                                                   |                                                                        |                        |        |        |  |      |         |         |   |   |        |       
|                                                                   | Net income/(loss)                                                      |                        | $      | 19,118 |  |      | $       | (66,528 | ) |   | $      | 741    | 
|                                                                   |                                                                        |                        |        |        |  |      |         |         |   |   |        |       
|Denominator:                                                       |                                                                        |                        |        |        |  |      |         |         |   |   |        |       
|Weighted average common shares outstanding                         |                                                                        |                        | 24,067 |        |  |      | 24,049  |         |   |   | 24,887 |       
|Effect of dilutive securities 
    employee stock options         |                                                                        |                        | 516    |        |  |      |        |         |   |   | 182    |       
|                                                                   |                                                                        |                        |        |        |  |      |         |         |   |   |        |       
|                                                                   | Weighted average common shares and dilutive
    securities outstanding |                        |        | 24,583 |  |      |         | 24,049  |   |   |        | 25,069 | 
|                                                                   |                                                                        |                        |        |        |  |      |         |         |   |   |        |       
|Net income/(loss) per share 
    basic:                           |                                                                        |                        |        |        |  |      |         |         |   |   |        |       
|Net income/(loss) per share before extraordinary
    item          |                                                                        | $                      | 0.79   |        |  | $    | (2.83   | )       |   | $ | 0.03   |       
|Extraordinary gain on early extinguishment of
    debt, net of tax |                                                                        |                        |       |        |  |      | 0.06    |         |   |   |       |       
|                                                                   |                                                                        |                        |        |        |  |      |         |         |   |   |        |       
|                                                                   | Net income/(loss) per share  basic                                    |                        | $      | 0.79   |  |      | $       | (2.77   | ) |   | $      | 0.03   | 
|                                                                   |                                                                        |                        |        |        |  |      |         |         |   |   |        |       
|Net income/(loss) per share 
    diluted:                         |                                                                        |                        |        |        |  |      |         |         |   |   |        |       
|Net income/(loss) per share before extraordinary
    item          |                                                                        | $                      | 0.78   |        |  | $    | (2.83   | )       |   | $ | 0.03   |       
|Extraordinary gain on early extinguishment of
    debt, net of tax |                                                                        |                        |       |        |  |      | 0.06    |         |   |   |       |       
|                                                                   |                                                                        |                        |        |        |  |      |         |         |   |   |        |       
|                                                                   | Net income/(loss) per share  diluted                                  |                        | $      | 0.78   |  |      | $       | (2.77   | ) |   | $      | 0.03   | 
|                                                                   |                                                                        |                        |        |        |  |      |         |         |   |   |        |       

F-10



---



##### Table of Contents



SOLA INTERNATIONAL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Options to purchase 1.4 million shares of
common stock at a range of $13.74 to $41.44 per share and
2.0 million shares of common stock at a range of $9.71 to
$41.44 per share were outstanding as of March 31, 2002 and
March 31, 2000, respectively, but were not included in the
computation of the diluted earnings per share for fiscal 2002
and fiscal 2000 because the options exercise price was
greater than the average market price of the common shares. For
the year ended March 31, 2001, approximately
3.4 million weighted average shares with exercise prices at
a range of $4.63 to $41.44 per share were not included in the
calculation of diluted net loss per share because to do so would
be anti-dilutive for the period.

Impact of
Recently Issued Accounting Standards:

In July 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 141 Business
Combinations,which establishes financial accounting and
reporting for business combinations and supersedes Accounting
Principles Board (APB) Opinion No. 16,
Business Combinations,and FASB Statement No. 38,
Accounting for Preacquisition Contingencies of Purchased
Enterprises.It requires that all business combinations in
the scope of this Statement are to be accounted for using one
method, the purchase method. The provisions of this Statement
apply to all business combinations initiated after June 30,
2001, and also apply to all business combinations accounted for
using the purchase method for which the date of acquisition is
July 1, 2001 or later. The Company has adopted SFAS
No. 141 with the first quarter of fiscal 2002, and the
adoption of SFAS No. 141 had no material impact on its
financial reporting and related disclosures.

In July 2001, the FASB issued SFAS No. 142
Goodwill and Other Intangible Assets, which establishes
financial accounting and reporting for acquired goodwill and
other intangible assets and supersedes APB Opinion No. 17,
Intangible Assets.It addresses how intangible assets
that are acquired individually or with a group of other assets
(but not those acquired in a business combination) should be
accounted for in financial statements upon their acquisition,
and after they have been initially recognized in the financial
statements. The Company has elected to early adopt SFAS
No. 142 beginning with the first quarter of fiscal 2002 and
has disclosed the impact of adopting SFAS No. 142 on its
consolidated financial statements in Note 4.

In August 2001, the FASB issued SFAS No. 144
Accounting for the Impairment or Disposal of Long-Lived
Assets, which establishes financial accounting and reporting
for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Ofand APB Opinion No. 30, Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions.In addition, SFAS No. 144
amends Accounting Research Bulletin No. 51, Consolidated
Financial Statements.SFAS No. 144 addresses the
accounting for a segment of a business accounted for as a
discontinued operation not previously addressed by SFAS
No. 121. In addition, SFAS No. 144 also resolves
significant implementation issues related to SFAS No. 121.
The provisions of this Statement are effective starting with
fiscal years beginning after December 15, 2001. The Company
believes that the adoption of SFAS No. 144 will have no
material impact on its financial reporting and related
disclosures.

In April 2002, the FASB issued SFAS 145
Rescission of FAS Nos. 4, 44, and 64, Amendment of
FAS 13, and Technical Corrections.SFAS 145
rescinds FASB Statement No. 4, Reporting Gains and
Losses from Extinguishment of Debt, and an amendment of that
Statement, FASB Statement No. 64, Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements, as well as
FASB Statement No. 44, Accounting for Intangible Assets
of Motor Carriers.This Statement amends FASB Statement
No. 13, Accounting for Leases, to eliminate an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease
modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other
existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability
under changed conditions. The provisions of SFAS 145 will
be adopted during fiscal year 2003. The Company does not
anticipate that

F-11



---



##### Table of Contents



SOLA INTERNATIONAL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

adoption of this statement will have a material
impact on its consolidated balance sheets or consolidated
statements of operations.

In May 2000, the Emerging Issues Task Force
(EITF) issued EITF Issue No. 00-14, Accounting for
Certain Sales Incentives. EITF Issue No. 00-14
addresses the recognition, measurement, and income statement
classification for sales incentives that a vendor voluntarily
offers to customers (without charge), which the customer can use
in, or exercise as a result of, a single exchange transaction.
Sales incentives that fall within the scope of EITF Issue
No. 00-14 include offers that a customer can use to receive
a reduction in the price of a product or service at the point of
sale. The EITF agreed to change the transition date for
Issue 00-14, dictating that a company should apply this
consensus no later than its annual or interim financial
statements for the periods beginning after December 15,
2001. In June 2001, the EITF issued EITF Issue No. 00-25,
Vendor Income Statement Characterization of Consideration
Paid to a Reseller of the Vendors Products, effective
for periods beginning after December 15, 2001. EITF Issue
No. 00-25 addresses whether consideration from a vendor to
a reseller is an adjustment of the selling prices of the
vendors products and, therefore, should be deducted from
revenue when recognized in the vendors statement of
operations or a cost incurred by the vendor for assets or
services received from the reseller and, therefore, should be
included as a cost or expense when recognized in the
vendors statement of operations In September of 2001, the
EITF issued EITF Issue No. 01-09, Accounting for
Consideration Given by Vendor to a Customer or a Reseller of the
Vendors Products, which is a codification of EITF
Issues No. 00-14, No. 00-25 and No. 00-22
Accounting for Points and Certain Other Time- or
Volume-Based Sales Incentive Offers and Offers for Free Products
or Services to be Delivered in the Future.The adoption of
the elements pertaining to EITF Issue No. 00-25 and 01-09
did not have a material impact on the Companys
consolidated financial position or its results of operations.

3.     Inventories

|                 |  |                |        |      |  |   |        | 
|---------------- |  | -------------- | ------ | ---- |  | - | ------ | 
|                 |  |               
|                 |  | March 31,     
|                 |  |               
|                 |  | 2002           |        | 2001
|                 |  |                |        |     
|                 |  |               
|                 |  | (In thousands)
|Raw materials    |  | $              | 13,104 |      |  | $ | 16,084 | 
|Work in progress |  |                | 3,510  |      |  |   | 3,744  | 
|Finished goods   |  |                | 65,972 |      |  |   | 71,474 | 
|                 |  |                |        |      |  |   |        | 
|                 |  | $              | 82,586 |      |  | $ | 91,302 | 
|                 |  |                |        |      |  |   |        | 

4.     Goodwill and
Intangibles

In July 2001, the Financial Accounting Standards
Board issued SFAS No. 142 Goodwill and Other Intangible
Assets,which establishes financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes
APB Opinion No. 17, Intangible Assets.The Company
has elected to early adopt SFAS No. 142 beginning with the
first quarter of fiscal 2002. SFAS 142 requires that
goodwill and intangible assets that have indefinite useful lives
will not be amortized but rather they will be tested at least
annually for impairment. Intangible assets that have finite
useful lives will continue to be amortized over their useful
lives. The goodwill test for impairment consists of a two-step
process that begins with an estimation of the fair value of a
reporting unit. The first step is a screen for potential
impairment and the second step measures the amount of
impairment, if any. SFAS 142 requires an entity to complete
the first step of the transitional goodwill impairment test
within six months of adopting the Statement. As of
March 31, 2002, the Company had completed both steps and
had determined that there was no impairment of goodwill at that
time.

F-12



---



##### Table of Contents



SOLA INTERNATIONAL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table reconciles the Companys
net income/(loss) for the fiscal 2002, 2001, and 2000 adjusted
to exclude goodwill amortization pursuant to SFAS No. 142
to amounts previously reported (in thousands, except per share
data):

|                                                   |  |           |        |      |  |      |         |   |  |   |       | 
|-------------------------------------------------- |  | --------- | ------ | ---- |  | ---- | ------- | - |  | - | ----- | 
|                                                   |  |          
|                                                   |  | March 31,
|                                                   |  |          
|                                                   |  | 2002      |        | 2001 |  | 2000
|                                                   |  |           |        |      |  |     
|Reported income/(loss) before extraordinary item   |  | $         | 19,118 |      |  | $    | (67,999 | ) |  | $ | 741   | 
|Add back: Goodwill amortization, net of tax effect |  |           |       |      |  |      | 4,495   |   |  |   | 4,051 | 
|                                                   |  |           |        |      |  |      |         |   |  |   |       | 
|Adjusted income/(loss) before extraordinary item   |  | $         | 19,118 |      |  | $    | (63,504 | ) |  | $ | 4,792 | 
|                                                   |  |           |        |      |  |      |         |   |  |   |       | 
|Reported net income/(loss)                         |  | $         | 19,118 |      |  | $    | (66,528 | ) |  | $ | 741   | 
|Add back: Goodwill amortization, net of tax effect |  |           |       |      |  |      | 4,495   |   |  |   | 4,051 | 
|                                                   |  |           |        |      |  |      |         |   |  |   |       | 
|Adjusted net income/(loss)                         |  | $         | 19,118 |      |  | $    | (62,033 | ) |  | $ | 4,792 | 
|                                                   |  |           |        |      |  |      |         |   |  |   |       | 
|Earnings/(loss) per share  basic                  |  |           |        |      |  |      |         |   |  |   |       | 
|Reported income/(loss) before extraordinary item   |  | $         | 0.79   |      |  | $    | (2.83   | ) |  | $ | 0.03  | 
|Goodwill amortization                              |  |           |       |      |  |      | 0.19    |   |  |   | 0.16  | 
|                                                   |  |           |        |      |  |      |         |   |  |   |       | 
|Adjusted income/(loss) before extraordinary item   |  | $         | 0.79   |      |  | $    | (2.64   | ) |  | $ | 0.19  | 
|                                                   |  |           |        |      |  |      |         |   |  |   |       | 
|Earnings/(loss) per share  basic                  |  |           |        |      |  |      |         |   |  |   |       | 
|Reported net income/(loss)                         |  | $         | 0.79   |      |  | $    | (2.77   | ) |  | $ | 0.03  | 
|Goodwill amortization                              |  |           |       |      |  |      | 0.19    |   |  |   | 0.16  | 
|                                                   |  |           |        |      |  |      |         |   |  |   |       | 
|Adjusted net income/(loss)                         |  | $         | 0.79   |      |  | $    | (2.58   | ) |  | $ | 0.19  | 
|                                                   |  |           |        |      |  |      |         |   |  |   |       | 
|Earnings/(loss) per share  diluted                |  |           |        |      |  |      |         |   |  |   |       | 
|Reported income/(loss) before extraordinary item   |  | $         | 0.78   |      |  | $    | (2.83   | ) |  | $ | 0.03  | 
|Goodwill amortization                              |  |           |       |      |  |      | 0.19    |   |  |   | 0.16  | 
|                                                   |  |           |        |      |  |      |         |   |  |   |       | 
|Adjusted income/(loss) before extraordinary item   |  | $         | 0.78   |      |  | $    | (2.64   | ) |  | $ | 0.19  | 
|                                                   |  |           |        |      |  |      |         |   |  |   |       | 
|Earnings/(loss) per share  diluted                |  |           |        |      |  |      |         |   |  |   |       | 
|Reported net income/(loss)                         |  | $         | 0.78   |      |  | $    | (2.77   | ) |  | $ | 0.03  | 
|Goodwill amortization                              |  |           |       |      |  |      | 0.19    |   |  |   | 0.16  | 
|                                                   |  |           |        |      |  |      |         |   |  |   |       | 
|Adjusted net income/(loss)                         |  | $         | 0.78   |      |  | $    | (2.58   | ) |  | $ | 0.19  | 
|                                                   |  |           |        |      |  |      |         |   |  |   |       | 

Following are patent costs classified as
intangible assets that continue to be subject to amortization(in
thousands):

|                               |  |           |      |      |  |      |     |   |  |   |     |  
|------------------------------ |  | --------- | ---- | ---- |  | ---- | --- | - |  | - | --- | -
|                               |  |          
|                               |  | March 31,
|                               |  |          
|                               |  | 2002      |      | 2001 |  | 2000
|                               |  |           |      |      |  |     
|                               |  |          
|Gross carrying amount          |  | $         | 476  |      |  | $    | 476 |   |  | $ | 476 |  
|Accumulated amortization       |  |           | (101 | )    |  |      | (57 | ) |  |   | (29 | )
|                               |  |           |      |      |  |      |     |   |  |   |     |  
|Net carrying amount            |  | $         | 375  |      |  | $    | 419 |   |  | $ | 447 |  
|                               |  |           |      |      |  |      |     |   |  |   |     |  
|Aggregate amortization expense |  | $         | 44   |      |  | $    | 28  |   |  | $ | 29  |  

F-13



---



##### Table of Contents



SOLA INTERNATIONAL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Estimated annual amortization expense for fiscal
years ending (in thousands):

|               |  |   |    |  |  |  |  |  |  |  |  | 
|-------------- |  | - | -- |  |  |  |  |  |  |  |  | 
|March 31, 2003 |  | $ | 43 |  |  |  |  |  |  |  |  | 
|March 31, 2004 |  |   | 43 |  |  |  |  |  |  |  |  | 
|March 31, 2005 |  |   | 43 |  |  |  |  |  |  |  |  | 
|March 31, 2006 |  |   | 43 |  |  |  |  |  |  |  |  | 
|March 31, 2007 |  |   | 43 |  |  |  |  |  |  |  |  | 

For fiscal 2002, goodwill increased
$0.2 million due to an adjustment for goodwill relating to
an acquisition which closed during fiscal 2001.

During fiscal 2001 the Company incurred an
impairment charge of $17.0 million included in special
charges related to the impairment of goodwill associated with a
prior acquisition of a lens manufacturing business. The
impairment of the goodwill was based on an estimate of projected
undiscounted cash flows, which were no longer deemed adequate to
support the value of goodwill associated with the business. (See
Note 13 of Notes to Consolidated Financial Statements).

5.     Property,
Plant and Equipment

|                                               |  |                |         |      |  |   |         | 
|---------------------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | 
|                                               |  |               
|                                               |  | March 31,     
|                                               |  |               
|                                               |  | 2002           |         | 2001
|                                               |  |                |         |     
|                                               |  |               
|                                               |  | (In thousands)
|Land, buildings and leasehold improvements     |  | $              | 34,997  |      |  | $ | 42,644  | 
|Machinery and office equipment                 |  |                | 179,306 |      |  |   | 166,569 | 
|Equipment under capital leases                 |  |                | 2,790   |      |  |   | 852     | 
|Molds                                          |  |                | 57,710  |      |  |   | 52,210  | 
|                                               |  |                |         |      |  |   |         | 
|                                               |  |                | 274,803 |      |  |   | 262,275 | 
|Less accumulated depreciation and amortization |  |                | 110,338 |      |  |   | 106,124 | 
|                                               |  |                |         |      |  |   |         | 
|                                               |  | $              | 164,465 |      |  | $ | 156,151 | 
|                                               |  |                |         |      |  |   |         | 

Depreciation expense for fiscal 2002, 2001 and
2000 was $18.5 million, $20.0 million and
$21.0 million, respectively. Accumulated amortization on
equipment under capital leases was $0.1 million at
March 31, 2002 and 2001.

6.     Derivative
Instruments

The Company has foreign subsidiaries that operate
and sell the Companys products in various global markets.
As a result, the Company is exposed to changes in foreign
currency exchange rates and interest rates. The Company utilizes
various hedge instruments, primarily forward contracts, to
manage its exposure associated with firm intercompany and
third-party transactions and net asset and liability positions
denominated in non-functional currencies. The Company does not
hold derivative financial instruments for speculative or trading
purposes.

Forward contracts are used to hedge certain cash
flows denominated in non-functional currencies. The contracts
outstanding at March 31, 2002 are designated as a foreign
currency fair-value hedges in accordance with SFAS No. 133.
Changes in the fair value of forward contracts due to changes in
time value are excluded from the assessment of effectiveness and
are recognized in other income and expense. For the year ended
March 31, 2002, the change in time value of the forward
contracts was not significant. The Company did not record any
gains or losses due to hedge ineffectiveness during fiscal 2002.

F-14



---



##### Table of Contents



SOLA INTERNATIONAL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Since July 27, 2001, the Company has
transacted four foreign exchange contracts to hedge its interest
expense exposure associated with the semi-annual coupon payments
due September 15, 2001, March 15, 2002,
September 15, 2002 and March 15, 2003 on its
205 million
11% Notes. In addition, the Company has entered into other
foreign exchange contracts to hedge portions of its accounts
payable exposure. As of March 31, 2002, the Company has the
September 15, 2002 and March 15, 2003 foreign exchange
contracts, in addition to the other foreign exchange contracts,
outstanding as described above.

Forward exchange contracts are also used to hedge
certain foreign currency-denominated assets or liabilities.
These derivatives do not qualify for SFAS No. 133 hedge
accounting treatment. Accordingly, changes in the fair value of
these hedges are recorded immediately in earnings to offset the
changes in fair value of the assets or liabilities being hedged.
The related gains and losses included in other income and
expense were not significant.

7.     Accrued
Liabilities

|                                                  |  |                |        |      |  |   |        | 
|------------------------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | 
|                                                  |  |               
|                                                  |  | March 31,     
|                                                  |  |               
|                                                  |  | 2002           |        | 2001
|                                                  |  |                |        |     
|                                                  |  |               
|                                                  |  | (In thousands)
|Liabilities associated with strategic initiatives |  | $              | 6,296  |      |  | $ | 16,121 | 
|Other accrued liabilities                         |  |                | 37,174 |      |  |   | 29,798 | 
|                                                  |  |                |        |      |  |   |        | 
|                                                  |  | $              | 43,470 |      |  | $ | 45,919 | 
|                                                  |  |                |        |      |  |   |        | 

8.     Notes Payable
to Banks

Notes payable to banks at March 31, 2002
represent borrowings denominated in foreign currencies under
foreign credit agreements with lenders. The weighted average
interest rates on these borrowings as of March 31, 2002 and
2001 were 5.5% and 6.0%, respectively. As of March 31,
2002, the Company had total unused lines of credit amounting to
$13.4 million and there were no restrictive covenants on
the borrowings.

F-15



---



##### Table of Contents



SOLA INTERNATIONAL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

9.     Long-Term
Debt

|                                                                                                                                                                                                                             |  |                |       |      |  |   |        | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----- | ---- |  | - | ------ | 
|                                                                                                                                                                                                                             |  |               
|                                                                                                                                                                                                                             |  | March 31,     
|                                                                                                                                                                                                                             |  |               
|                                                                                                                                                                                                                             |  | 2002           |       | 2001
|                                                                                                                                                                                                                             |  |                |       |     
|                                                                                                                                                                                                                             |  |               
|                                                                                                                                                                                                                             |  | (In thousands)
|Uncollateralized promissory note, interest rate
    at 7.5% at March 31, 2002, and varying from 6.5% to 7.5% at
    March 31, 2001, principal and interest payable through
    January 2003                                  |  | $              | 2,000 |      |  | $ | 4,606  | 
|Uncollateralized term loans, interest rates
    varying from 4.0% to 7.5% at March 31, 2002, and varying
    from 4.0% to 15.0% at March 31, 2001, principal and
    interest payable through December 2008                  |  |                | 1,703 |      |  |   | 8,724  | 
|Loans collateralized by equipment and other
    assets, interest rates varying from 3.2% to 12.0% at
    March 31, 2002, principal and interest payable through
    August 2011                                              |  |                | 4,076 |      |  |   |       | 
|Loans collateralized by equipment and other
    assets, interest rates indexed to LIBOR and Bank Base Rate
    (LIBOR 3.5% and Bank Base Rate 4.0% at March 31, 2002),
    principal and interest payable through March 2007 |  |                | 629   |      |  |   |       | 
|Uncollateralized term loan, interest 1.85% at
    March 31, 2002 and 2001 principal and interest payable
    through June 2008                                                                                               |  |                | 481   |      |  |   | 522    | 
|Loans collateralized by equipment and other
    assets, interest rates varying from 6.2% to 7.0% at
    March 31, 2001, principal and interest payable through
    February 2005                                             |  |                |      |      |  |   | 404    | 
|Uncollateralized interest free government loan,
    principal payable June 2007 through June 2011                                                                                                                            |  |                | 293   |      |  |   |       | 
|                                                                                                                                                                                                                             |  |                |       |      |  |   |        | 
|                                                                                                                                                                                                                             |  |                | 9,182 |      |  |   | 14,256 | 
|Less current portion                                                                                                                                                                                                         |  |                | 4,140 |      |  |   | 4,076  | 
|                                                                                                                                                                                                                             |  |                |       |      |  |   |        | 
|Long-term debt, less current portion                                                                                                                                                                                         |  | $              | 5,042 |      |  | $ | 10,180 | 
|                                                                                                                                                                                                                             |  |                |       |      |  |   |        | 

Aggregate annual maturities of long-term debt
over the next five years and thereafter are as follows:

|                        |            |                |   |       |       | 
|----------------------- | ---------- | -------------- | - | ----- | ----- | 
|                        |            | (In thousands)
|Period Ending March 31, |            |                |   |      
|                        | 2003       |                | $ | 4,140 |      
|                        | 2004       |                |   | 1,661 |      
|                        | 2005       |                |   | 1,070 |      
|                        | 2006       |                |   | 1,020 |      
|                        | 2007       |                |   | 981   |      
|                        | Thereafter |                |   | 310   |      
|                        |            |                |   |      
|                        |            | Total          |   | $     | 9,182 | 
|                        |            |                |   |      

The Company believes that, as of March 31,
2002, the fair value of its long-term debt approximates the
carrying value of those obligations based on the borrowing rates
which are comparable to market interest rates. Long-term debt
includes capital lease obligations of $3.0 million and
$0.4 million at March 31, 2002 and 2001, respectively.
Future minimum capital lease principal payments at
March 31, 2002 consist of $0.8 million,
$0.6 million, $0.6 million, $0.6 million, and
$0.4 million for fiscal 2003 through fiscal 2007,
respectively. Interest on capital lease obligations is
approximately $0.3 million.

F-16



---



##### Table of Contents



SOLA INTERNATIONAL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

10.     Bank Credit
Agreement

On July 26, 2001, the Company entered into a
three-year $45 million secured revolving credit facility
(Credit Agreement) maturing on July 27, 2004.
Borrowings under the Credit Agreement may be made as either
U.S. Dollar Alternate Base Rate (ABR) loans or
Eurodollar loans. ABR loans bear interest at a rate per annum
equal to the greater of (a) the Prime Rate in effect on
such day, or (b) the Federal Funds Effective Rate in effect
on such day plus 0.50%, plus an applicable percentage based on
the Companys adjusted leverage ratio. The Eurodollar loans
bear interest at a rate per annum equal to the LIBOR Rate plus
an applicable percentage based on the Companys adjusted
leverage ratio.

The Credit Agreement contains a number of
covenants, including, among others, covenants restricting the
Company and its subsidiaries with respect to the incurrence of
indebtedness, the creation of liens, the making of certain
investments and loans, the payment of dividends, and the ability
to enter into certain transactions with affiliates. In addition,
the Credit Agreement requires the Company to maintain certain
interest coverage, net worth and leverage ratios and places
certain restrictions on capital expenditures. As of
March 31, 2002, the Company was in compliance with all
covenants.

In connection with the Credit Agreement, the
Company entered into a Security Agreement that grants a security
interest in and pledges the rights to certain of the
Companys assets, including domestic accounts receivable,
domestic inventory and 65% of the pledged stock of certain
significant foreign subsidiaries, for the payment and
performance of the Companys obligations under the Credit
Agreement.

At March 31, 2002, there was no debt
outstanding under this agreement and the borrowing base amounted
to $43.6 million.

11.     Senior
Notes

Following is the detail of Senior Notes:

|                    |                    |                |         |         |  |   |        |        | 
|------------------- | ------------------ | -------------- | ------- | ------- |  | - | ------ | ------ | 
|                    |                    |               
|                    |                    | March 31,     
|                    |                    |               
|                    |                    | 2002           |         | 2001   
|                    |                    |                |         |        
|                    |                    |               
|                    |                    | (In thousands)
|6 7/8% Senior Notes |                    | $              | 94,771  |         |  | $ | 94,730 |       
|11% Senior Notes    |                    |                | 178,432 |         |  |   |       |       
|                    |                    |                |         |         |  |   |        |       
|                    | Total Senior Notes |                | $       | 273,203 |  |   | $      | 94,730 | 
|                    |                    |                |         |         |  |   |        |       

On April 17, 2001, the Company completed the
sale of
205 million
($182.0 million at date of sale) of 11% Senior Notes due
March 15, 2008 through a private placement to qualified
institutional buyers pursuant to Rule 144A and to persons
outside of the United States in compliance with
Regulation S. The notes are senior unsecured obligations
and rank equally with all existing and future unsecured debt.
Interest on the notes is payable semi-annually on each
September 15 and March 15.

The Company may redeem these Senior Notes in
whole or in part, at any time, on or after March 15, 2005,
at a redemption price equal to 100% of their principal amount
plus a premium declining ratably to par plus accrued and unpaid
interest and liquidation damages, if any. Prior to
March 15, 2004, the Company may redeem up to 35% of the
original aggregate principal amount of these Notes with the
proceeds of qualified equity offerings at a redemption price of
111% of their principal amount plus accrued and unpaid interest
and liquidation damages, if any. The indenture governing the
notes contains certain covenants that, among other things, limit
the Companys ability to incur additional indebtedness or
liens, make investments, sell assets, pay dividends or make
other distributions.

The net proceeds from the sale of these Senior
Notes were used to repay fully the Companys outstanding
bank borrowings and for general corporate purposes.

F-17



---



##### Table of Contents



SOLA INTERNATIONAL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Companys 6 7/8% Senior Notes
(Notes) were issued under an indenture dated
March 19, 1998, among the Company and State Street Bank and
Trust Company of California, N.A., as Trustee (the
Indenture). The Notes are unsecured senior
obligations of the Company, limited to $100 million
aggregate principal amount at maturity, and will mature on
March 15, 2008. Interest on the Notes is payable
semiannually on March 15 and September 15 of each
year. During fiscal 2001 the Company repurchased
$5.0 million principal amount of its Notes. As a result,
the Company recorded an extraordinary gain, net of tax, of
$1.5 million resulting from the difference between the
carrying value of the Notes and the purchase price.

The Notes will be redeemable, as a whole or from
time to time in part, at the option of the Company on any date
(a Redemption Date) at a redemption price equal to
the greater of (i) 100% of the principal amount of the
Notes to be redeemed or (ii) the sum of the present values
of the Remaining Scheduled Payments (as defined) thereon
discounted to such Redemption Date on a semiannual basis at the
Treasury Rate (as defined) plus 20 basis points, plus in either
case accrued interest (as defined).

The Notes rank pari passu to all other Senior
Indebtedness, as defined in the Indenture, of the Company. The
Company has determined the estimated fair value of its Senior
Notes using available market information. The estimated fair
value, based on the most recent market trades, of the Senior
Notes was $276.3 million and $84.0 million at
March 31, 2002 and March 31, 2001, respectively, and
the carrying amounts were $273.2 million and
$94.7 million, respectively. The fair value estimates do
not necessarily reflect the values the Company could realize in
the current market.

12.     Common
Stock

Common
Stock

The Company entered into loan agreements with
certain members of the Companys management to enable them
to invest in the Companys common stock. As of
March 31, 2001, all loans have been repaid. On May 3,
2000 the Companys Board of Directors authorized a stock
repurchase program in which up to 1,250,000 shares of the
Companys common stock may be repurchased in the open
market from time to time. Accordingly, the Company repurchased
1,250,000 shared of its common stock in the open market for
approximately $8.2 million during the year ended
March 31, 2001. The Company reissued 844,000 common
shares from treasury stock through March 31, 2002.

Shareholder
Rights Plan

On August 26, 1998 the Companys Board
of Directors adopted a Shareholder Rights Plan and declared a
dividend distribution to be made to shareholders of record on
September 9, 1998 of one Right for each share of the
Companys outstanding common stock. The rights contain
provisions which are intended to protect the Companys
shareholders in the event of an unsolicited and unfair attempt
to acquire the Company. The Company is entitled to redeem the
Rights at $.01 per Right at any time before a buyer acquires a
15 percent position in the Company. The Rights will expire
on August 27, 2008, unless redeemed or exercised.

Stock
Options

The Company has elected to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees(APB 25) and related
interpretations in accounting for its employee stock options
because, as discussed below, the alternative fair value
accounting provided for under FASB Statement No. 123,
Accounting for Stock-Based Compensation(SFAS 123) requires use of option valuation
models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the
Companys employee stock options equals or exceeds the
market price of the underlying stock on the date of grant, no
compensation expense is recognized.

F-18



---



##### Table of Contents



SOLA INTERNATIONAL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On February 23, 1995 all outstanding stock
options under the previous corporate structure were assumed by
the Company and converted into options to acquire shares of the
Companys Common Stock, with the number of shares subject
to such option and exercise price thereof adjusted appropriately
(the Existing Option Plan). The Existing Option Plan
has been amended to provide that no new options will be granted
thereunder.

The Company adopted the SOLA International Inc.
Stock Option Plan (the International Plan),
effective February 15, 1995. On August 14, 1998 and
August 16, 1996 the shareholders of the Company ratified
increases of 1,690,000 and 500,000, respectively, to the number
of options available for issuance under the International Plan.
The maximum number of shares of Common Stock with respect to
which options may be granted under the International Plan is
3,045,868 shares plus, subject to the requirements of
Rule 16b-3 of the Securities Exchange Act of 1934, if
applicable, the number of shares of Common Stock subject to
existing options under the Existing Option Plan, which expire or
terminate without exercise for any reason, which number of
shares underlying Existing Options shall not exceed 1,645,219.
Under the International Plan certain key employees, and non
employee directors and/or creditors of the Company and its
subsidiaries and affiliates (each an Optionee) are
eligible to receive non-qualified stock options (the
International Options) to acquire shares of common
stock of the Company. International Options granted to an
Optionee are evidenced by an agreement between the Optionee and
the Company which contains terms not inconsistent with the
International Plan, which the committee appointed to administer
the International Plan deemed necessary or desirable (the
International Option Agreement). Shares available
for future grants under the International Plan were 242,375 at
March 31, 2002.

Pursuant to the Existing Option Plan and the
International Plan (Plans), unless otherwise set
forth in an Existing Option Agreement or an International Option
Agreement, 20% of the Options granted to an Optionee vest on the
date of grant, with an additional 20% vesting on each successive
one-year anniversary of the date of grant. Options not
previously vested become fully vested in the event of a sale or
other disposition of 80% or more of the outstanding capital
stock or substantially all of the assets of the Company, or upon
a merger or consolidation of the Company and its subsidiaries
and affiliates unless the merger or consolidation is one in
which the Company is the surviving corporation or one in which
control of the Company and its subsidiaries and affiliates does
not change (a Termination Event).

However, Existing Options which are not exercised
on or prior to a Termination Event lapse upon the closing of a
Termination Event. All non-vested Options of an Optionee lapse
upon such Optionees termination of employment for any
reason. An Optionees vested Options lapse 45 days
after termination of such Optionees employment with the
Company and its subsidiaries and affiliates for any reason other
than death or disability, in which case such options terminate
180 days after such termination; provided, however, that
such options lapse immediately in the event an Optionees
employment with the Company and its subsidiaries and affiliates
is terminated for cause.

Pro Forma
Disclosures

Pro forma information regarding net income and
earnings per share is required by SFAS 123 and has been
determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following
assumptions: risk-free interest rates of 4.23%-4.50%,
4.63%-5.90%, and 4.95%-5.90%, no dividend yield, volatility
factors of the expected market price of the Companys
common stock of .614, .519-.877, and .519 and a weighted-average
expected life of the option of 4 years, for fiscal 2002,
2001, and 2000, respectively.

The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options
which have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price
volatility. Because the

F-19



---



##### Table of Contents



SOLA INTERNATIONAL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Companys employee stock options have
characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions
can materially affect the fair value estimate the existing
models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.

For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over
the options vesting period. The Companys actual and
pro forma information follows:

|                                     |         |                       |        |      |  |      |         |       |   |   |        |       |  
|------------------------------------ | ------- | --------------------- | ------ | ---- |  | ---- | ------- | ----- | - | - | ------ | ----- | -
|                                     |         |                      
|                                     |         | Year Ended March 31, 
|                                     |         |                      
|                                     |         | 2002                  |        | 2001 |  | 2000
|                                     |         |                       |        |      |  |     
|                                     |         |                      
|                                     |         | (In thousands, except
|                                     |         | per share data)      
|Actual                               |         |                       |        |      |  |      |         |       |   |   |        |      
|Net income/(loss)                    |         | $                     | 19,118 |      |  | $    | (66,528 | )     |   | $ | 741    |      
|Net income/(loss) per share          |         |                       |        |      |  |      |         |       |   |   |        |      
|                                     | Basic   |                       | $      | 0.79 |  |      | $       | (2.77 | ) |   | $      | 0.03  |  
|                                     | Diluted |                       | $      | 0.78 |  |      | $       | (2.77 | ) |   | $      | 0.03  |  
|Pro forma                            |         |                       |        |      |  |      |         |       |   |   |        |      
|Pro forma net (loss) income          |         | $                     | 16,529 |      |  | $    | (68,684 | )     |   | $ | (1,590 | )    
|Pro forma (loss) earnings per share: |         |                       |        |      |  |      |         |       |   |   |        |      
|                                     | Basic   |                       | $      | 0.69 |  |      | $       | (2.86 | ) |   | $      | (0.06 | )
|                                     | Diluted |                       | $      | 0.67 |  |      | $       | (2.86 | ) |   | $      | (0.06 | )

The pro forma effect on net income of SFAS 123
may not be representative of the effects on pro forma net
income/(loss) in future periods.

F-20



---



##### Table of Contents



SOLA INTERNATIONAL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Option Activity

A summary of the Companys stock option
activity and related information for fiscal 2000, 2001 and 2002
follows:

|                                                                                                                 |                |                       |       |          |  |   |       |       | 
|---------------------------------------------------------------------------------------------------------------- | -------------- | --------------------- | ----- | -------- |  | - | ----- | ----- | 
|                                                                                                                 |                | Number of             |       | Weighted
|                                                                                                                 |                | Securities            |       | Average 
|                                                                                                                 |                | Underlying            |       | Exercise
|                                                                                                                 |                | Options               |       | Price   
|                                                                                                                 |                |                       |       |         
|                                                                                                                 |                |                      
|                                                                                                                 |                | (In thousands, except
|                                                                                                                 |                | per share data)      
|Options outstanding as of March 31, 1999                                                                         |                |                       | 2,643 |          |  | $ | 20.79 |      
|Options granted during fiscal 2000 with an
    exercise price equal to the market price on the date of grant     |                |                       | 600   |          |  |   | 15.63 |      
|Options exercised in fiscal 2000                                                                                 |                |                       | (70   | )        |  |   | 9.71  |      
|Options cancelled in fiscal 2000                                                                                 |                |                       | (300  | )        |  |   | 24.27 |      
|                                                                                                                 |                |                       |       |          |  |   |       |      
|Options outstanding as of March 31, 2000                                                                         |                |                       | 2,873 |          |  |   | 19.62 |      
|Options granted during fiscal 2001 with an
    exercise price equal to the market price on the date of grant     |                |                       | 1,025 |          |  |   | 5.19  |      
|Options granted during fiscal 2001 with an
    exercise price greater than the market price on the date of grant |                |                       | 44    |          |  |   | 7.88  |      
|Options exercised in fiscal 2001                                                                                 |                |                       | (22   | )        |  |   | 4.75  |      
|Options cancelled in fiscal 2001                                                                                 |                |                       | (569  | )        |  |   | 18.25 |      
|                                                                                                                 |                |                       |       |          |  |   |       |      
|Options outstanding as of March 31, 2001                                                                         |                |                       | 3,351 |          |  |   | 15.36 |      
|Options granted during fiscal 2002 with an
    exercise price equal to the market price on the date of grant     |                |                       | 386   |          |  |   | 14.30 |      
|Options exercised in fiscal 2002                                                                                 |                |                       | (823  | )        |  |   | 9.32  |      
|Options cancelled in fiscal 2002                                                                                 |                |                       | (331  | )        |  |   | 23.47 |      
|                                                                                                                 |                |                       |       |          |  |   |       |      
|Options outstanding as of March 31, 2002                                                                         |                |                       | 2,583 |          |  | $ | 16.06 |      
|                                                                                                                 |                |                       |       |          |  |   |       |      
|Options exercisable at:                                                                                          |                |                       |       |          |  |   |       |      
|                                                                                                                 | March 31, 2002 |                       |       | 1,567    |  |   | $     | 19.62 | 
|                                                                                                                 | March 31, 2001 |                       |       | 2,088    |  |   | $     | 17.87 | 
|                                                                                                                 | March 31, 2000 |                       |       | 2,003    |  |   | $     | 18.08 | 
|Weighted average fair value per share of options
    granted during fiscal year:                                 |                |                       |       |          |  |   |       |      
|                                                                                                                 | 2002           |                       | $7.24
|                                                                                                                 | 2001           |                       | $3.13
|                                                                                                                 | 2000           |                       | $7.13

F-21



---



##### Table of Contents



SOLA INTERNATIONAL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes stock options
outstanding at March 31, 2002:

|                        |               |                |  |          |       |                  |  |                |       |       |  |  |      |  |  |  |       |  |  |   |       | 
|----------------------- | ------------- | -------------- |  | -------- | ----- | ---------------- |  | -------------- | ----- | ----- |  |  | ---- |  |  |  | ----- |  |  | - | ----- | 
|                        |               |                |  |          |       |                 
|                        |               | Outstanding    |  |          |       |                 
|                        |               |                |  |         
|                        |               |                |  | Weighted |       | Exercisable     
|                        |               |                |  | Weighted |       | Average          |  |               
|Range of Exercise Price |               | Shares         |  | Price    |       | Contractual Life |  | Shares         |       | Price
|                        |               |                |  |          |       |                  |  |                |       |      
|                        |               | (In thousands) |  |          |       |                  |  | (In thousands) |       |      
|                        | $ 4.63-$ 4.75 |                |  |          | 466   |                  |  | $              | 4.72  |       |  |  | 8.22 |  |  |  | 138   |  |  | $ | 4.72  | 
|                        | $ 5.81-$ 9.71 |                |  |          | 440   |                  |  |                | 7.28  |       |  |  | 6.62 |  |  |  | 242   |  |  |   | 7.98  | 
|                        | $11.41-$15.00 |                |  |          | 473   |                  |  |                | 14.15 |       |  |  | 8.73 |  |  |  | 156   |  |  |   | 14.32 | 
|                        | $15.38-$16.88 |                |  |          | 451   |                  |  |                | 16.31 |       |  |  | 5.07 |  |  |  | 367   |  |  |   | 16.36 | 
|                        | $16.99-$30.13 |                |  |          | 475   |                  |  |                | 26.49 |       |  |  | 5.73 |  |  |  | 389   |  |  |   | 27.24 | 
|                        | $30.19-$38.38 |                |  |          | 278   |                  |  |                | 34.01 |       |  |  | 4.91 |  |  |  | 275   |  |  |   | 33.97 | 
|                        |               |                |  |          |       |                  |  |                |       |       |  |  |      |  |  |  |       |  |  |   |       | 
|                        | $ 4.63-$38.38 |                |  |          | 2,583 |                  |  | $              | 16.06 |       |  |  | 6.68 |  |  |  | 1,567 |  |  | $ | 19.62 | 
|                        |               |                |  |          |       |                  |  |                |       |       |  |  |      |  |  |  |       |  |  |   |       | 

13.     Special
Charges and Transition Costs

Commencing in the third quarter of fiscal 1999,
the Company implemented strategic initiatives designed to
streamline manufacturing and logistics, reduce operating costs
worldwide and write-off inventory SKUs that are no longer being
manufactured. As a result of these strategic initiatives, during
fiscal 2002, 2001 and 2000, the Company recorded pretax special
charges comprised of the following:

|                                                                                 |       |                |      |      |  |      |        |        |  |   |        |        | 
|-------------------------------------------------------------------------------- | ----- | -------------- | ---- | ---- |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                                                                 |       | 2002           |      | 2001 |  | 2000
|                                                                                 |       |                |      |      |  |     
|                                                                                 |       |               
|                                                                                 |       | (In thousands)
|Charges associated with work-force reductions                                    |       | $              |     |      |  | $    | 19,681 |        |  | $ | 6,650  |       
|Molds write-off associated with product
    standardization                      |       |                |     |      |  |      | 24,256 |        |  |   | 10,200 |       
|Charges associated with facility closures                                        |       |                | 768  |      |  |      | 28,235 |        |  |   | 2,969  |       
|Impairment of goodwill                                                           |       |                |     |      |  |      | 17,057 |        |  |   |       |       
|Accounts receivable write-offs associated with
    the economic slowdown in Asia |       |                |     |      |  |      |       |        |  |   | 2,500  |       
|Asset write-offs associated with discontinued
    product line                   |       |                |     |      |  |      | 7,690  |        |  |   |       |       
|Gain on sale of land associated with facility
    closure                        |       |                | (740 | )    |  |      | (5,854 | )      |  |   |       |       
|                                                                                 |       |                |      |      |  |      |        |        |  |   |        |       
|                                                                                 | Total |                | $    | 28   |  |      | $      | 91,065 |  |   | $      | 22,319 | 
|                                                                                 |       |                |      |      |  |      |        |        |  |   |        |       

During fiscal 2002, the Company recorded net
pretax special charges of $28,000 comprised of $0.8 million
associated with additional facility closure costs, offset by a
gain on the sale of land in North America of $0.8 million,
also associated with facility closures.

During fiscal 2001, the Company recorded net
pretax special charges of $91.1 million. The Company
incurred $19.7 million associated with workforce reductions
in North America, Europe and Australia. Included in the
workforce reductions were 780 employees from manufacturing, 91
employees from sales and marketing, 75 employees from
administration, and 46 employees from research and development.
At March 31, 2002, $25.1 million cash had been paid
related to workforce reductions incurred since fiscal 1999. The
special charges include $24.3 million related to the
write-off of molds, which were discontinued as a result of the
Companys efforts to globally standardize product
specifications. Also, the Company continued the transfer of
high-volume production to low-cost manufacturing locations and
the consolidation of manufacturing expertise into fewer
production facilities that commenced in the fourth quarter of
fiscal 2000. As a result, special charges of $28.2 million
related to redundant equipment write-off and facility closure
costs were incurred. Additionally, as a result of the
discontinuation of the development of the polycarbonate Matrix

F-22



---



##### Table of Contents



SOLA INTERNATIONAL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

product line, the Company incurred
$7.6 million in asset write-offs including equipment
($7.0 million) and related commitments ($0.6 million).
Lastly, the Company recognized a gain on the sale of land in
North America of $5.8 million associated with facility
closures. Also included in special charges is $17.0 million
related to the impairment of goodwill associated with a prior
acquisition of a lens manufacturing business. This impairment
was recorded pursuant to SFAS 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of, as the Company decided to discontinue and exit
operations of this lens manufacturing business and completely
close-down the facility.

In addition to the special charges of
$91.1 million recorded during fiscal 2001, the Company
wrote-down approximately $25.6 million in inventory due to
product discontinuance resulting from the Companys efforts
to globally standardize product specifications. These
write-downs have been accounted for in cost of sales.

In fiscal 2000, primarily during the fourth
quarter, the Company recorded pretax special charges of
$22.3 million. The Company commenced consolidation of its
Mexican manufacturing operations in fiscal year 1999 and
completed the consolidation in fiscal year 2000. Included in the
Mexican manufacturing facilities consolidation charge of
$4.0 million are write-offs of molds ($1.4 million)
and costs associated with combining the two manufacturing
operations ($2.6 million). The special charge amount
includes $6.7 million relating to work-force reductions in
North America, Europe and Australia. Included in the workforce
reductions were 143 employees from manufacturing, 19 employees
from sales and marketing, 19 employees from administration and 9
employees from research and development. The Company recorded a
charge of $2.5 million for provision against collection of
accounts receivable in Asia as a result of the economic
slow-down in the region during fiscal 1999. During fiscal year
2000, the Company commenced the transfer of high volume
production to low cost manufacturing locations and the
consolidation of certain manufacturing expertise into fewer
production facilities. As a result, charges of $8.8 million
were incurred related to the write-off of molds and
$0.3 million related to facility closure costs.

Additionally, during fiscal 2002 and fiscal 2001,
the Company incurred transition costs associated with its
restructuring plan. Such costs amounted to $20.6 million
and $17.5 million, respectively, and were related to
interim workforce and out-of-pocket expenditures which are
expected to be eliminated as the restructuring plan is fully
executed. Of these costs, $12.2 million and
$11.2 million are reflected in costs of sales,
$0.7 million and $0.8 million are reflected in
research and development expenses, $3.3 million and
$2.4 million are reflected in selling and marketing
expenses, and $4.4 million and $3.1 million are
reflected in general and administrative expenses, for fiscal
2002 and 2001, respectively.

F-23



---



##### Table of Contents



SOLA INTERNATIONAL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Details of the special charges are as follows (in
thousands):

|                                                        |           |            |        |            |         |            |        |          |         |            |       |              |        |         |        |       |         |   |        |  |         |   |       |  |        |   |        |   |       |   |        |  |         |  
|------------------------------------------------------- | --------- | ---------- | ------ | ---------- | ------- | ---------- | ------ | -------- | ------- | ---------- | ----- | ------------ | ------ | ------- | ------ | ----- | ------- | - | ------ |  | ------- | - | ----- |  | ------ | - | ------ | - | ----- | - | ------ |  | ------- | -
|                                                        |           |            |        |            |         |            |        |          |         |            |       | Asset        |        |         |        |      
|                                                        |           |            |        |            |         |            |        |          |         |            |       | Write-offs   |        |         |        |      
|                                                        |           |            |        |            |         |            |        |          |         |            |       | Associated   |        |         |        |      
|                                                        |           |            |        |            |         |            |        |          |         |            |       | with         |        |         |        |      
|                                                        |           |            |        |            |         | Accounts   |        |          |         |            |       | Discontinued |        | Gain on |        |      
|                                                        |           | Workforce  |        | Mold       |         | Receivable |        | Facility |         | Goodwill   |       | Product      |        | sale of |        |      
|                                                        |           | Reductions |        | Write-offs |         | Write-offs |        | Closures |         | Impairment |       | Line         |        | Land    |        | Total
|                                                        |           |            |        |            |         |            |        |          |         |            |       |              |        |         |        |      
|Strategic initiative liability as of
    March 31, 1999 |           | $          | 1,751  |            |         | $          |       |          |         | $          |      |              |        | $       |       |       |         | $ |       |  |         | $ |      |  |        | $ |       |   |       | $ | 1,751  | 
|Fiscal 2000 Charge to operations                        |           |            | 6,650  |            |         |            | 10,200 |          |         |            | 2,500 |              |        |         | 2,969  |       |         |   |       |  |         |   |      |  |        |   |       |   |       |   | 22,319 | 
|                                                        | Utilized: |            |        |            |         |            |        |          |         |            |       |              |        |         |        |       |         |   |        |  |         |   |       |  |        |   |        |   |       |   |        |  |        
|                                                        |           | Non-cash   |        |            |        |            |        |          | (10,200 | )          |       |              | (2,500 | )       |        |       | (2,969  | ) |        |  |        |   |       |  |       |   |        |   |      |   |        |  | (15,669 | )
|                                                        |           | Cash       |        |            | (2,133  | )          |        |          |        |            |       |              |       |         |        |       |        |   |        |  |        |   |       |  |       |   |        |   |      |   |        |  | (2,133  | )
|                                                        |           |            |        |            |         |            |        |          |         |            |       |              |        |         |        |       |         |   |        |  |         |   |       |  |        |   |        |   |       |   |        | 
|Strategic initiative liability as of
    March 31, 2000 |           |            | 6,268  |            |         |            |       |          |         |            |      |              |        |         |       |       |         |   |       |  |         |   |      |  |        |   |       |   |       |   | 6,268  | 
|Fiscal 2001 Charge to operations                        |           |            | 19,681 |            |         |            | 24,256 |          |         |            |      |              |        |         | 28,235 |       |         |   | 17,057 |  |         |   | 7,690 |  |        |   | (5,854 | ) |       |   | 91,065 | 
|                                                        | Utilized: |            |        |            |         |            |        |          |         |            |       |              |        |         |        |       |         |   |        |  |         |   |       |  |        |   |        |   |       |   |        |  |        
|                                                        |           | Non-cash   |        |            |        |            |        |          | (24,256 | )          |       |              |       |         |        |       | (25,286 | ) |        |  | (17,057 | ) |       |  | (7,690 | ) |        |   |      |   |        |  | (74,289 | )
|                                                        |           | Cash       |        |            | (12,267 | )          |        |          |        |            |       |              |       |         |        |       | (510    | ) |        |  |        |   |       |  |       |   |        |   | 5,854 |   |        |  | (6,923  | )
|                                                        |           |            |        |            |         |            |        |          |         |            |       |              |        |         |        |       |         |   |        |  |         |   |       |  |        |   |        |   |       |   |        | 
|Strategic initiative liability as of
    March 31, 2001 |           |            | 13,682 |            |         |            |       |          |         |            |      |              |        |         | 2,439  |       |         |   |       |  |         |   |      |  |        |   |       |   |       |   | 16,121 | 
|Fiscal 2002 Charge to operations                        |           |            |       |            |         |            |       |          |         |            |      |              |        |         | 28     |       |         |   |       |  |         |   |      |  |        |   |       |   |       |   | 28     | 
|                                                        | Utilized: |            |        |            |         |            |        |          |         |            |       |              |        |         |        |       |         |   |        |  |         |   |       |  |        |   |        |   |       |   |        |  |        
|                                                        |           | Non-cash   |        |            |        |            |        |          |        |            |       |              |       |         |        |       | (767    | ) |        |  |        |   |       |  |       |   |        |   |      |   |        |  | (767    | )
|                                                        |           | Cash       |        |            | (8,812  | )          |        |          |        |            |       |              |       |         |        |       | (274    | ) |        |  |        |   |       |  |       |   |        |   |      |   |        |  | (9,086  | )
|                                                        |           |            |        |            |         |            |        |          |         |            |       |              |        |         |        |       |         |   |        |  |         |   |       |  |        |   |        |   |       |   |        | 
|Strategic initiative liability as of
    March 31, 2002 |           | $          | 4,870  |            |         | $          |       |          |         | $          |      |              |        | $       | 1,426  |       |         | $ |       |  |         | $ |      |  |        | $ |       |   |       | $ | 6,296  | 
|                                                        |           |            |        |            |         |            |        |          |         |            |       |              |        |         |        |       |         |   |        |  |         |   |       |  |        |   |        |   |       |   |        | 

At March 31, 2002, the Companys
strategic initiatives have been substantially completed and the
Company does not anticipate any additional special charges
related to its strategic initiatives. The liability associated
with the strategic initiatives as of March 31, 2002 is
included in accrued liabilities. The Company anticipates that
substantially all of the accrued liability will be paid in
fiscal 2003 and will be funded through cash provided by
operations.

14.     Defined
Contribution Plans

The Company sponsors several defined contribution
plans covering substantially all U.S. and U.K. employees.
Under the U.S. 401(k) retirement plan, the Company provides
50% matching contributions up to a maximum of 6% of the
employees compensation during the plan year. Contributions
for the years ended March 31, 2002, 2001 and 2000 were
$0.7 million, $1.0 million and $1.2 million,
respectively. Under the U.K. plan, the Company matches
pension contributions of up to 8% of the employees
pensionable salary. The contribution was $0.1 million in
each of the years ended March 31, 2002, 2001 and 2000.

F-24



---



##### Table of Contents



SOLA INTERNATIONAL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

15.     Defined
Benefit Retirement Plans

The Company participates in a defined benefit
pension plan (Domestic Pension Plan) covering
substantially all full-time domestic employees. The Company also
participates in a contributory defined benefit pension plan
covering certain Australian employees (International
Pension Plan).

The following provides a reconciliation of the
changes in the plans benefit obligations and fair value of
assets and a statement of the funded status for both the
Domestic and the International Pension Plans.

|                                          |  |                  |        |                       |  |      |        |      |  |   |        |   |  |   |        |  
|----------------------------------------- |  | ---------------- | ------ | --------------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                          |  |                  |        |                      
|                                          |  | Domestic Pension |        | International Pension
|                                          |  | Plan             |        | Plan                 
|                                          |  |                  |        |                      
|                                          |  | 2002             |        | 2001                  |  | 2002 |        | 2001
|                                          |  |                  |        |                       |  |      |        |     
|                                          |  |                 
|                                          |  | (In thousands)  
|Year ended March 31,                      |  |                  |        |                       |  |      |        |      |  |   |        |   |  |   |        |  
|Reconciliation of benefit
    obligation: |  |                  |        |                       |  |      |        |      |  |   |        |   |  |   |        |  
|Benefit obligation  beginning of year    |  | $                | 22,703 |                       |  | $    | 21,491 |      |  | $ | 11,857 |   |  | $ | 12,852 |  
|Service cost                              |  |                  | 1,308  |                       |  |      | 2,220  |      |  |   | 1,536  |   |  |   | 1,555  |  
|Interest cost                             |  |                  | 1,303  |                       |  |      | 1,429  |      |  |   | 627    |   |  |   | 676    |  
|Participant contributions                 |  |                  |       |                       |  |      |       |      |  |   | 128    |   |  |   | 137    |  
|Actuarial gain/(loss)                     |  |                  | (2,516 | )                     |  |      | 2,648  |      |  |   | (2,570 | ) |  |   | 1,163  |  
|Benefit payments                          |  |                  | (444   | )                     |  |      | (209   | )    |  |   | (2,134 | ) |  |   | (1,571 | )
|Curtailments                              |  |                  |       |                       |  |      | (4,876 | )    |  |   |       |   |  |   |       |  
|Other                                     |  |                  |       |                       |  |      |       |      |  |   | 29     |   |  |   | (152   | )
|Effect of exchange rates                  |  |                  |       |                       |  |      |       |      |  |   | 1,035  |   |  |   | (2,803 | )
|                                          |  |                  |        |                       |  |      |        |      |  |   |        |   |  |   |        |  
|Benefit obligation  end of year          |  | $                | 22,354 |                       |  | $    | 22,703 |      |  | $ | 10,508 |   |  | $ | 11,857 |  
|                                          |  |                  |        |                       |  |      |        |      |  |   |        |   |  |   |        |  

Curtailments in fiscal 2001 relate to the
termination of approximately 600 plan participants as a result
of the Companys strategic initiatives and associated
reduction in workforce.

|                                                  |  |                  |        |                       |  |      |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------- |  | ---------------- | ------ | --------------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                  |  |                  |        |                      
|                                                  |  | Domestic Pension |        | International Pension
|                                                  |  | Plan             |        | Plan                 
|                                                  |  |                  |        |                      
|                                                  |  | 2002             |        | 2001                  |  | 2002 |        | 2001
|                                                  |  |                  |        |                       |  |      |        |     
|                                                  |  |                 
|                                                  |  | (In thousands)  
|Year ended March 31,                              |  |                  |        |                       |  |      |        |      |  |   |        |   |  |   |        |  
|Reconciliation of fair value of plan
    assets:  |  |                  |        |                       |  |      |        |      |  |   |        |   |  |   |        |  
|Fair value of plan assets  beginning
    of year |  | $                | 14,610 |                       |  | $    | 20,318 |      |  | $ | 11,189 |   |  | $ | 14,251 |  
|Actual return on plan assets                      |  |                  | 904    |                       |  |      | (6,749 | )    |  |   | 292    |   |  |   | 473    |  
|Employer contributions                            |  |                  |       |                       |  |      | 1,250  |      |  |   | 1,217  |   |  |   | 878    |  
|Participant contributions                         |  |                  |       |                       |  |      |       |      |  |   | 128    |   |  |   | 137    |  
|Benefit payments                                  |  |                  | (444   | )                     |  |      | (209   | )    |  |   | (2,134 | ) |  |   | (1,571 | )
|Other                                             |  |                  |       |                       |  |      |       |      |  |   | 29     |   |  |   | (152   | )
|Effect of exchange rates                          |  |                  |       |                       |  |      |       |      |  |   | 1,041  |   |  |   | (2,827 | )
|                                                  |  |                  |        |                       |  |      |        |      |  |   |        |   |  |   |        |  
|Fair value of plan assets  end of year           |  | $                | 15,070 |                       |  | $    | 14,610 |      |  | $ | 11,762 |   |  | $ | 11,189 |  
|                                                  |  |                  |        |                       |  |      |        |      |  |   |        |   |  |   |        |  

F-25



---



##### Table of Contents



SOLA INTERNATIONAL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                              |  |                  |        |                       |  |      |        |      |  |   |        |   |  |   |        |  
|----------------------------- |  | ---------------- | ------ | --------------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                              |  |                  |        |                      
|                              |  | Domestic Pension |        | International Pension
|                              |  | Plan             |        | Plan                 
|                              |  |                  |        |                      
|                              |  | 2002             |        | 2001                  |  | 2002 |        | 2001
|                              |  |                  |        |                       |  |      |        |     
|                              |  |                 
|                              |  | (In thousands)  
|Year ended March 31,          |  |                  |        |                       |  |      |        |      |  |   |        |   |  |   |        |  
|Funded status:                |  |                  |        |                       |  |      |        |      |  |   |        |   |  |   |        |  
|Funded status at March 31     |  | $                | (7,284 | )                     |  | $    | (8,093 | )    |  | $ | 1,253  |   |  | $ | (668   | )
|Unrecognized transition asset |  |                  |       |                       |  |      |       |      |  |   | (58    | ) |  |   | (70    | )
|Unrecognized (gain) loss      |  |                  | (51    | )                     |  |      | 2,204  |      |  |   | (2,913 | ) |  |   | (803   | )
|                              |  |                  |        |                       |  |      |        |      |  |   |        |   |  |   |        |  
|Accrued pension cost          |  | $                | (7,335 | )                     |  | $    | (5,889 | )    |  | $ | (1,718 | ) |  | $ | (1,541 | )
|                              |  |                  |        |                       |  |      |        |      |  |   |        |   |  |   |        |  

The assumptions used in the measurement of the
Companys benefit obligation are shown in the following
table:

|                                                 |  |              |      |               |  |      |      |      |  |  |      |   |  |  |      |  
|------------------------------------------------ |  | ------------ | ---- | ------------- |  | ---- | ---- | ---- |  |  | ---- | - |  |  | ---- | -
|                                                 |  |              |      |              
|                                                 |  | Domestic     |      | International
|                                                 |  | Pension Plan |      | Pension Plan 
|                                                 |  |              |      |              
|                                                 |  | 2002         |      | 2001          |  | 2002 |      | 2001
|                                                 |  |              |      |               |  |      |      |     
|Year ended March 31,                             |  |              |      |               |  |      |      |      |  |  |      |   |  |  |      |  
|Discount rate                                    |  |              | 6.50 | %             |  |      | 6.50 | %    |  |  | 6.50 | % |  |  | 5.50 | %
|Expected long-term rate of return on plan assets |  |              | 8.00 | %             |  |      | 8.00 | %    |  |  | 7.50 | % |  |  | 8.00 | %
|Rate of increase in future compensation levels   |  |              | 5.00 | %             |  |      | 5.00 | %    |  |  | 4.00 | % |  |  | 5.00 | %

Net periodic pension costs include the following
components:

|                                 |  |                       |        |                            |  |      |        |      |  |      |        |      |  |   |       |   |  |   |        |   |  |   |        |  
|-------------------------------- |  | --------------------- | ------ | -------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | - | ----- | - |  | - | ------ | - |  | - | ------ | -
|                                 |  |                       |        |                           
|                                 |  | Domestic Pension Plan |        | International Pension Plan
|                                 |  |                       |        |                           
|                                 |  | 2002                  |        | 2001                       |  | 2000 |        | 2002 |  | 2001 |        | 2000
|                                 |  |                       |        |                            |  |      |        |      |  |      |        |     
|                                 |  |                      
|                                 |  | (In thousands)       
|Year ended March 31,             |  |                       |        |                            |  |      |        |      |  |      |        |      |  |   |       |   |  |   |        |   |  |   |        |  
|Service cost                     |  | $                     | 1,308  |                            |  | $    | 2,220  |      |  | $    | 2,608  |      |  | $ | 1,536 |   |  | $ | 1,555  |   |  | $ | 1,581  |  
|Interest cost                    |  |                       | 1,303  |                            |  |      | 1,429  |      |  |      | 1,302  |      |  |   | 627   |   |  |   | 676    |   |  |   | 737    |  
|Expected return on plan assets   |  |                       | (1,195 | )                          |  |      | (1,700 | )    |  |      | (1,173 | )    |  |   | (909  | ) |  |   | (1,009 | ) |  |   | (1,077 | )
|Amortization of transition asset |  |                       |       |                            |  |      |       |      |  |      |       |      |  |   | (19   | ) |  |   | (21    | ) |  |   | (24    | )
|Amortization of gain             |  |                       |       |                            |  |      | (345   | )    |  |      |       |      |  |   |      |   |  |   | (118   | ) |  |   | (90    | )
|                                 |  |                       |        |                            |  |      |        |      |  |      |        |      |  |   |       |   |  |   |        |   |  |   |        |  
|Net periodic pension cost        |  | $                     | 1,416  |                            |  | $    | 1,604  |      |  | $    | 2,737  |      |  | $ | 1,235 |   |  | $ | 1,083  |   |  | $ | 1,127  |  
|                                 |  |                       |        |                            |  |      |        |      |  |      |        |      |  |   |       |   |  |   |        |   |  |   |        |  

16.     Income
Taxes

The domestic and foreign components of
income/(loss) before provision/ (benefit) for income taxes,
minority interest and extraordinary item are as follows:

|         |  |                      |        |      |  |      |          |   |  |   |         |  
|-------- |  | -------------------- | ------ | ---- |  | ---- | -------- | - |  | - | ------- | -
|         |  |                     
|         |  | Year Ended March 31,
|         |  |                     
|         |  | 2002                 |        | 2001 |  | 2000
|         |  |                      |        |      |  |     
|         |  |                     
|         |  | (In thousands)      
|Domestic |  | $                    | (297   | )    |  | $    | (89,087  | ) |  | $ | (12,120 | )
|Foreign  |  |                      | 25,332 |      |  |      | (11,405  | ) |  |   | 13,185  |  
|         |  |                      |        |      |  |      |          |   |  |   |         |  
|         |  | $                    | 25,035 |      |  | $    | (100,492 | ) |  | $ | 1,065   |  
|         |  |                      |        |      |  |      |          |   |  |   |         |  

F-26



---



##### Table of Contents



SOLA INTERNATIONAL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The components of the provision/ (benefit) for
income taxes are as follows:

|                               |                   |                      |       |        |   |      |         |         |   |   |        |        |  
|------------------------------ | ----------------- | -------------------- | ----- | ------ | - | ---- | ------- | ------- | - | - | ------ | ------ | -
|                               |                   |                     
|                               |                   | Year Ended March 31,
|                               |                   |                     
|                               |                   | 2002                 |       | 2001   |   | 2000
|                               |                   |                      |       |        |   |     
|                               |                   |                     
|                               |                   | (In thousands)      
|Current:                       |                   |                      |       |        |   |      |         |         |   |   |        |       
|                               | Federal and State |                      | $     | 141    |   |      | $       | (561    | ) |   | $      | (9,951 | )
|                               | Foreign           |                      |       | 5,714  |   |      |         | (702    | ) |   |        | 7,675  |  
|Deferred:                      |                   |                      |       |        |   |      |         |         |   |   |        |       
|                               | Federal and State |                      |       | (1,817 | ) |      |         | (33,821 | ) |   |        | 2,211  |  
|                               | Foreign           |                      |       | (1,490 | ) |      |         | 307     |   |   |        | 2,420  |  
|Valuation allowance adjustment |                   |                      | 4,462 |        |   |      | 2,571   |         |   |   | (1,461 | )     
|                               |                   |                      |       |        |   |      |         |         |   |   |        |       
|                               |                   | $                    | 7,010 |        |   | $    | (32,206 | )       |   | $ | 894    |       
|                               |                   |                      |       |        |   |      |         |         |   |   |        |       

During fiscal 2002, 2001, and 2000, the Company
recognized $2.5 million, $27,000, and $0.1 million of
certain tax benefits related to stock option plans. Such
benefits were recorded as a reduction of income taxes payable
and an increase in additional paid-in capital.

A reconciliation between income tax
provisions/(benefits) computed at the U.S. federal
statutory rate and the effective rate reflected in the
statements of operations is as follows:

|                                                                |  |                      |       |      |  |      |       |    |  |  |        |  
|--------------------------------------------------------------- |  | -------------------- | ----- | ---- |  | ---- | ----- | -- |  |  | ------ | -
|                                                                |  |                     
|                                                                |  | Year Ended March 31,
|                                                                |  |                     
|                                                                |  | 2002                 |       | 2001 |  | 2000
|                                                                |  |                      |       |      |  |     
|Provision/(benefit) at statutory rate                           |  |                      | 35.0  | %    |  |      | (35.0 | )% |  |  | 35.0   | %
|State tax provision, net of federal effect                      |  |                      | 1.0   |      |  |      | (1.0  | )  |  |  | 2.0    |  
|Valuation allowance                                             |  |                      | 17.8  |      |  |      | 2.6   |    |  |  | (137.2 | )
|Special charges at differing statutory rates                    |  |                      |      |      |  |      | 3.6   |    |  |  | 217.8  |  
|Income of foreign subsidiaries at differing
    statutory rates |  |                      | (20.8 | )    |  |      |      |    |  |  |       |  
|Other                                                           |  |                      | (5.0  | )    |  |      | (2.2  | )  |  |  | (33.7  | )
|                                                                |  |                      |       |      |  |      |       |    |  |  |        |  
|                                                                |  |                      | 28.0  | %    |  |      | (32.0 | )% |  |  | 83.9   | %
|                                                                |  |                      |       |      |  |      |       |    |  |  |        |  

F-27



---



##### Table of Contents



SOLA INTERNATIONAL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The tax effects of temporary differences that
give rise to significant portions of the deferred tax assets and
deferred tax liabilities are presented below:

|                          |                                                                                   |                                                               |   |        |        |  |   |        |        | 
|------------------------- | --------------------------------------------------------------------------------- | ------------------------------------------------------------- | - | ------ | ------ |  | - | ------ | ------ | 
|                          |                                                                                   |                                                              
|                          |                                                                                   | March 31,                                                    
|                          |                                                                                   |                                                              
|                          |                                                                                   | 2002                                                          |   | 2001  
|                          |                                                                                   |                                                               |   |       
|                          |                                                                                   |                                                              
|                          |                                                                                   | (In thousands)                                               
|Deferred tax assets:      |                                                                                   |                                                               |   |        |        |  |   |       
|                          | Accounts receivable, principally due to
    allowances for doubtful accounts      |                                                               | $ | 2,390  |        |  | $ | 2,320  |       
|                          | Inventories, principally due to reserves                                          |                                                               |   | 14,655 |        |  |   | 12,233 |       
|                          | Property, plant and equipment, principally due to
    differences in depreciation |                                                               |   | 2,619  |        |  |   | 2,852  |       
|                          | Accruals for employee benefits                                                    |                                                               |   | 8,644  |        |  |   | 6,382  |       
|                          | In-process research and development                                               |                                                               |   | 8,057  |        |  |   | 8,845  |       
|                          | Other assets                                                                      |                                                               |   | 5,396  |        |  |   | 11,381 |       
|                          | Net operating losses (NOL)                                                        |                                                               |   | 50,962 |        |  |   | 37,599 |       
|                          |                                                                                   |                                                               |   |        |        |  |   |       
|                          | Total deferred tax assets                                                         |                                                               |   | 92,753 |        |  |   | 81,612 |       
|                          | Less: valuation allowance                                                         |                                                               |   | 16,262 |        |  |   | 11,800 |       
|                          |                                                                                   |                                                               |   |        |        |  |   |       
|                          | Net deferred tax assets                                                           |                                                               | $ | 76,461 |        |  | $ | 69,812 |       
|                          |                                                                                   |                                                               |   |        |        |  |   |       
|Deferred tax liabilities: |                                                                                   |                                                               |   |        |        |  |   |       
|                          | Property, plant and equipment, principally due to
    differences in depreciation |                                                               | $ | 16,218 |        |  | $ | 14,388 |       
|                          | Inventories                                                                       |                                                               |   | 4,218  |        |  |   | 2,049  |       
|                          | Amortization of goodwill                                                          |                                                               |   | 14,102 |        |  |   | 10,399 |       
|                          | Other                                                                             |                                                               |   | 5,841  |        |  |   | 8,193  |       
|                          |                                                                                   |                                                               |   |        |        |  |   |       
|                          | Net deferred tax liabilities                                                      |                                                               | $ | 40,379 |        |  | $ | 35,029 |       
|                          |                                                                                   |                                                               |   |        |        |  |   |       
|                          |                                                                                   | Net deferred tax assets less net deferred tax
    liabilities |   | $      | 36,082 |  |   | $      | 34,783 | 
|                          |                                                                                   |                                                               |   |        |        |  |   |       

The deferred tax assets valuation allowance at
March 31, 2002 and 2001 is primarily attributable to
deferred tax assets, which resulted primarily from net operating
loss carryovers. Management believes that the realization of
these deferred tax assets was not assured in the years presented.

For tax purposes, the Company and its foreign
subsidiaries, at March 31, 2002, had net operating loss
carryforwards of $122.0 million. Of this amount,
$51.3 million does not expire, and $70.7 million
expires between 2003 and 2022. The deferred tax assets reflected
in the Companys accounts as of March 31, 2002 before
valuation allowances reflect these NOLs.

The Company has not provided for
U.S. federal income and foreign withholding taxes on
$95.9 million of non-U.S. subsidiaries
undistributed earnings as of March 31, 2002 because such
earnings are intended to be reinvested indefinitely. Upon
distribution of those earnings in the form of dividends or
otherwise, the Company would be subject to U.S. income
taxes (subject to an adjustment for foreign tax credits).
Determination of the amount of unrecognized deferred
U.S. income tax liability is not practicable because of the
complexities associated with its hypothetical calculation.

17.     Commitments

The Company leases certain warehouse and office
facilities, office equipment and automobiles under noncancelable
operating leases which expire in 2003 through 2014. The Company
is responsible for taxes,

F-28



---



##### Table of Contents



SOLA INTERNATIONAL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

insurance and maintenance expenses related to the
leased facilities. Under the terms of certain lease agreements,
the leases may be extended, at the Companys option, and
certain of the leases provide for adjustments of the minimum
monthly rent.

Future minimum annual lease payments under the
leases are as follows:

|                        |            |                |   |       | 
|----------------------- | ---------- | -------------- | - | ----- | 
|                        |            | (In thousands)
|Period Ending March 31, |            |                |   |      
|                        | 2003       |                | $ | 2,965 | 
|                        | 2004       |                |   | 2,600 | 
|                        | 2005       |                |   | 1,829 | 
|                        | 2006       |                |   | 1,236 | 
|                        | 2007       |                |   | 852   | 
|                        | Thereafter |                |   | 830   | 

The Company subleases certain of its office and
warehouse facilities. Future minimum rental receipts under
noncancelable subleases are as follows:

|                        |            |                |   |     | 
|----------------------- | ---------- | -------------- | - | --- | 
|                        |            | (In thousands)
|Period Ending March 31, |            |                |   |    
|                        | 2003       |                | $ | 113 | 
|                        | 2004       |                |   | 60  | 
|                        | 2005       |                |   | 13  | 
|                        | 2006       |                |   |    | 
|                        | 2007       |                |   |    | 
|                        | Thereafter |                |   |    | 

Rent expense for fiscal 2002, 2001, and 2000 was
$6.8 million, $7.8 million and $7.8 million,
respectively.

18.     Extraordinary
Item

In June 2000, the Company purchased
$5.0 million of its 6 7/8% Senior Notes due 2008. As a
result, the Company recorded an extraordinary gain of
$1.5 million, net of tax of $0.9 million, resulting
from the difference between the carrying value of the Notes and
the purchase price. The purchase was funded by the
Companys Credit Agreement and resulted in a decline in net
borrowings.

19.     Contingencies

The Company is subject to environmental laws and
regulations concerning emissions to the air, discharges to
surface and subsurface waters and the generation, handling,
storage, transportation, treatment and disposal of waste
materials.

Since 1988, the Company has operated a ground
water remediation system at its Petaluma, California
manufacturing facility in accordance with a consent order issued
by the U.S. EPA under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980. The system is designed
to remediate a pre-1982 release of hazardous substances.
Analytical results indicate that contamination levels have
decreased significantly over the past few years. Since March
1997, the Company has curtailed clean-up activities, while
continuing to monitor contamination levels. In 1997, the Company
submitted to the EPA a report on contamination levels and the
impact of curtailed activities that indicates no significant
impact on the site from the curtailed activities. The EPA has
consented to continued curtailment of clean-up activities. The
Company expects continued reduction of clean-up activities due
to relatively low levels of contamination existing at the site.
In connection with the acquisition from Pilkington, Pilkington
has agreed to indemnify the Company with respect to
environmental losses relating to certain then existing facts,
events, conditions, matters or issues, for

F-29



---



##### Table of Contents



SOLA INTERNATIONAL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(1) 50% of the losses to the extent they
exceed $1 million but are less than or equal to
$5 million, and (2) 100% of the losses in excess of
$5 million. In March 2001 the Company completed the sale of
the affected property and indemnified the buyer with respect to
certain then-existing facts, events, conditions, matters or
issues.

It is possible that the Company may be involved
in other similar investigations and actions under state, federal
or foreign laws in the future. Based on currently available
information, the Company does not believe that its share of
costs at the existing is likely to result in a liability that
will have a material adverse effect on its results of
operations, financial condition or cash flows.

The Companys policy is to meet or exceed
all applicable environmental, health and safety laws and
regulations. The complexity and continuing evolution of
environmental regulation, including certain programs for which
implementing regulations have not yet been finalized, preclude
precise estimation of future environmental expenditures.

In the ordinary course of business, various legal
actions and claims pending have been filed against the Company.
While it is reasonably possible that such contingencies may
result in a cost greater than that provided for in the financial
statements, it is the opinion of management that the ultimate
liability, if any, with respect to these matters, will not
materially affect the consolidated operations, cash flows, or
financial position of the Company.

20.     Worldwide
Operations

The Companys chief operating decision maker
reviews financial information presented on a consolidated basis,
accompanied by disaggregated information by geographic region
for purposes of making operating decisions and assessing
financial performance. Accordingly, the Company considers itself
to be a single industry segment, specifically, operating in the
ophthalmic industry in the design and manufacture of eyeglass
lenses.

A summary of information about the Companys
geographic areas is as follows:

|                          |          |                |         |         |  |          |         |              |  |       |         |         |  |  |        |          |   |  |         |         | 
|------------------------- | -------- | -------------- | ------- | ------- |  | -------- | ------- | ------------ |  | ----- | ------- | ------- |  |  | ------ | -------- | - |  | ------- | ------- | 
|                          |          | North          |         |         |  | Rest of  |         |              |  |      
|                          |          | America        |         | Europe  |  | World(b) |         | Eliminations |  | Total
|                          |          |                |         |         |  |          |         |              |  |      
|                          |          |               
|                          |          | (In thousands)
|Year Ended March 31, 2002 |          |                |         |         |  |          |         |              |  |       |         |         |  |  |        |          |   |  |         |        
|Net sales(a):             |          |                |         |         |  |          |         |              |  |       |         |         |  |  |        |          |   |  |         |        
|                          | External |                | $       | 236,785 |  |          | $       | 185,806      |  |       | $       | 106,914 |  |  | $      |         |   |  | $       | 529,505 | 
|                          | Internal |                |         | 58,420  |  |          |         | 74,481       |  |       |         | 73,586  |  |  |        | (206,487 | ) |  |         |        | 
|Identifiable assets       |          |                | 360,929 |         |  |          | 178,063 |              |  |       | 174,910 |         |  |  | (837   | )        |   |  | 713,065 |        
|Year Ended March 31, 2001 |          |                |         |         |  |          |         |              |  |       |         |         |  |  |        |          |   |  |         |        
|Net sales(a):             |          |                |         |         |  |          |         |              |  |       |         |         |  |  |        |          |   |  |         |        
|                          | External |                | $       | 245,397 |  |          | $       | 182,919      |  |       | $       | 117,116 |  |  | $      |         |   |  | $       | 545,432 | 
|                          | Internal |                |         | 63,670  |  |          |         | 65,895       |  |       |         | 77,708  |  |  |        | (207,273 | ) |  |         |        | 
|Identifiable assets       |          |                | 341,974 |         |  |          | 153,738 |              |  |       | 168,376 |         |  |  | (1,713 | )        |   |  | 662,375 |        
|Year Ended March 31, 2000 |          |                |         |         |  |          |         |              |  |       |         |         |  |  |        |          |   |  |         |        
|Net sales(a):             |          |                |         |         |  |          |         |              |  |       |         |         |  |  |        |          |   |  |         |        
|                          | External |                | $       | 258,175 |  |          | $       | 179,016      |  |       | $       | 106,254 |  |  | $      |         |   |  | $       | 543,445 | 
|                          | Internal |                |         | 56,674  |  |          |         | 63,225       |  |       |         | 64,384  |  |  |        | (184,283 | ) |  |         |        | 
|Identifiable assets       |          |                | 371,650 |         |  |          | 164,857 |              |  |       | 178,420 |         |  |  | 106    |          |   |  | 715,033 |        

F-30



---



##### Table of Contents



SOLA INTERNATIONAL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



---



|    |  |                                                                                                                               
|--- |  | ------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Net sales are attributed to regions based on the
    location of SOLA and its subsidiaries country or region of
    domicile.
|   
|(b) |  | The Rest of World consists primarily of
    Australia, Asia and South America.                                                

Internal sales represent intercompany sales
between regions at a mark-up from cost; the elimination of any
profit arising from such sales is reflected in eliminations in
determining operating income/(loss).

Included in North American operations are the
Companys businesses in Canada and Mexico, as well as the
United States. In each of the three fiscal years ended
March 31, 2002, Canadian and Mexican operations accounted
for less than 6.5% of external revenues and less than 3.5% of
identifiable assets of the North American region. The
information for Canada and Mexico, individually and combined, is
not considered material to information for the United States
alone.

21.     Supplementary
Cash Flow Data

|                                                                             |                                           |                      |   |        |  |      |   |        |   |  |   |        | 
|---------------------------------------------------------------------------- | ----------------------------------------- | -------------------- | - | ------ |  | ---- | - | ------ | - |  | - | ------ | 
|                                                                             |                                           |                     
|                                                                             |                                           | Year Ended March 31,
|                                                                             |                                           |                     
|                                                                             |                                           | 2002                 |   | 2001   |  | 2000
|                                                                             |                                           |                      |   |        |  |     
|                                                                             |                                           |                     
|                                                                             |                                           | (In thousands)      
|Supplemental disclosures of cash flow information:                           |                                           |                      |   |        |  |      |   |        |   |  |   |       
|                                                                             | Interest paid                             |                      | $ | 35,389 |  |      | $ | 32,064 |   |  | $ | 27,134 | 
|                                                                             |                                           |                      |   |        |  |      |   |        |   |  |   |       
|                                                                             | Taxes paid/ (received)                    |                      | $ | 8,152  |  |      | $ | (4,018 | ) |  | $ | 7,133  | 
|                                                                             |                                           |                      |   |        |  |      |   |        |   |  |   |       
|Supplemental disclosures of non-cash investing
    and financing activities: |                                           |                      |   |        |  |      |   |        |   |  |   |       
|                                                                             | Capital expenditures accrued but not paid |                      | $ | 10,776 |  |      | $ | 1,503  |   |  | $ | 4,258  | 
|                                                                             |                                           |                      |   |        |  |      |   |        |   |  |   |       

F-31



---



##### Table of Contents



SOLA INTERNATIONAL INC.

SUPPLEMENTAL INFORMATION

QUARTERLY FINANCIAL DATA 
UNAUDITED


|                                       |                   |                                       |         |           |  |          |         |           |   |   |         |      |  |   |         |      | 
|-------------------------------------- | ----------------- | ------------------------------------- | ------- | --------- |  | -------- | ------- | --------- | - | - | ------- | ---- |  | - | ------- | ---- | 
|                                       |                   |                                      
|                                       |                   | Quarter Ended                        
|                                       |                   |                                      
|                                       |                   | June 30,                              |         | Sept. 30, |  | Dec. 31, |         | March 31,
|                                       |                   | 2001                                  |         | 2001      |  | 2001     |         | 2002     
|                                       |                   |                                       |         |           |  |          |         |          
|                                       |                   |                                      
|                                       |                   | (In thousands, except per share data)
|Net sales                              |                   | $                                     | 135,956 |           |  | $        | 129,444 |           |   | $ | 126,330 |      |  | $ | 137,775 |     
|Gross profit                           |                   |                                       | 54,809  |           |  |          | 51,088  |           |   |   | 51,678  |      |  |   | 56,717  |     
|Operating income (loss)                |                   |                                       | 11,957  |           |  |          | 10,097  |           |   |   | 12,693  |      |  |   | 17,002  |     
|Net income (loss)                      |                   |                                       | 6,678   |           |  |          | (4,003  | )         |   |   | 7,272   |      |  |   | 9,171   |     
|Net income/(loss) per share  basic:   |                   |                                       |         |           |  |          |         |           |   |   |         |      |  |   |         |     
|                                       | Net income (loss) |                                       |         | 0.28      |  |          |         | (0.17     | ) |   |         | 0.30 |  |   |         | 0.37 | 
|Net income/(loss) per share  diluted: |                   |                                       |         |           |  |          |         |           |   |   |         |      |  |   |         |     
|                                       | Net income (loss) |                                       |         | 0.28      |  |          |         | (0.17     | ) |   |         | 0.29 |  |   |         | 0.37 | 

|                                       |                   |                                       |         |           |  |          |         |           |  |   |         |       |   |   |         |       |  
|-------------------------------------- | ----------------- | ------------------------------------- | ------- | --------- |  | -------- | ------- | --------- |  | - | ------- | ----- | - | - | ------- | ----- | -
|                                       |                   |                                      
|                                       |                   | Quarter Ended                        
|                                       |                   |                                      
|                                       |                   | June 30,                              |         | Sept. 30, |  | Dec. 31, |         | March 31,
|                                       |                   | 2000                                  |         | 2000      |  | 2000     |         | 2001     
|                                       |                   |                                       |         |           |  |          |         |          
|                                       |                   |                                      
|                                       |                   | (In thousands, except per share data)
|Net sales                              |                   | $                                     | 141,991 |           |  | $        | 134,846 |           |  | $ | 127,263 |       |   | $ | 141,332 |      
|Gross profit(1)                        |                   |                                       | 59,244  |           |  |          | 54,644  |           |  |   | 28,738  |       |   |   | 53,250  |      
|Special charges                        |                   |                                       | 6,088   |           |  |          | 4,827   |           |  |   | 75,749  |       |   |   | 4,401   |      
|Operating income (loss)                |                   |                                       | 7,188   |           |  |          | 7,785   |           |  |   | (91,860 | )     |   |   | 2,904   |      
|Net income (loss)                      |                   |                                       | 2,353   |           |  |          | 1,234   |           |  |   | (67,685 | )     |   |   | (2,430  | )    
|Net income/(loss) per share  basic:   |                   |                                       |         |           |  |          |         |           |  |   |         |       |   |   |         |      
|                                       | Net income (loss) |                                       |         | 0.09      |  |          |         | 0.05      |  |   |         | (2.86 | ) |   |         | (0.10 | )
|Net income/(loss) per share  diluted: |                   |                                       |         |           |  |          |         |           |  |   |         |       |   |   |         |      
|                                       | Net income (loss) |                                       |         | 0.09      |  |          |         | 0.05      |  |   |         | (2.86 | ) |   |         | (0.10 | )



---



|    |                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes inventory write-offs of $24,848 and $781
    for the quarters ended December 31, 2000 and March 31,
    2001, respectively.

S-1



---



##### Table of Contents



Schedule II

SOLA INTERNATIONAL INC.

VALUATION AND QUALIFYING ACCOUNTS

|                          |                                                |                |   |          |  |            |   |          |  |          |   |         |   |  |   |        |   |  |   |        | 
|------------------------- | ---------------------------------------------- | -------------- | - | -------- |  | ---------- | - | -------- |  | -------- | - | ------- | - |  | - | ------ | - |  | - | ------ | 
|                          |                                                | Balance,       |   | Charged  |  |            |   |          |  | Balance,
|                          |                                                | Beginning      |   | to       |  |            |   |          |  | End of  
|                          |                                                | of Period      |   | Expenses |  | Deductions |   | Other(1) |  | Period  
|                          |                                                |                |   |          |  |            |   |          |  |         
|                          |                                                |               
|                          |                                                | (in thousands)
|Year ended March 31, 2002 |                                                |                |   |          |  |            |   |          |  |          |   |         |   |  |   |        |   |  |   |       
|                          | Allowance for doubtful accounts                |                | $ | 9,201    |  |            | $ | 2,317    |  |          | $ | (3,106  | ) |  | $ | (17    | ) |  | $ | 8,395  | 
|                          |                                                |                |   |          |  |            |   |          |  |          |   |         |   |  |   |        |   |  |   |       
|                          | Allowance for excess and obsolete inventory    |                | $ | 18,011   |  |            | $ | 3,976    |  |          | $ | (3,648  | ) |  | $ | 170    |   |  | $ | 18,509 | 
|                          |                                                |                |   |          |  |            |   |          |  |          |   |         |   |  |   |        |   |  |   |       
|Year ended March 31, 2001 |                                                |                |   |          |  |            |   |          |  |          |   |         |   |  |   |        |   |  |   |       
|                          | Allowance for doubtful accounts                |                | $ | 8,873    |  |            | $ | 2,992    |  |          | $ | (2,391  | ) |  | $ | (273   | ) |  | $ | 9,201  | 
|                          |                                                |                |   |          |  |            |   |          |  |          |   |         |   |  |   |        |   |  |   |       
|                          | Allowance for excess and obsolete inventory(2) |                | $ | 14,663   |  |            | $ | 19,369   |  |          | $ | (14,854 | ) |  | $ | (1,167 | ) |  | $ | 18,011 | 
|                          |                                                |                |   |          |  |            |   |          |  |          |   |         |   |  |   |        |   |  |   |       
|Year ended March 31, 2000 |                                                |                |   |          |  |            |   |          |  |          |   |         |   |  |   |        |   |  |   |       
|                          | Allowance for doubtful accounts                |                | $ | 7,003    |  |            | $ | 2,568    |  |          | $ | (396    | ) |  | $ | (302   | ) |  | $ | 8,873  | 
|                          |                                                |                |   |          |  |            |   |          |  |          |   |         |   |  |   |        |   |  |   |       
|                          | Allowance for excess and obsolete inventory    |                | $ | 9,236    |  |            | $ | 7,293    |  |          | $ | (1,455  | ) |  | $ | (411   | ) |  | $ | 14,663 | 
|                          |                                                |                |   |          |  |            |   |          |  |          |   |         |   |  |   |        |   |  |   |       



---



|    |                                                                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Other relates primarily to foreign currency
    translation adjustments.                                                                                                                                                                                                                                                                          
|   
|(2) | Of the $25.6 million in inventory write-offs
    associated with the strategic initiatives for the year ended
    March 31, 2001, $19.6 million was included in the
    charge to the allowance for excess and obsolete inventory,
    $3.6 million was written-off directly against inventory and
    $2.4 million related to prior period costs.

S-2



---



##### Table of Contents






INDEX OF EXHIBITS

|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                                           |  |                                                                                                                                                                              
|------- | ----- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |             |  |                                                                                                                                                                                                                                                                                                                                                                          
|No.     |       | Description |  | Reference                                                                                                                                                                                                                                                                                                                                                                
|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                                          
|        | 3.1   |             |  | Amended and Restated Certificate of Incorporation
    of the Company                                                                                                                                                                                                                                                                                                      |  | Filed as Exhibit 3.1 to the Companys
    Annual Report on Form 10-K for the fiscal year ended
    March 31, 1995 and incorporated herein by reference (File
    No. 1-13606)
|        | 3.2   |             |  | Amended and Restated By-Laws of the Company                                                                                                                                                                                                                                                                                                                               |  | Filed as Exhibit 3 to the Companys
    Quarterly Report on Form 10-Q for the period ended
    September 30, 1998 and incorporated herein by reference                       
|        | 4.1   |             |  | Rights Agreement dated as of August 27, 1998
    between SOLA International Inc. and Bank Boston N.A.                                                                                                                                                                                                                                                                     |  | Filed as Exhibit 1 to the Companys
    Form 8-A dated August 27, 1998 and incorporated herein
    by reference                                                              
|        | 4.2   |             |  | Indenture by and between the Company and State
    Street Bank and Trust Company of California, N.A., as Trustee,
    with respect to the 6 7/8% Notes due 2008                                                                                                                                                                                                           |  | Filed as Exhibit 10.21 to the Companys
    Annual Report on Form 10-K for the fiscal year ended
    March 31, 1998 and incorporated herein by reference                     
|        | 4.3   |             |  | Officers Certificate Related to Terms of
    Senior Notes                                                                                                                                                                                                                                                                                                                |  | Filed as Exhibit 99.1 to the Companys
    Quarterly Report on Form 10-Q for the period ended
    June 30, 1998 and incorporated herein by reference                         
|        | 4.4   |             |  | Indenture dated as of April 17, 2001 by and
    between the Company and The Bank of New York, as Trustee, with
    respect to the 11% Notes due 2008                                                                                                                                                                                                                      |  | Filed as Exhibit 4.4 to the Companys
    Annual Report on Form 10-K for the fiscal year ended
    March 31, 2001 and incorporated herein by reference                       
|        | 4.5   |             |  | Registration Rights Agreement dated as of
    April 17, 2001 by and among the Company and UBS AG acting
    through its business group UBS Warburg, as Initial Purchaser,
    with respect to the 11% Notes due 2008                                                                                                                                                      |  | Filed as Exhibit 4.5 to the Companys
    Annual Report on Form 10-K for the fiscal year ended
    March 31, 2001 and incorporated herein by reference                       
|        | 10.1  |             |  | Purchase Agreement, dated as of September 1,
    1993 by and between SOLA Holdings Inc., Pilkington plc and
    certain of Pilkington plcs subsidiaries                                                                                                                                                                                                                  |  | Filed as Exhibit 10.1 to the Companys
    Registration Statement, as amended, on Form S-1 (File
    No. 33-68824) and incorporated herein by reference                      
|        | 10.2* |             |  | Employment Agreement between SOLA International
    Inc. and Steven M. Neil, dated as of September 2, 1997                                                                                                                                                                                                                                                                |  | Filed as Exhibit 10.2 to the Companys
    Registration Statement, as amended, on Form S-3 (File
    No. 333-45929) and incorporated herein by reference                     
|        | 10.3* |             |  | Confidential Severance Agreement between SOLA
    International Inc. and Steven M. Neil, dated as of
    October 13, 1997                                                                                                                                                                                                                                                 |  | Filed as Exhibit 10.5 to the Companys
    Annual Report on Form 10-K for the fiscal year ended
    March 31, 1999 and incorporated herein by reference                      
|        | 10.4  |             |  | Credit Agreement dated as of July 26, 2001
    among the Company, as Borrower, the Lenders named therein and
    UBS Warburg LLC, as Sole Lead Arranger, ABN AMRO Bank, N.V. as
    Syndication Agent and UBS AG, Stamford Branch, as Administrative
    Agent, and UBS AG Stamford Branch, as Collateral Agent, and
    Union Bank of California as Documentation Agent. |  | Filed as Exhibit 10.1 to the Companys
    Quarterly Report on Form 10-Q for the period ended
    June 30, 2001 and incorporated herein by reference                         

E-1



---



##### Table of Contents



|        |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                                                                                                                                                          
|------- | ---- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|No.     |      | Description |  | Reference                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10.5 |             |  | Multicurrency Credit Agreement, dated as of
    June 14, 1996, among SOLA International Inc., and the other
    Borrowers as the Borrowers, the Subsidiary Guarantors, Bank of
    America National Trust and Savings Association, as Agent and
    Letter of Credit Issuing Bank, The First National Bank of Boston
    and The Bank of Nova Scotia, as Co-Agents, and the Other
    Financial Institutions Party Thereto                                |  | Filed as Exhibit 4 to the Companys
    Report on Form 8-K/A dated May 6, 1996 and
    incorporated herein by reference                                  
|        | 10.6 |             |  | Amendment No. 1 to the Multicurrency Credit
    Agreement, dated as of June 14, 1996, among SOLA
    International Inc., and the other Borrowers as the Borrowers,
    the Subsidiary Guarantors, The Bank of America National Trust
    and Savings Association, as Agent and Letter of Credit Issuing
    Bank, The First National Bank of Boston and The Bank of Nova
    Scotia, as Co-Agents, and the Other Financial Institutions Party
    Thereto |  | Filed as Exhibit 10.1 to the Companys
    Quarterly Report on Form 10-Q for the period ended
    December 31, 1997 and incorporated herein by reference 
|        | 10.7 |             |  | Amendment No. 2 to the Multicurrency Credit
    Agreement, dated as of June 14, 1996, among SOLA
    International Inc., and the other Borrowers as the Borrowers,
    the Subsidiary Guarantors, The Bank of America National Trust
    and Savings Association, as Agent and Letter of Credit Issuing
    Bank, The First National Bank of Boston and The Bank of Nova
    Scotia, as Co-Agents, and the Other Financial Institutions Party
    Thereto |  | Filed as Exhibit 10.2 to the Companys
    Quarterly Report on Form 10-Q for the period ended
    December 31, 1997 and incorporated herein by reference 
|        | 10.8 |             |  | Amendment No. 3 to the Multicurrency Credit
    Agreement, dated as of June 14, 1996, among SOLA
    International Inc., and the other Borrowers as the Borrowers,
    the Subsidiary Guarantors, The Bank of America National Trust
    and Savings Association, as Agent and Letter of Credit Issuing
    Bank, The First National Bank of Boston and The Bank of Nova
    Scotia, as Co-Agents, and the Other Financial Institutions Party
    Thereto |  | Filed as Exhibit 10.1 to the Companys
    Registration Statement, as amended, on Form S-3 (File
    No 333-45929) and incorporated herein by reference  
|        | 10.9 |             |  | Amendment No. 4 to the Multicurrency Credit
    Agreement, dated as of June 14, 1996, among SOLA
    International Inc., and the other Borrowers as the Borrowers,
    the Subsidiary Guarantors, The Bank of America National Trust
    and Savings Association, as Agent and Letter of Credit Issuing
    Bank, The First National Bank of Boston and The Bank of Nova
    Scotia, as Co-Agents, and the Other Financial Institutions Party
    Thereto |  | Filed as Exhibit 10.26 to the Companys
    Quarterly Report on Form 10-Q for the period ended
    December 31, 2000 and incorporated herein by reference

E-2



---



##### Table of Contents



|        |        |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                                                                                                                                                                                        
|------- | ------ | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|No.     |        | Description |  | Reference                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        |        |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10.10  |             |  | Amendment No. 5 to the Multicurrency Credit
    Agreement, dated as of June 14, 1996, among SOLA
    International Inc., and the other Borrowers as the Borrowers,
    the Subsidiary Guarantors, The Bank of America National Trust
    and Savings Association, as Agent and Letter of Credit Issuing
    Bank, The First National Bank of Boston and The Bank of Nova
    Scotia, as Co-Agents, and the Other Financial Institutions Party
    Thereto |  | Filed as Exhibit 10.11 to the Companys
    Annual Report on Form 10-K for the fiscal year ended
    March 31, 2001 and incorporated herein by reference                               
|        | 10.11  |             |  | Amendment No. 6 to the Multicurrency Credit
    Agreement, dated as of June 14, 1996, among SOLA
    International Inc., and the other Borrowers as the Borrowers,
    the Subsidiary Guarantors, The Bank of America National Trust
    and Savings Association, as Agent and Letter of Credit Issuing
    Bank, The First National Bank of Boston and The Bank of Nova
    Scotia, as Co-Agents, and the Other Financial Institutions Party
    Thereto |  | Filed as Exhibit 10.12 to the Companys
    Annual Report on Form 10-K for the fiscal year ended
    March 31, 2001 and incorporated herein by reference                               
|        | 10.12  |             |  | Lease Agreement, dated May 10, 1993, between
    SOLA Optical Taiwan Ltd. and Chang Jin Co., Ltd. (including
    English summary of principal terms)                                                                                                                                                                                                                                                                                                      |  | Filed as Exhibit 10.9 to the Companys
    Registration Statement, as amended, on Form S-1 (File
    No. 33-68824) and incorporated herein by reference                                
|        | 10.13  |             |  | Lease Agreement between Optical SOLA de Mexico
    and Messrs. Salvadore Luttenroth-Camou and Carlos
    Lutteroth-Lomeli (including English summary of principal terms)                                                                                                                                                                                                                                                                                  |  | Filed as Exhibit 10.10 to the Companys
    Registration Statement, as amended, on Form S-1 (File
    No. 33-68824) and incorporated herein by reference                               
|        | 10.14* |             |  | SOLA Investors Inc. Stock Option Plan                                                                                                                                                                                                                                                                                                                                                                                                                     |  | Filed as Exhibit 10.11 to the Companys
    Annual Report on Form 10-K for the fiscal year ended
    March 31, 1994 (File No. 1-13606) and incorporated
    herein by reference        
|        | 10.15* |             |  | Amendment Number One to SOLA Investors Inc. Stock
    Option Plan                                                                                                                                                                                                                                                                                                                                                                                         |  | Filed as Exhibit 10.21 to the Companys
    Registration Statement, as amended, on Form S-1 (File
    No. 33-87892) and incorporated herein by reference                               
|        | 10.16* |             |  | Amended and Restated 1998 SOLA International Inc.
    Stock Option Plan                                                                                                                                                                                                                                                                                                                                                                                   |  | Filed as Appendix A to the Companys
    Fiscal 1998 Proxy Statement dated June 30, 1998 and
    incorporated herein by reference                                                      
|        | 10.17  |             |  | Form of Indemnification Agreement between the
    executive officers and directors of the Company and the Company                                                                                                                                                                                                                                                                                                                                         |  | Filed as Exhibit 10.24 to the Companys
    Registration Statement, as amended, on Form S-1 (File
    No. 33-87892) and incorporated herein by reference                               
|        | 10.18* |             |  | SOLA International Inc. Management Incentive Plan                                                                                                                                                                                                                                                                                                                                                                                                         |  | Filed as Exhibit 10.25 to the Companys
    Registration Statement, as amended, on Form S-1 (File
    No. 33-87892) and incorporated herein by reference                               
|        | 10.19* |             |  | SOLA Optical 401(k) Savings Plan                                                                                                                                                                                                                                                                                                                                                                                                                          |  | Filed as Exhibit 4.4 to the Companys
    Registration Statement on Form S-8 (File No. 333-4489)
    filed with the Commission on May 23, 1996 and incorporated
    herein by reference

E-3



---



##### Table of Contents



|        |        |             |  |                                                                                                                       |  |                                                                                                                                                                                        
|------- | ------ | ----------- |  | --------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |             |  |                                                                                                                      
|No.     |        | Description |  | Reference                                                                                                            
|        |        |             |  |                                                                                                                      
|        | 10.20  |             |  | Trust Agreement entered into as of May 15,
    1996 between SOLA Optical USA, Inc. and Chase Manhattan Bank,
    N.A. |  | Filed as Exhibit 4.5 to the Companys
    Registration Statement on Form S-8 (File No. 333-4489)
    filed with the Commission on May 23, 1996 and incorporated
    herein by reference
|        | 10.21* |             |  | Employment Agreement between Sola International
    Inc. and Jeremy Charles Bishop, dated as of November 6, 2000      |  | Filed as Exhibit 10.27 to the Companys
    Quarterly Report on Form 10-Q for the period ended
    December 31, 2000 and incorporated herein by reference                              
|        | 10.22* |             |  | Letter agreement with Theodore Gioia dated
    February 7, 2001                                                       |  | Filed as Exhibit 10.23 to the Companys
    Annual Report on Form 10-K for the fiscal year ended
    March 31, 2001 and incorporated herein by reference                               
|        | 10.23* |             |  | Confidential Severance Agreement between Sola
    International Inc. and Barry J. Packham, dated
    January 1, 1997  |  |                                                                                                                                                                                        
|        | 10.24* |             |  | Confidential Severance Agreement between Sola
    International Inc. and Mark Ashcroft, dated April 6, 2002           |  |                                                                                                                                                                                        
|        | 10.25* |             |  | Letter Agreement between Sola International Inc.
    and Theodore Gioia, dated May 7, 2001                            |  |                                                                                                                                                                                        
|        | 12.1   |             |  | Statement regarding ratio of earnings/(loss) to
    fixed charges                                                     |  |                                                                                                                                                                                        
|        | 21.1   |             |  | List of subsidiaries of the Company                                                                                   |  |                                                                                                                                                                                        
|        | 23.1   |             |  | Consent of PricewaterhouseCoopers LLP,
    Independent Accountants                                                    |  |                                                                                                                                                                                        



---



|  |                                          
|- | -----------------------------------------
|* | Compensatory plan or management agreement

E-4