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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K

       (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                    For the fiscal year ended March 31, 1999

                                       or

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

             For the transition period from __________ to _________

                         Commission File Number: 1-13606

                             SOLA INTERNATIONAL INC.

             (Exact name of registrant as specified in its charter)

          DELAWARE                                      94-3189941
(State or other jurisdiction of             (I.R.S. employer identification no.)
 incorporation or organization)

              2420 SAND HILL ROAD, SUITE 200, MENLO PARK, CA 94025
               (Address of principal executive offices) (Zip Code)

       Registrant's telephone number, including area code: (650) 324-6868

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

            Title of each class:          Name of exchange on which registered:
      Common Stock, Par Value $0.01             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 |X| No |_|

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in 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. |X|

As of May  28,  1999,  the  aggregate  market  value  of  Common  Stock  held by
non-affiliates was approximately $408,402,347. 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 May 28, 1999,  24,866,482  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  Company's  stock is traded on the New York
Stock Exchange under the symbol SOL.

The  responses  to Items  11, 12 and 13 are  incorporated  by  reference  to the
material  included in the  Company's  proxy  statement for the fiscal year ended
March 31, 1999.

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<PAGE>


                             SOLA INTERNATIONAL INC.

                           ANNUAL REPORT ON FORM 10-K

                    FOR THE FISCAL YEAR ENDED MARCH 31, 1999

                                                                            Page
PART I

Item 1.   Business..........................................................  3
Item 2.   Properties........................................................  8
Item 3.   Legal Proceedings.................................................  9
Item 4.   Submission of Matters to a Vote of Security Holders...............  9

PART II

Item 5.   Market for the Registrant's Common Equity and Related
               Stockholder Matters.......................................... 10
Item 6.   Selected Financial Data........................................... 11
Item 7.   Management's Discussion and Analysis of Financial
               Condition and Results of Operations.......................... 12
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk........ 19
Item 8.   Financial Statements and Supplementary Data....................... 23
Item 9.   Changes in and Disagreements with Accountants on
               Accounting and Financial Disclosure.......................... 23

PART III

Item 10.  Directors and Executive Officers of the Registrant................ 24
Item 11.  Executive Compensation............................................ 26
Item 12.  Security Ownership of Certain Beneficial Owners and
               Management................................................... 26
Item 13.  Certain Relationships and Related Transactions.................... 26

PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports
               on Form 8-K.................................................. 27

                                       2

<PAGE>


                                     PART I

Item 1.    Business

General

         Sola International Inc., a Delaware corporation,  designs, manufactures
and  distributes a broad range of plastic and glass  eyeglass  lenses.  Sola has
manufacturing  and  distribution  sites in three major regions -- North America,
Europe,  and Rest of  World  (comprising  primarily  Australia,  Asia and  South
America).  Sola's business commenced operations in 1960. Sola International Inc.
acquired the Sola business unit (the  "Predecessor  Business") of Pilkington plc
("Pilkington")  on December  1, 1993 (the  "Acquisition").  In March 1995,  Sola
completed  its  initial  public  offering  (the  "IPO").  On June 19,  1996 Sola
acquired  substantially all of the worldwide  ophthalmic  business (the "AO" and
"AO Acquisition") of American Optical  Corporation  ("AOC"). On July 2, 1996 the
Company  acquired  Neolens,  Inc.  ("Neolens"),  a manufacturer of polycarbonate
eyeglass lenses.  Unless the context otherwise  requires,  all references to the
"Company" or "Sola" herein refer to Sola International Inc. and its consolidated
subsidiaries.  The  Company's  fiscal  year ends on March 31 of each  year.  The
fiscal  years  ended  March  31,  1999,  March 31,  1998 and March 31,  1997 are
referred  to  herein  as  "fiscal  1999",   "fiscal  1998"  and  "fiscal  1997",
respectively.

Products

         The Company produces  plastic and glass eyeglass lenses.  The Company's
lens products are differentiated by type of vision correction, lens design, lens
material and coatings  applied to the lens. The Company's  lenses include single
vision  lenses  (lenses which have a constant  corrective  power at all points);
multifocal lenses (lenses which have more than one corrective  power,  including
bifocal lenses, which have two distinct areas of different corrective power, and
progressive  lenses,  which have a continuous  gradient of different  corrective
power);  and  plano  lenses  (lenses  which  have no  corrective  power  and are
primarily used for sunglasses).

         Although  the  Company's  lenses  are  manufactured  in both  glass and
plastic, plastic lenses currently account for approximately 90% of the Company's
net lens sales.  Approximately 47% of ophthalmic lens sales generated by plastic
lenses are accounted for by conventional hard resin plastics, with the remainder
derived from advanced lens  materials  such as thinner and lighter  plastics and
plastic  photochromics.  These more  advanced  materials  have  accounted  for a
growing  percentage  of the  Company's  sales both by volume and  revenue.  Sola
manufactures  and markets  several  advanced  thinner and lighter  plastic  lens
materials,   including  Spectralite(R),   Finalite  1.6(TM)  and  polycarbonate.
Spectralite  and  Finalite  1.6 are  proprietary  materials  developed by Sola's
research and  development  operation.  Raw materials used in the  manufacture of
these products are available from a number of chemical suppliers.  Polycarbonate
is a thin and light material with greater impact resistance.  To make its lenses
even thinner and lighter,  the Company has  increasingly  employed  aspheric and
atoric designs (i.e.,  lenses that achieve comparable optical performance with a
thinner  cross  section).  The Company also sells plastic  photochromic  lenses,
which require processing by a third party. The technology for such processing is
currently proprietary to such third party.

         The Company  also  manufactures  and sells glass  lenses,  primarily in
North America and Europe. These lenses are manufactured in plants located in the
United  States,  Mexico and France.  The  Company's  strategy for the glass lens
market  is to  focus  on high  value-added  product  categories,  such as  glass
progressive  and higher  index  glass  lenses.  Since the  Company is  primarily
focused on plastic lenses, glass lenses represent a small and decreasing portion
of the Company's  sales.  The Company  sells  virtually no glass lenses in South
America  and  non-Japan  Asia,  markets  where  glass is still  the  predominant
material for eyeglass lenses.

         The  Company  produces  a variety  of lens  coatings,  which  primarily
provide scratch resistance and  anti-reflection  properties.  The penetration of
coated lenses varies significantly from market to market.

                                       3

<PAGE>


         The Company has recently  introduced a number of new products and has a
number of products in development that are intended to maintain and increase the
Company's  operating  margins.  For  example,  the  Company  has  developed  and
successfully  marketed  proprietary  progressive lenses (including  Percepta(R),
Visuality(R) and AO Compact(R)),  which incorporate more complex design features
than standard  products and therefore  attract an above average gross profit per
pair. During fiscal 1998 and 1999 Sola's  proprietary  Matrix(R) delivery system
was  installed  at an  increasing  number  of  sites  in the  U.S.  and  foreign
locations. This system, which creates finished prescriptions by bonding together
thin lens wafers in a desktop laminating  console,  allows the rapid delivery of
lenses with  anti-reflective  coating and potentially other high margin add-ons.
The Company from time to time may also market  products or technologies of third
parties to broaden its product range pursuant to contractual  relationships with
such third parties.

Marketing and Sales

         The  Company   develops  and  manages  its  marketing   strategy  on  a
decentralized  basis and has sales  offices  in 25  countries  across  its three
regions.  The Company  differentiates its products from those of its competitors
through lens design,  lens materials and coatings  formulations.  In response to
customer demand,  the Company's strategy is focused on providing a wide range of
quality  products  on short  notice.  In  developing  markets,  particularly  in
non-Japan Asia and Latin  America,  the Company seeks to expand its market share
by increasing local production,  attempting to develop brand recognition for its
products  and  marketing  to  customers  the  advantage  of  higher  value-added
products,  all of which are intended to help the Company compete on the basis of
quality and service rather than price.

         During fiscal 1999 Sola reached co-branding  agreements with Nike, Inc.
and  Fisher-Price,  Inc. The agreement with Nike  represents the initiation of a
marketing strategy using "Optics by SOLA" as the cornerstone.  The Fisher-Price,
Inc.  relationship  enables  the  Company to reach the  children's  lens  market
segment combined with a powerful brand name.

Distribution

         In order to meet  customer  demand  for  delivery  of a broad  range of
products  within  a  short  time,  the  Company  has  established  a  widespread
distribution network, which is managed on a regional basis. The Company operates
59 major distribution centers located in 23 countries, covering all of its three
regions.

         The  Company  utilizes  three  primary  distribution  channels  for its
products.  Lenses with corrective  power are distributed (i) through a wholesale
channel to wholesale distributors or to independent processing laboratories that
process  the  Company's  lenses  and then  resell  them to  retail  outlets  and
practitioners for resale to consumers,  (ii) through a retail channel to chains,
superoptical   retail  stores  (retail  outlets  with  on-site  lens  processing
capability)  and other  retailers  (including  "buying  groups"  consisting of a
number of retailers  acting together to purchase  lenses) who sell the lenses to
consumers  and (iii) in certain  markets in Asia and  Europe,  direct to eyecare
practitioners  through the Company's processing  laboratories.  Plano lenses are
sold primarily to manufacturers of sunglasses.

Customers

         During fiscal 1999, the Company's ten largest  customers  accounted for
approximately  22.8% of net sales and the Company's  largest customer  accounted
for less than 5% of net sales. During fiscal 1999, 8 of the Company's 10 largest
customers were located in North America and accounted for approximately 18.4% of
net sales in the aggregate.

         One of the company's largest  competitors,  Essilor  International,  is
extensively  vertically  integrated  into  wholesale  laboratories,  both in the
United States and other parts of the world.  Sola has sold and continues to sell
its products to these Essilor laboratories.  A number of these laboratories have
decreased the purchase of Sola products since being acquired by Essilor.

                                       4

<PAGE>


International Operations

         The Company operates  manufacturing and distribution sites in all major
regions of the world--North  America  (including  Mexico),  Europe,  and Rest of
World--and  derived  approximately half of its net sales in fiscal 1999 from the
sale of products outside the United States. See Note 16 of Notes to Consolidated
Financial  Statements  included  elsewhere  herein.  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 or results of operations in the future.

Manufacturing Operations

         The Company has 19 manufacturing  facilities located in its three major
regions,  including 17 lens manufacturing facilities.  The Company has sought to
make each operating region  self-sufficient  in the production of core products,
while manufacturing both high-volume plano lenses and newer, low-volume and more
complex products in fewer locations.  More centralized  manufacturing is pursued
where  appropriate  in order to  maximize  production  efficiencies  or maintain
strict quality controls and research and development  support.  For the location
and principal operations of these facilities, see "Properties".

         The  principal  materials  used by the  Company  in the  production  of
eyeglass  lenses  are hard  resins (a  commodity  plastic  used in most  plastic
lenses),  glass,  specialized chemicals used in many higher index plastic lenses
and monomers mixed by the Company in the production of Spectralite and Finalite.
The Company believes that these materials are currently available from a variety
of sources and that the materials  necessary to produce the  Company's  coatings
are readily  available  from a number of potential  sources.  In order to reduce
materials  costs,  the  Company  coordinates  centrally  the  purchasing  of raw
materials (including monomers).

Research and Development

         The Company has  invested and  continues to invest  heavily in research
and development in order to continually  develop new and innovative products and
to improve the efficiency of its manufacturing process. At March 31, 1999, there
were  approximately  184  employees  involved  in  the  Company's  research  and
development  efforts.  The Company's  research and development  expenditures for
fiscal 1999, 1998 and 1997 were $18.8 million,  $18.3 million and $17.5 million,
respectively,  (excluding the non-recurring $9.5 million in-process research and
development  non-cash charge  associated with the AO Acquisition in fiscal 1997)
representing  3.5%,  3.3% and 3.6% of net  sales  for each of those  years.  The
Company has its own research and  development  centers in Petaluma,  California,
Southbridge,  Massachusetts, and Adelaide, Australia. A small process automation
group is attached to the manufacturing operation in Wexford, Ireland.

         The  Company's  research  and  development  focuses  on the  design and
development of innovative,  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 the  Finalite  thin and  light  lens  material,  the
development of Spectralite with photochromic capabilities,  Percepta,  Visuality
and AO Compact progressive designs and ViZio(TM)  polycarbonate  lenses.  Sola's
proprietary  Matrix  delivery  system which creates  finished  prescriptions  by
bonding together thin lens wafers in a desktop  laminating  console,  allows the
rapid delivery of lenses with anti-reflection coating and potentially other high
margin add-ons.  This system is being installed at an increasing number of sites
in the U.S. and foreign locations.

                                       5

<PAGE>


Competition

         The  eyeglass  lens and  coating  industry is highly  competitive.  The
Company competes  principally on the basis of customer service,  the quality and
breadth of product  offerings,  and price.  The Company  believes that among its
largest global competitors are Essilor  International and Hoya Corporation.  The
eyeglass lens and coating industry is characterized by price competition,  which
can be  severe  in  certain  markets,  particularly  for high  volume,  standard
products.  Sola attempts,  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 Sola lenses
and coatings. There can be no assurance, however, that the Company's competitors
will not develop  products or services that are more effective or less expensive
than the  Company's  products or which  could  render  certain of the  Company's
products  less  competitive.   Since  recently-developed   products  comprise  a
substantial  portion  of the  Company's  sales,  the  Company's  performance  is
dependent upon its continuing  ability to develop and market new products.  Some
of the Company's competitors have significantly greater financial resources than
the Company to fund expansion and research and development.  Within a particular
market,  certain  of  the  Company's  competitors  may  enjoy  a  "home-country"
advantage over foreign competition.  In addition,  in certain markets (primarily
Europe),  the  Company  also faces  competition  from a number of its  principal
competitors which are vertically integrated with processing centers to a greater
extent than the Company,  enabling them to customize  prescription  lenses. This
limits the number of independent lens processing  customers to which the Company
can market its products.

         In addition to direct competition with other  manufacturers of eyeglass
lenses, the Company competes indirectly with manufacturers of contact lenses and
providers of medical procedures for the correction of visual impairment. Contact
lenses and  eyeglasses  are not,  however,  perfect  substitutes  because of the
difficulty of developing  progressive  or bifocal  contact lenses for presbyopia
and the  tendency of contact lens  wearers to also 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  ineffective  at correcting  presbyopia,  which affects the vast
majority  of people  above  the age of 45,  and is a major  cause of demand  for
Sola's  progressive  and  other  multifocal  lenses.  However,  there  can be no
assurance that current medical procedures, or ones developed in the future, will
not materially impact demand for the Company's lenses.

Patents, Trademarks & Licenses

         The Company seeks to protect its intellectual  property  throughout the
world.  As of March 31, 1999, the Company had filed (or applied for) patents for
69 discrete inventions or technologies.  Many of the Company's patents have been
filed  in  multiple   countries,   and  they   include  55  patents  (or  patent
applications)  filed in the United States.  The Company has been granted,  or is
licensed to use, 1,021 trademarks in various countries,  representing  rights to
245 discrete names.  These include 65 trademarks granted in the United States. A
further 56 trade names are under application.  The Company does not believe that
it is dependent on any particular patent,  trade secret or similar  intellectual
property  and,  in  light  of  its  manufacturing,  marketing  and  distribution
strengths,  believes that the loss of any individual trademark,  trade secret or
patent would not have a material  adverse effect on its results of operations or
financial condition.

Employees

         As of March 31, 1999,  the Company had  approximately  7,450  employees
throughout  the  world.  The  majority  of  the  Company's   employees  are  not
represented by labor unions. Labor relations are considered to be good and there
have been no significant labor disputes in the past ten years.

Environmental Matters

         The  Company  (together  with the  industry  in which it  operates)  is
subject  to  United  States  and  foreign  environmental  laws  and  regulations
concerning  emissions to the air,  waste water  discharges  and the

                                       6

<PAGE>


generation,  handling, storage, transportation and disposal of hazardous wastes,
and to other  federal,  state and  foreign  laws and  regulations.  The  Company
believes that it possesses all material  permits and licenses  necessary for the
continuing  operation of its business and believes  that its  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 the Company in the future.

         Environmental  laws and  regulations  vary among countries in which the
Company  operates.  During  fiscal 1992,  the Company  adopted an  environmental
policy which includes an environmental auditing process designed to evaluate and
assist operating regions in their environmental compliance efforts.

         The Company's  manufacturing  processes generally utilize non-hazardous
chemicals where feasible. Certain processes, including those for cleaning lenses
and mold  assemblies,  and abrasion  resistant  and  anti-reflection  coating of
lenses,  use a variety  of  volatile  and other  hazardous  substances.  Company
developments  in  manufacturing   methods,   alternative   non-solvent  cleaning
processes and waste  reduction have been successful in reducing the use of these
chemicals  and/or  emissions  and  environmental  damage  from these  processes.
Programs to eliminate use of chlorinated  hydrocarbons  and  chlorofluorocarbons
("CFC's") in  manufacturing  processes  have also been developed and the current
use of these substances in the Company's North American operations is minimal.

         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.  Environmental  Protection  Agency  ("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.
During the quarter ended December 31, 1997 a report on contamination levels, and
the impact of curtailed activities,  was submitted to the EPA which indicates no
significant  impact on the site from the curtailed  activities,  and the EPA has
consented to continued curtailment of activities.  The Company expects continued
reduction of clean-up  activities due to relatively low levels of  contamination
existing at the site.

         Late  in  fiscal  1996,  the  Company  was  requested  by the  Missouri
Department  of  Natural  Resources  ("MDNR")  to  conduct a removal  action at a
disposal site near Eldon,  Missouri known as the Coburn Optical  Industries Dump
site,  which was allegedly  used by a predecessor to the Company for disposal of
waste water sludge  containing lead from 1974 to 1986. The Company completed its
clean-up  program  during  fiscal 1998 and the MDNR  issued a no further  action
letter.

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

         It  is  the  Company's   policy  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 connection with the Acquisition,  Pilkington has agreed to indemnify
the Company with respect to  environmental  losses based upon or resulting  from
certain existing facts,  events,  conditions,  matters or issues, for (i) 50% of
such  losses to the extent  such  losses  exceed $1 million but are less than or
equal to $5 million, and (ii) 100% of such losses in excess of $5 million.

         See Note 15 of  Notes to  Consolidated  Financial  Statements  included
elsewhere herein.

                                       7

<PAGE>


Item 2. PROPERTIES

<TABLE>
         The  following  table sets forth  certain  information  relating to the
Company's principal facilities.  The Company operates other smaller domestic and
foreign  manufacturing  facilities,  distribution  facilities  and sales offices
which are omitted from this table.

<CAPTION>
          Region and Location                                Principal Operations                         Leased/Owned
          -------------------                                --------------------                         ------------
<S>                                      <C>                                                              <C>
North America
     Menlo Park, California.........     Headquarters                                                        Leased

     Petaluma, California...........     Manufactures plastic lenses; marketing and distribution          Part owned,
                                         center; research and development facility; administrative        part leased
                                         offices for North American operations

     Eldon, Missouri................     Manufactures multifocal glass lenses; manufactures molds            Owned

     San Diego, California..........     Headquarters for American Optical                                   Leased

     Southbridge, Massachusetts.....     Research and development and distribution center                    Leased

     Miami, Florida.................     Manufactures finished polycarbonate lenses; houses tinting          Leased
                                         and coating operations for plano lenses; Sunlens and Latin
                                         America divisional head offices

     Portland, Oregon...............     Anti-reflection coating laboratory                                  Owned

     Tijuana, Mexico................     Manufactures plastic and glass lenses; manufactures molds;       Part owned,
                                         distribution center                                              part leased


Europe
     Goetzenbruck, France...........     Manufactures glass lenses; marketing and distribution center        Owned

     Fougeres, France...............     Prescription processing laboratory with anti-reflection             Leased
                                         coating capability

     Wexford, Ireland...............     Manufactures plastic lenses; prescription processing                Owned
                                         laboratory; distribution center

     Varese, Italy................       Tinting operations; prescription processing laboratory with         Leased
                                         anti-reflection coating capability; marketing and
                                         distribution center

     Birmingham, United                  Prescription processing laboratory with anti-reflection             Leased
       Kingdom......................     coating capability; marketing and distribution center


Rest of World
   Asia
     Xian, China....................     Site owned by a joint venture managed by the Company in             Leased
                                         which the Company holds a 50% ownership interest;
                                         manufactures hard resin lenses

     Hong Kong......................     Prescription processing laboratory with anti-reflection             Leased
                                         coating capability; marketing and distribution center

     Guangzhou, China...............     Two sites; China head office and second China manufacturing    Part owned, part
                                         site for hard resin lenses                                          leased

     Osaka, Japan...................     Prescription processing laboratory with anti-reflection             Leased
                                         coating capability; marketing and distribution center

                                                 8

<PAGE>


          Region and Location                                Principal Operations                         Leased/Owned
          -------------------                                --------------------                         ------------

     Chung Li, Taiwan...............     Manufactures hard resin lenses; marketing and distribution          Leased
                                         center

     Singapore......................     Manufactures glass molds; marketing and distribution                Leased
                                         center; prescription processing facility with
                                         anti-reflection coating capability

   South America
     Petropolis, Brazil.............     Manufactures hard resin ophthalmic and plano lenses                 Owned

     Villa de Cura, Venezuela.......     Manufactures hard resin lenses; distribution center                 Owned


   Australia
     Lonsdale, Australia............     Manufactures plastic lenses; manufactures molds; research      Part owned, part
                                         and development center; prescription processing laboratory          leased
                                         with anti-reflection coating facility; marketing and
                                         distribution center; regional administrative offices for
                                         Australia and Asian regions
</TABLE>


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

         For further information concerning the Company's leased properties, see
Note 14 of Notes to Consolidated Financial Statements included elsewhere herein.
The Company's  operating leases have expirations  ranging from 1999 to 2012. The
Company does not  anticipate  any  difficulties  in renewing or  replacing  such
leases as they expire; however, there can be no assurances that the Company will
be able to  renew  or  replace  such  leases.  The  Company  believes  that  its
manufacturing capacity is sufficient for its current needs.


Item 3. LEGAL PROCEEDINGS

         In   addition  to  the   proceedings   described   under   "Business  -
Environmental Matters", the Company is involved in routine litigation incidental
to its business,  none of which it believes will have a material  adverse effect
on its results of  operations  or financial  condition.  See Note 15 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 the  security  holders of the
Company during the last quarter of fiscal 1999.

                                       9

<PAGE>


                                     PART II

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

<TABLE>
         The  Company's  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 the  Common  Stock as  reported  on the New York Stock
Exchange Composite Tape for the fiscal quarters indicated.

<CAPTION>
                                                                                            Common Stock
                                                                                             Price Range
                                                                                        ---------------------
                                                                                        High              Low
                                                                                        ----              ---
<S>                                                                                    <C>              <C>
Fiscal Year Ended March 31, 1998:
     First Quarter ended June 30, 1997......................................           $33 1/2          $21 7/8
     Second Quarter ended September 30, 1997................................           $34 1/2          $30 1/8
     Third Quarter ended December 31, 1997..................................           $36 1/4          $29 1/2
     Fourth Quarter ended March 31, 1998....................................           $41 7/16         $30 3/16

Fiscal Year Ended March 31, 1999:
     First Quarter ended June 30, 1998......................................           $43 3/4          $32 1/2
     Second Quarter ended September 30, 1998................................           $34 3/4          $14 3/8
     Third Quarter ended December 31, 1998..................................           $20              $13
     Fourth Quarter ended March 31, 1999....................................           $18 3/4          $ 9 7/8
</TABLE>


         On May 28, 1999,  the closing price per share of the  Company's  Common
Stock on the New York Stock Exchange was $16.69.  As of May 28, 1999, there were
433 holders of record of the Company's Common Stock,  which excludes  beneficial
owners of Common Stock held in "street name".

         The Company has not  declared or paid any cash  dividends on its Common
Stock since December 1993. The Company's  credit  agreement,  among the Company,
the lenders  named  therein and The Bank of America  National  Trust and Savings
Association,  for  itself  and as  agent  for a  syndicate  of  other  financial
institutions,  dated June 1996 as amended (the "Amended  Agreement"),  generally
restricts,   subject  to  certain   exceptions,   the   payment  of   dividends,
distributions  and other  payments.  The Company does not anticipate  paying any
cash dividends in the  foreseeable  future and intends to retain future earnings
for the development and expansion of its business. Subject to such restrictions,
any future  determination  to pay  dividends  will be at the  discretion  of the
Company's  Board of  Directors  and  subject  to certain  limitations  under the
General  Corporation  Law of the  State of  Delaware  and will  depend  upon the
Company's  results  of  operations,   financial  condition,   other  contractual
restrictions and factors deemed relevant by the Board of Directors.

                                       10

<PAGE>


<TABLE>
Item 6. SELECTED FINANCIAL DATA

<CAPTION>
                                                                             Fiscal Year Ended March 31,
                                                     ---------------------------------------------------------------------------
                                                       1999(1)         1998            1997(2)          1996             1995
                                                     ---------       ---------        ---------       ---------        ---------
<S>                                                  <C>             <C>              <C>             <C>              <C>
Statements of Operations Data
(in thousands, except per share data)
   Net sales ....................................    $ 529,789       $ 547,735        $ 488,689       $ 387,709        $ 345,631
                                                     =========       =========        =========       =========        =========
   Income before
     extraordinary item .........................    $  12,521       $  51,092        $  30,897       $  34,588        $  13,640(4)
   Extraordinary item, net of
      taxes .....................................         --            (5,939)(3)         --              (912)(3)       (3,915)(4)
                                                     ---------       ---------        ---------       ---------        ---------
   Net income ...................................    $  12,521       $  45,153        $  30,897       $  33,676        $   9,725
                                                     =========       =========        =========       =========        =========

Earnings (Loss) Per Share Data
basic
   Income (loss) before
   extraordinary ................................    $    0.51       $    2.09        $    1.31       $    1.59        $    0.82
     item
   Extraordinary item ...........................         --             (0.24)            --             (0.04)           (0.23)
                                                     ---------       ---------        ---------       ---------        ---------
   Net income ...................................    $    0.51       $    1.85        $    1.31       $    1.55        $    0.59
                                                     =========       =========        =========       =========        =========
   Weighted average common
     shares outstanding .........................       24,794          24,400           23,561          21,785           16,710
                                                     =========       =========        =========       =========        =========
Earnings (Loss) Per Share Data
diluted
   Income (loss) before
   extraordinary ................................    $    0.49       $    2.00        $    1.24       $    1.51        $    0.78
     item
   Extraordinary item ...........................         --             (0.23)            --             (0.04)           (0.22)
                                                     ---------       ---------        ---------       ---------        ---------
   Net income ...................................    $    0.49       $    1.77        $    1.24       $    1.47        $    0.56
                                                     =========       =========        =========       =========        =========
   Weighted average common and
     dilutive securities outstanding ............       25,412          25,547           24,859          22,944           17,516
                                                     =========       =========        =========       =========        =========


                                                                                  As of March 31,
                                                     ---------------------------------------------------------------------------
                                                       1999            1998             1997            1996              1995
                                                     ---------       ---------        ---------       ---------        ---------
Balance Sheet Data
   Total assets .................................    $ 699,299       $ 684,058        $ 605,508       $ 416,849        $ 383,457
   Long-term debt ...............................      208,414         196,386          162,797          97,890          107,407
   Total shareholders' equity ...................      332,362         327,022          284,298         192,241          159,443


<FN>
---------------------------
(1)  In fiscal 1999,  primarily during the fourth quarter,  the Company recorded
     special charges in the amount of $27.3 million, or $20.5 million, $0.81 per
     diluted share, after consideration of the associated tax benefit (see "Note
     10 of Notes to Consolidated Financial Statements").
(2)  For  fiscal  1997,  the  Company  recorded  two  non-recurring  charges  in
     connection  with the AO  Acquisition:  (i) a $7.2  million  charge  for the
     amortization  associated with an inventory  write-up to fair value that was
     reflected  in  cost  of  sales;  and  (ii) a $9.5  million  charge  for the
     write-off of  in-process  research and  development  that was  reflected in
     in-process research and development expense.
(3)  For fiscal 1998 and fiscal 1996, the  extraordinary  items comprise  losses
     due to the repurchases of senior subordinated notes, net of tax.
(4)  For  fiscal  1995,  the  Company  recorded  two  non-recurring  charges  in
     connection  with the IPO: (i) a $3.0 million charge for the  termination of
     the AEA  Investors  Inc.  management  agreement  with the Company  that was
     reflected in general and administrative  expenses;  and (ii) a $3.9 million
     write-off of debt  issuance  costs,  that was  reflected in the  historical
     financial statements as an extraordinary item.
</FN>
</TABLE>

                                       11

<PAGE>


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

Overview

         The  following  discussion  of the  Company's  financial  condition and
results  of  operations  should  be  read  in  conjunction  with  the  Company's
consolidated  financial  statements and notes thereto included elsewhere in this
Form 10-K.  The financial  statements  for the year ended March 31, 1997 reflect
the consolidated  operations of the Company after accounting for the acquisition
("AO  Acquisition") of substantially  all of the worldwide  ophthalmic  business
("AO") of American Optical  Corporation  ("AOC") on June 19, 1996 (see Note 1 of
Notes to  Consolidated  Financial  Statements),  using  the  purchase  method of
accounting.  Operating  results for fiscal 1997 subsequent to the AO Acquisition
include non-recurring,  non-cash charges relating to the write-off of in-process
research and  development  projects ($9.5 million) and  amortization  associated
with an  inventory  write-up  to fair value ($7.2  million),  both of which were
recorded in connection with the AO Acquisition.  The years ended March 31, 1999,
1998 and 1997 are  referred  to herein as fiscal  1999,  fiscal  1998 and fiscal
1997, respectively.

<TABLE>
         The following  table  reflects the results of operations  for the three
fiscal years 1999, 1998 and 1997. The adjustment  column in fiscal 1997 reflects
adjustments  to  present  results  of  operations  on a  more  comparable  basis
adjusting for the  non-recurring,  non-cash charges,  and tax effects thereof in
connection with the AO Acquisition, noted above.

<CAPTION>
                                                                              Fiscal Year Ended March 31,
                                                      -----------------------------------------------------------------------------
                                                                                                                         Adjusted
(In thousands)                                          1999             1998             1997          Adjustments        1997
                                                      ---------        ---------        ---------        ---------        ---------
<S>                                                   <C>              <C>              <C>                               <C>
Net sales .....................................       $ 529,789        $ 547,735        $ 488,689                         $ 488,689
Cost of sales .................................         291,389          289,677          264,535        $  (7,216)         257,319
                                                      ---------        ---------        ---------        ---------        ---------
  Gross profit ................................         238,400          258,058          224,154            7,216          231,370
                                                      ---------        ---------        ---------        ---------        ---------
Research and development expenses .............          18,757           18,303           17,539                            17,539
Selling and marketing expenses ................          96,609           93,993           92,387                            92,387
General and administrative expenses
  (including goodwill amortization) ...........          57,977           53,056           47,381                            47,381
Special charges ...............................          27,306             --               --                                --
In-process research and development expenses ..            --               --              9,500           (9,500)            --
                                                      ---------        ---------        ---------        ---------        ---------
  Operating expenses ..........................         200,649          165,352          166,807           (9,500)         157,307
                                                      ---------        ---------        ---------        ---------        ---------
  Operating income ............................          37,751           92,706           57,347           16,716           74,063
Interest expense, net .........................         (17,559)         (16,754)         (15,961)                          (15,961)
                                                      ---------        ---------        ---------        ---------        ---------
  Income before provision for
    income taxes, minority interest
    and extraordinary item ....................          20,192           75,952           41,386           16,716           58,102
Provision for income taxes ....................          (8,394)         (25,369)         (10,737)          (5,851)         (16,588)
Minority interest .............................             723              509              248                               248
                                                      ---------        ---------        ---------        ---------        ---------
  Income before extraordinary item ............          12,521           51,092           30,897           10,865           41,762
Extraordinary item, loss on
  repurchase of senior subordinated
  notes, net of tax ...........................            --             (5,939)            --                                --
                                                      ---------        ---------        ---------        ---------        ---------
  Net income ..................................       $  12,521        $  45,153        $  30,897        $  10,865        $  41,762
                                                      =========        =========        =========        =========        =========
</TABLE>

                                                                 12

<PAGE>


Results of Operations

<TABLE>
         The following  table sets forth,  for the fiscal years  indicated,  the
Company's results of operations as a percentage of net sales.

<CAPTION>
                                                                      Fiscal year ended March 31,
                                                                   ---------------------------------
                                                                   1999          1998          1997
                                                                   -----         -----         -----
                                                                    %             %             %
<S>                                                                <C>           <C>           <C>
        Net sales.........................................         100.0         100.0         100.0
        Cost of sales.....................................          55.0          52.9          54.1
                                                                   -----         -----         -----
          Gross profit....................................          45.0          47.1          45.9
                                                                   -----         -----         -----
        Research and development expenses.................           3.5           3.3           3.6
        Selling and marketing expenses....................          18.2          17.2          18.9
        General and administrative expenses...............          10.9           9.7           9.7
        Special charges...................................           5.2           --             --
        In-process research and
          development expenses............................           --            --            1.9
                                                                   -----         -----         -----
          Operating expenses..............................          37.8          30.2          34.1
                                                                   -----         -----         -----
          Operating income ...............................           7.2          16.9          11.8
        Interest expense, net.............................          (3.3)         (3.1)         (3.2)
          Income before provision for income taxes,
            minority interest and extraordinary item......           3.9          13.8           8.6
        Provision for income taxes........................          (1.6)         (4.6)         (2.2)
        Minority interest.................................           0.1           0.0           0.0
        Extraordinary item................................           0.0          (1.0)          0.0
                                                                   -----         -----         -----
          Net income .....................................           2.4           8.2           6.4
                                                                   =====         =====         =====
</TABLE>


Fiscal 1999 compared to Fiscal 1998

Net Sales

         Net sales were $529.8  million in fiscal 1999  reflecting a decrease of
3.3% from $547.7 million in fiscal 1998.  Using  constant  exchange  rates,  the
percentage  decrease  was 2.3%,  and  excluding  Brazilian  frame and  equipment
business  sales  (see  below),  constant  exchange  rate net  sales  would  have
decreased by 1.4%.  The decline in net sales was primarily  attributable  to the
North  American  and Rest of World  regions.  The  sales  decline  in the  North
American region (primarily the United States) resulted from reduced net sales to
laboratory  customers that were acquired in fiscal 1998 by Essilor  Laboratories
of America, as well as lower sales of Spectralite  photochromic  products caused
by the release of a new generation Transitions product in CR39 plastic material.
Also  contributing  to the  net  sales  shortfall  was  softness  of the  Asian,
Australian and South American  economies,  although these regions only accounted
for  approximately  18% of net sales in the aggregate.  Underperformance  in the
Company's  Australian  operations  was  partially  caused  by  weakness  of  the
Australian  dollar  against the U.S.  dollar.  South  American sales declined by
approximately 25% in the fourth quarter compared to the fourth quarter of fiscal
1998.  Significantly  contributing  to this decline was the  devaluation  of the
Brazilian Real in January 1999 and the sale of the Company's Brazilian frame and
equipment  business during April 1998, which had contributed  approximately $5.2
million of net sales in fiscal 1998.

         The  foregoing  decreases  were  offset,  in part,  by  growth  in CR39
photochromic  lens  sales,  especially  due to the  new  generation  Transitions
product in CR39 plastic  material,  mentioned above,  sales of high index lenses
and  new  progressive  lens  designs.   Higher  priced  products  accounted  for
approximately 67% of net lens sales in fiscal 1999 compared to approximately 66%
for fiscal  1998.  Progressive  lens net sales for fiscal 1999 were down by 1.5%
compared to fiscal 1998,  although in the fourth  quarter  progressive  lens net
sales were 4.3% higher  than for the same  period in the prior  year.  Net sales
performances by region were as follows:  North America declined by 6.2%,  Europe
increased by 6.9% and Rest of World declined by 10.9%.  Using constant  exchange
rates the regional performances were

                                       13

<PAGE>


as follows: North America declined by 6.0%, Europe increased by 5.7% and Rest of
World declined by 5.1%.

Gross Profit and Gross Margin

         Gross  profit  totaled  $238.4  million  for fiscal 1999  reflecting  a
decrease  of 7.6% from gross  profit of $258.1  million for fiscal  1998.  Gross
profit as a  percentage  of net sales  ("gross  margin")  decreased to 45.0% for
fiscal  1999  from  47.1%  for  fiscal  1998.  The  gross  margin  decrease  was
principally due to lower  progressive  lens product sales,  product mix changes,
and  underabsorption  of overhead due to a slow-down in production levels during
the second through  fourth  quarters to align  production  with sales demand and
expectations.  The Company experiences price competition, which can be severe in
certain markets, particularly for standard products.

Operating Expenses

         Operating  expenses in fiscal 1999 totaled $200.6  million  compared to
operating  expenses of $165.4  million for fiscal 1998.  Included in fiscal 1999
operating  expenses  is $27.3  million  representing  special  charges  incurred
predominantly  in the  fourth  quarter.  If these  charges  were  excluded  from
operating  expenses,  operating  expenses  would have been  $173.3  million,  an
increase over the prior year of 4.8%. Operating expenses,  excluding the special
charges,  for fiscal 1999 and 1998 as a  percentage  of net sales were 32.7% and
30.2%,  respectively.  Reflecting the reduced net sales in fiscal 1999,  overall
operating expenses, excluding the special charges, in fiscal 1999, have remained
relatively flat with those of the prior year. Research and development  expenses
for fiscal  1999 and 1998  represent  3.5% and 3.3% of net sales,  respectively.
Selling and marketing expenses were 18.2% and 17.2%, of net sales in fiscal 1999
and 1998, respectively. As a percentage of net sales, general and administrative
expenses  increased  to 10.9% for fiscal 1999  compared to 9.7% for fiscal 1998.
The  change  in  general  and  administrative   expenses  relates  to  increased
information  technology  related expenses and impact of currency rates offset by
lower expenses for performance based management bonuses and favorable changes in
estimates  related to certain  reserves  and  accruals  in the first  quarter of
fiscal 1999.

         Fiscal  1999  operating  expenses  included  $27.3  million  of special
charges.  Of this $27.3  million  charge,  $15.2  million  related to  strategic
actions  designed to improve the Company's  operating  performance.  The charges
include costs associated with the consolidation of the Sola and American Optical
manufacturing  facilities in Mexico ($8.0 million),  other work force reductions
($3.0  million),  as well as inventory  ($3.1  million) and accounts  receivable
($1.1 million)  write-downs which resulted from the Asian and Brazilian economic
softness.  The  Company  currently  estimates  that it is  likely  to  incur  an
additional  $2  million  to  $3  million  in  charges  associated  with  further
reductions in force in the first half of fiscal 2000. Additionally, the dramatic
devaluation  of the Brazilian  Real in January 1999,  and the related  impact on
asset  realization,  including  losses  related to the  Company's  inability  to
collect the accounts  receivable  from the original sale of the Brazilian  frame
and equipment  business (which the Company re-assumed in April 1999) resulted in
pre-tax  charges of $12.1  million in the fourth  quarter,  which  comprised the
remainder  of the  $27.3  million  special  charge  (see  Note  10 of  Notes  to
Consolidated Financial Statements).

Operating Income

         Operating  income for fiscal 1999 totaled $37.8 million,  a decrease of
$54.9 million from fiscal 1998 operating  income of $92.7 million,  or 59.3%. If
the special  charges  included in  operating  expenses  were  excluded  from the
operating income, fiscal 1999 operating income would have been $65.1 million and
the decrease of fiscal 1999 operating  income from fiscal 1998 operating  income
would have been 29.8%.

Net Interest Expense

         Net interest  expense totaled $17.6 million for fiscal 1999 compared to
$16.8  million for fiscal 1998,  an increase of $0.8  million.  During the third
quarter of fiscal 1998 the Company  repurchased  its 9 5/8% Senior  Subordinated
Notes,  and during the fourth  quarter of fiscal 1998 the Company  issued 6 7/8%

                                       14

<PAGE>


Senior Notes. The net effect of the above two changes has been to reduce current
period interest rates.  This reduction in interest rates and therefore  interest
expense has been more than  offset by an  increase  in  interest  expense due to
increased borrowing levels in the current year.

Provision for Income Taxes

         The  Company's  combined  state,  federal  and  foreign  tax  rate  was
approximately  41.6% for fiscal  1999  compared  to 33.4% for fiscal  1998.  The
primary cause of the increase in the  effective  income tax rate for fiscal 1999
to 41.6% was the Company  booking a valuation  allowance,  and  therefore no tax
benefit,  against the loss  related to the  Company's  inability  to collect the
accounts  receivable from the original sale of the Brazilian frame and equipment
business,  which the Company reassumed in April 1999. If the special charges are
excluded  from income before  provision  for income  taxes,  and the tax benefit
associated  with the special  charges are excluded from the provision for income
taxes,  the resulting  effective  combined  state,  federal and foreign tax rate
would have been 32.0%.  The Company has deferred tax assets on its balance sheet
as of March 31, 1999  amounting to  approximately  $23.8  million.  The ultimate
utilization of these  deferred tax assets is dependent on the Company's  ability
to generate taxable income in the future.

Net Income

         Net income for fiscal  1999  totaled  $12.5  million  compared to $45.2
million for fiscal 1998. If the extraordinary item was excluded from fiscal 1998
results and the special  charges and associated  taxes were excluded from fiscal
1999  results,  the decline from fiscal 1998,  as adjusted,  to fiscal 1999,  as
adjusted, would have been $18.1 million, or 35.4%.

Fiscal 1998 compared to Fiscal 1997

Net Sales

         Net sales were $547.7 million in fiscal 1998  reflecting an increase of
12.1% from $488.7 million in fiscal 1997.  Using constant  exchange  rates,  the
percentage  increase  from fiscal 1997 to fiscal 1998 was 16.6%.  Higher  priced
product growth  contributed to the Company's net sales growth in fiscal 1998 and
fiscal  1997,  led  by the  growth  of  Spectralite,  plastic  photochromic  and
polycarbonate products,  offset in part by price and volume erosion in net sales
of lower priced products. Higher priced products accounted for approximately 66%
of net lens  sales in fiscal  1998  compared  to 61% in fiscal  1997.  Increased
marketing and customer  service efforts also  contributed to the growth in other
higher priced  products.  Net sales increases by region from fiscal 1997 to 1998
were as follows:  North  America  20.1%,  Europe 7.1% and Rest of World 1.3%. At
constant  exchange  rates,  net sales  increases from fiscal 1997 to fiscal 1998
were: North America 20.1%, Europe 16.0% and Rest of World 6.8%.

Gross Profit and Gross Margin

         Gross  profit  totaled  $258.1  million in fiscal  1998  reflecting  an
increase  of 15.1% from  fiscal  1997  gross  profit of $224.2  million.  If the
amortization associated with an inventory write-up to fair value in fiscal 1997,
of $7.2  million,  is  excluded  from the  fiscal  1997 gross  profit,  then the
percentage  increase from fiscal 1997 to fiscal 1998 is 11.5%. Gross profit as a
percentage  of net  sales in  fiscal  1998,  fiscal  1997 and  fiscal  1997,  as
adjusted,  were  47.1%,  45.9% and 47.3%,  respectively.  The  Company  incurred
manufacturing  start up costs in its new  finished  polycarbonate  manufacturing
operation  acquired when the Company purchased  Neolens,  Inc. in July 1996, and
ramp up costs  associated  with  new  product  offerings,  such as  Matrix,  the
Company's  anti-reflective  coating delivery  system,  which resulted in reduced
gross  margins.  Offsetting in part the  aforementioned  reductions,  has been a
shift towards higher value added products,  and benefits from the Company's cost
reduction program.

                                       15

<PAGE>


Operating Expenses

         Operating expenses totaled $165.4 million in fiscal 1998, a decrease of
$1.4  million  from fiscal 1997  operating  expenses of $166.8  million.  If the
write-off of in-process research and development projects in fiscal 1997 of $9.5
million is excluded  from the fiscal 1997  operating  expenses,  then the fiscal
1998  operating  expenses  increased  5.1% compared to fiscal 1997, as adjusted.
Research and development expenses for fiscal 1998 and fiscal 1997 represent 3.3%
and 3.6%, respectively,  of annual net sales, reflecting the Company's continued
commitment to research and development of new products, materials and processes.
Selling and marketing  expenses were 17.2% and 18.9% of net sales in fiscal 1998
and 1997,  respectively.  During the fourth  quarter of fiscal  1997 the Company
introduced a new progressive  lens design,  Percepta,  with a worldwide  launch.
Significant  marketing  expenditures  associated  with this launch were incurred
primarily in the last two  quarters of the 1997 fiscal year  resulting in higher
sales and  marketing  expenses  as a  percentage  of net  sales in fiscal  1997.
General  and  administrative  expenses  in both fiscal 1998 and fiscal 1997 were
9.7% as a percentage of net sales.

Operating Income

         Operating income for fiscal 1998 totaled $92.7 million,  an increase of
$35.4 million over fiscal 1997 operating  income of $57.3 million,  or 61.7%. If
the  amortization  associated with the inventory  write-up to fair value of $7.2
million,  and the write-off of in-process  research and development  projects of
$9.5 million, are excluded from the operating income of fiscal 1997, then fiscal
1997 operating income increases to $74.1 million,  and the growth of fiscal 1998
operating income over fiscal 1997 operating income, as adjusted, is 25.2%.

Net Interest Expense

         Net interest  expense  totaled  $16.8 million for fiscal 1998 and $15.9
million for fiscal 1997.  Interest expense was higher in fiscal 1998 than fiscal
1997,  primarily  due  to a  full  year  of  higher  indebtedness  to  fund  the
acquisitions of AO and Neolens in June and July of 1996, offset in part by lower
interest rates on the Company's  revolving line of credit, and the repurchase of
its 9 5/8% senior  subordinated notes in December 1997.  Simultaneously with the
AO  Acquisition,  the Company  entered into a new bank credit  facility with The
Bank of America National Trust and Savings Association,  for itself and as agent
for a syndicate of other financial  institutions  (see  "--Liquidity and Capital
Resources").  In July 1996,  the Company  issued 2.32  million  shares of common
stock in a public  offering for which it received net proceeds of  approximately
$62.8 million.

Provision for Income Taxes

         The  Company's  combined  state,  federal  and  foreign  tax  rate  was
approximately  33.4% for fiscal  1998  compared  to 25.9% for fiscal  1997.  The
utilization of United States valuation allowances,  arising in fiscal 1994, were
the primary reasons for the lower income tax rate in fiscal 1997.

Extraordinary Item

         During fiscal 1998 the Company  repurchased all of its remaining 9 5/8%
Senior  Subordinated  Notes due 2003. As a result of the  repurchase the Company
recorded an extraordinary charge of $5.9 million resulting from the write-off of
unamortized debt issuance costs and premium over accreted value, net of tax. The
repurchase was funded by borrowings under the Company's credit agreement.

Net Income

         Net income for fiscal  1998  totaled  $45.2  million  compared to $30.9
million for fiscal 1997.  If the  extraordinary  item is excluded in fiscal 1998
and the one time  charges  are  excluded  in fiscal  1997 the growth from fiscal
1997, as adjusted, to fiscal 1998, as adjusted would have been 22.3%.

                                       16

<PAGE>


Liquidity and Capital Resources

         Operating  activities  generated  $3.2  million in cash in fiscal  1999
compared with $20.9 million in fiscal 1998 and $32.4 million in fiscal 1997. The
reduction in cash flows from  operations  in fiscal 1999 compared to fiscal 1998
is primarily due to the reduced net income,  reduced trade  payables and accrued
liabilities,  and increased net deferred taxes, offset in part by reduced growth
of  accounts  receivable  and  inventories,   and  increased   depreciation  and
amortization.  The change in cash flows from  operations in fiscal 1998 compared
to fiscal 1997 was  primarily  due to  increases  in  inventories  and  accounts
receivable,  offset by  significantly  improved  net income in fiscal  1998.  In
addition, during fiscal 1998 the Company decided to take advantage of prompt pay
discounts  offered by  suppliers  in the United  States  resulting  in  accounts
payable not increasing in line with the increases in the business.

         During  fiscal 1999  inventories  as a percentage  of net sales grew to
31.8% from 31.0% in the prior year.  The increase in inventories as a percentage
of net sales is  primarily a result of reduced net sales.  During the first half
of fiscal 1999 inventory levels increased substantially,  and management reduced
production  levels,  primarily  in the second  half of the year,  to combat this
growth,  bringing the  inventory  levels back in line with the  beginning of the
year levels. During fiscal 1998 inventories as a percentage of net sales grew to
31.0% from 28.4% in the prior year. The increase in inventories  was primarily a
result of building inventories to support new product launches, growth in higher
priced products as a percentage of net sales and therefore of  inventories,  and
the  projected  overall  increase  in the  business.  Accounts  receivable  as a
percentage  of net sales  increased to 22.4% in fiscal 1999  compared to 22.0% a
year ago.  The  slow-down  in world  economies,  particularly  in Asia and South
America have contributed to the increase in accounts  receivable as a percentage
of net sales.  Accounts  receivable  as a percentage  of net sales  increased to
22.0% in fiscal 1998 compared to 21.5% for fiscal 1997.

         During fiscal 1999 net cash expended on investing  activities  amounted
to $38.5 million. Of this amount $30.5 million represented capital  expenditures
and $8.6 million  represented  investment in acquisitions.  The most significant
capital  expenditures,  primarily on additional production capacity and computer
system  upgrades,  were made in the United  States,  Mexico,  Brazil,  Italy and
Australia.  The $8.6 million spent on acquisitions represents the acquisition of
the assets of an anti-reflection  coating laboratory in Oregon, USA, acquired by
the  Company in June 1998.  During  fiscal 1998 net cash  expended on  investing
activities amounted to $41.2 million, primarily being capital expenditures.  The
most  significant  capital  expenditures,  primarily  on  additional  production
capacity,  were made in the United States,  Mexico, Brazil, China, Venezuela and
Australia. During fiscal 1997 net cash expended on investing activities amounted
to $154.8 million.  On June 19, 1996, the Company acquired  substantially all of
the  worldwide  ophthalmic  business  of AOC for cash  consideration  of  $103.6
million  (together  with  the  assumption  of  certain   liabilities)  (the  "AO
Acquisition").  The AO Acquisition was funded primarily through borrowings under
the Company's then existing credit agreement, which borrowings were subsequently
repaid in part with the proceeds  from the equity  public  offering  during July
1996. On July 2, 1996 the Company acquired Neolens, Inc. ("Neolens"),  a Florida
corporation for cash consideration of approximately $15.5 million, including the
assumption of Neolens debt ("Neolens Acquisition").  The Neolens Acquisition was
funded through  borrowings  under the Company's then existing credit  agreement.
During  fiscal 1997,  the Company spent  approximately  $30.0 million on capital
expenditures,  primarily  to add  production  capacity,  in the  United  States,
Mexico,  China and Brazil.  Management  anticipates capital  expenditures of $25
million  to  $30  million  annually  over  the  next  several  years,  of  which
approximately $5 million annually is viewed as discretionary.

         Financing activities generated $22.5 million in cash in fiscal 1999 and
$32.3 million in fiscal 1998,  primarily from  additional  borrowings  under the
Amended  Agreement  and  exercise of stock  options by  employees.  In the third
quarter of fiscal  1998 the  Company  repurchased  all of its  remaining  9 5/8%
Senior  Subordinated  Notes  due  2003.  The  notes  repurchase  was  funded  by
borrowings  under the Amended  Agreement.  In conjunction with the repurchase of
its Senior Subordinated Notes the Company amended its bank credit agreement with
The Bank of America  National Trust and Savings  Association,  for itself and as
agent for a syndicate of other financial institutions ("Amended Agreement").

                                       17

<PAGE>


         The Amended Agreement increased the Company's  multicurrency  revolving
facility  from $180  million to $300  million.  Borrowings  are divided into two
tranches.  Tranche A permits borrowings up to $30 million in either U.S. dollars
or foreign currencies,  to be used for working capital and consummating  certain
permitted  acquisitions.  Tranche B permits borrowings of up to $270 million and
can be used for  working  capital  purposes,  outstanding  letters of credit and
consummating certain permitted  acquisitions.  The Tranche A Facility matures on
October 31, 2000 and the Tranche B Facility matures on May 31, 2001. Among other
things the Amended Agreement changed certain  financial  covenants,  removed the
requirement  for  foreign  subsidiary  guarantees  under the Tranche A Facility,
increased the basket for incurring other unsecured indebtedness to $150 million,
and deleted the term facility portion.

         Borrowings  under the  Tranche A and  Tranche B  revolvers  (other than
swing line  loans,  which may only be Base Rate  loans) may be made as Base Rate
Loans or LIBO Rate Loans. Base Rate Loans bear interest at rates per annum equal
to the higher of (a) 0.50% per annum above the latest Federal Funds Rate, or (b)
the Bank of America  Reference Rate. LIBO Rate Loans bear interest at a rate per
annum  equal to the sum of the LIBO  Rate and a margin  varying  from  0.450% to
0.750% based on the Company's  leverage ratio.  Fixed rate borrowings in foreign
currencies  bear interest at rates per annum equal to the referenced  currency's
local IBOR plus a margin  varying from 0.450% to 0.750%  based on the  Company's
leverage  ratio.  Local  currency Base Rate Loans are also available at a spread
similar to US Base Rate Loans described above.

         During the  fourth  quarter of fiscal  1998 the  Company  issued 6 7/8%
Senior Notes  ("Notes") due 2008, for which the Company  received  approximately
$98.5 million net proceeds,  after discounts and issuance expenses. Net proceeds
were used to pay down  borrowings  under the  Amended  Agreement.  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. The Notes will
be  redeemable,  as a whole or from time to time in part,  at the  option of the
Company  on any date at a  redemption  price  equal to the  aggregate  principal
amount plus a make whole premium.

         Financing  activities  generated $125.3 million in fiscal 1997.  During
July 1996 the  Company  sold  2,320,000  additional  shares  of common  stock at
$28.625 per share through a public offering. The net proceeds from this offering
were  approximately  $62.8 million.  The Company used such net proceeds to repay
indebtedness  which it incurred  under its then existing bank credit  agreement.
Simultaneously with the closing of the AO Acquisition,  the Company entered into
a bank  credit  agreement  with The Bank of America  National  Trust and Savings
Association,  for  itself  and as  agent  for a  syndicate  of  other  financial
institutions, covering an aggregate amount of $180 million.

         The Company's foreign subsidiaries  maintain local credit facilities to
provide credit for overdraft,  working  capital and some fixed asset  investment
purposes.  As of March 31, 1999, the Company's total credit available under such
facilities  was  approximately  $44.1  million,  of which $16.9 million had been
utilized.

         The Company continues to have significant  liquidity  requirements.  In
addition  to working  capital  needs and capital  expenditures,  the Company has
substantial  cash  requirements  for debt service.  The Company expects that the
Amended  Agreement and other overseas credit  facilities,  together with cash on
hand and internally  generated funds, if available as anticipated,  will provide
sufficient  capital  resources  to  finance  the  Company's   operations,   fund
anticipated capital  expenditures,  and meet interest  requirements on its debt,
including the Notes, for the foreseeable  future. As the Company's debt matures,
the Company may need to refinance such debt. There can be no assurance that such
debt can be refinanced on terms acceptable to the Company.

Currency Exchange Rates

         As a result of the Company's  worldwide  operations,  currency exchange
rate  fluctuations  tend to affect  the  Company's  results  of  operations  and
financial position.  The two principal effects of currency exchange rates on the
Company's  results of  operations  and  financial  position are (i)  translation
adjustments for subsidiaries where the local currency is the functional currency
and  (ii)  translation

                                       18

<PAGE>


adjustments  for  subsidiaries  in  hyper-inflationary  countries.   Translation
adjustments  for functional  local  currencies  have been made to  shareholders'
equity.  For the  fiscal  years  ended  March  31,  1999,  1998  and  1997  such
translation  adjustments were approximately $(9.2) million,  $(10.0) million and
$(3.8) million, respectively,  primarily as a result of the strength of the U.S.
dollar.

         For translation  adjustments of the Company's subsidiaries operating in
hyper-inflationary  countries,  until recently  primarily Brazil, the functional
currency is determined  to be the U.S.  dollar,  and  therefore all  translation
adjustments  are reflected in the Company's  Statements  of  Operations.  During
January 1999 the Brazilian Real devalued against the U.S.  dollar.  By March 31,
1999 the Real had deteriorated to 1.74 against the U.S. dollar, compared to 1.21
against the U.S. dollar as of December 31, 1998,  although it had reached higher
than 2.00 against the U.S. dollar in February.  As a result of this  devaluation
the Company  incurred  an exchange  loss of  approximately  $5.9  million in the
fourth  quarter of fiscal 1999 (see Note 10 of Notes to  Consolidated  Financial
Statements). In hyper-inflationary  environments, the Company generally protects
margins by methods which 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.

         Because a majority of the Company's  debt is U.S.  dollar  denominated,
the Company may hedge against  certain  currency  fluctuations  by entering into
currency swaps (however certain  currencies,  such as the Brazilian Real, cannot
be hedged  economically),  although  no such swaps had been  entered  into as of
March  31,  1999.  As of  March  31,  1999  certain  of  the  Company's  foreign
subsidiaries  had entered  into  forward  contracts  for  intercompany  purchase
commitments  in amounts other than their home currency.  The carrying  amount of
the forward contracts approximates fair value, which has been estimated based on
current exchange rates. For further financial data of the Company's  performance
by region, see Note 16 of Notes to Consolidated Financial Statements.

Seasonality

         The Company's business is somewhat seasonal, with third quarter results
generally weaker than the other three quarters as a result of lower sales during
the holiday season, and fourth quarter results generally the strongest.

Inflation

         Inflation  continues to affect the cost of the goods and services  used
by the Company. The competitive environment in many markets limits the Company's
ability to recover  higher  costs  through  increased  selling  prices,  and the
Company is subject to price erosion in many of its standard  product lines.  The
Company  seeks to  mitigate  the  adverse  effects  of  inflation  through  cost
containment and  productivity  and  manufacturing  process  improvements.  For a
description of the effects of inflation on the Company's  reported  revenues and
profits  and the  measures  taken by the  Company in  response  to  inflationary
conditions (see--"Currency Exchange Rates").

Quantitative and Qualitative Disclosures about Market Risk

         Quantitative Disclosures.

         The  Company is exposed to market  risks  inherent  in its  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. The Company is subject to interest rate risk on its
existing long-term debt and any future financing  requirements.  Fixed rate debt
consists  primarily of outstanding  balances on Senior Notes,  and variable rate
debt relates primarily to borrowings under the Company's Bank Credit Agreement.

                                       19

<PAGE>


<TABLE>
         The  following  table  presents  the  future  principal  cash flows and
weighted  average  interest rates expected on the Company's  existing  long-term
debt instruments. Fair values have been determined based on quoted market prices
as of March 31, 1999:

<CAPTION>
                                                        Expected Maturity Date (as of March 31, 1999)
                               -----------------------------------------------------------------------------------------------------
                               Fiscal        Fiscal       Fiscal        Fiscal     Fiscal
                                2000          2001         2002          2003       2004      Thereafter       Total      Fair Value
                                ----          ----         ----          ----       ----      ----------       -----      ----------
                                                                  (dollars in thousands)
<S>                           <C>          <C>          <C>            <C>        <C>        <C>            <C>            <C>
Long-term debt:
  Fixed rate debt ..........  $   4,510    $   1,441    $     3,292    $   264    $   174    $   100,243    $   109,924    $103,274

Weighted average
  interest rate ............       6.93%        6.09%          6.35%      4.21%      3.13%          6.85%          6.21%

Long-term debt:
  Variable rate debt .......       --           --      $   103,000       --         --             --      $   103,000    $103,000

Weighted average
  interest rate ............       --           --             5.56%      --         --             --             5.56%
</TABLE>


         Currency Rate Risk.  The Company's  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,  and  therefore  there are no
appropriate quantitative disclosures.

         Qualitative Disclosures.

         Interest Rate Risk. The Company's  primary interest rate risk exposures
relate to:

            o    Interest rate risk on variable long-term borrowings,

            o    The  ability  of the  Company  to pay  or  refinance  long-term
                 borrowings at maturity at market rates,

            o    The impact of interest rate movements on the Company's  ability
                 to meet interest expense  requirements and financial  covenants
                 and

            o    The impact of interest rate movements on the Company's  ability
                 to obtain  adequate  financing  to fund  future  operations  or
                 business acquisitions

         The Company  manages  interest rate risk on its  outstanding  long-term
borrowings  through the use of fixed and variable  rate debt.  While the Company
cannot predict its ability to refinance  existing  debt, or the impact  interest
rate movements might have on existing debt,  management  evaluates the Company's
financial position on an ongoing basis.

         Currency Rate Risk. The Company's  primary currency rate risk exposures
relate to:

            o    The Company's decentralized  operations,  whereby approximately
                 50% of the  Company's  revenues  are  derived  from  operations
                 outside the United States, denominated in currencies other than
                 the U.S. dollar,

            o    The ability of the  Company's  U.S.  operations to satisfy cash
                 flow  requirements of  predominantly  U.S.  dollar  denominated
                 long-term  debt without the need to repatriate  into the United
                 States foreign  earnings and profits,  which are denominated in
                 currencies other than the U.S. dollar,

                                       20

<PAGE>


            o    The  Company's   investments  in  foreign   subsidiaries  being
                 primarily  directly  from the U.S.  parent,  resulting  in U.S.
                 dollar investments in foreign currency functional companies and

            o    The  location  of the  Company's  operating  subsidiaries  in a
                 number of countries  that have seen  significant  exchange rate
                 changes against the U.S. dollar,  primarily downwards in recent
                 years, such as Brazil, Mexico, China, Venezuela and other Asian
                 countries.

         The  Company  manages  its  currency  rate  risks  through a variety of
measures.   The  Company  operates  on  a  decentralized   regional  basis  with
manufacturing operations located in most major markets. As a result,  individual
markets are not necessarily  impacted by changes in currency  exchange rates. In
addition,  the  Company  negotiated  as  part of its  Bank  Credit  Agreement  a
multicurrency facility so that local borrowings could be made in the currency of
the local  entity,  whilst still  obtaining  the  benefits of central  borrowing
capability.  In addition,  in certain  limited  instances,  subsidiaries,  after
obtaining  approval  from the  Company's  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 or
hyper-inflationary   environments  protect  margins  by  methods  which  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.  The Company  discloses
constant  exchange rate net sales  performances in the aggregate,  as well as by
region, in the management's  discussion and analysis of financial  condition and
results of operations (see "--Currency Exchange Rates").

Year 2000

         The Year 2000 issue is the result of computer  programs  being  written
using two  digits  rather  than four to define  the  applicable  year.  Computer
programs or hardware  that have  date-sensitive  software or embedded  chips may
recognize  a date using "00" as the year 1900  rather  than the year 2000.  This
could  result in a system  failure or  miscalculations  causing  disruptions  of
operations,  including,  among other  things,  a temporary  inability to process
transactions, send invoices, or engage in similar normal business activities.

         The Company has completed its Year 2000 assessment of critical business
systems.  Based on these  assessments,  the Company  determined  that it will be
required to modify or replace  certain  portions  of its  software so that those
systems  will  properly  utilize  dates beyond  December  31, 1999.  The Company
presently believes that with modifications or replacements of existing software,
the Year 2000 issue can be mitigated.  Year 2000  expenditures  to-date have not
been  material,  and the overall  cost to the Company of making its  Information
Technology  ("IT")  systems  Year 2000  compliant  is also  estimated  to not be
material to the  Company's  results of  operations  (less than $2 million over a
three fiscal year period).

         The Company has also performed extensive testing of operating equipment
("embedded  chips")  to ensure  that they are Year  2000  compliant.  To date no
material exposures have been detected.

         For  those IT  systems  that  require  upgrades  to make them Year 2000
compliant,  the Company  believes it has commenced  upgrade programs in a timely
manner so that the systems  will be available  for  extensive  testing  prior to
implementation. The majority of remediation work has been completed. However, in
certain instances, the Company will not meet the timetable for implementation of
its main  Year  2000  strategy,  primarily  in  Australia  and  France.  In both
instances  contingency  plans have been developed and  implemented  which should
deliver  adequate  computer   functionality  until  the  main  strategy  can  be
completed.

         The cost of the Company's  Year 2000 program and its beliefs  regarding
its  compliance  program are based on the Company's best  estimates,  which were
derived  utilizing a number of  assumptions  about  future  events,  such as the
availability  and cost of personnel  trained in this area, the ability to locate
and correct all relevant  computer  codes,  the  performance of key software and
hardware vendors and other

                                       21

<PAGE>


similar uncertainties.  However, the Company is not sure that its estimates will
be achieved and actual results could differ materially from those anticipated.

         As part of its overall assessment  package,  the Company is also in the
process of assessing  the possible  effects on the  Company's  operations of the
Year 2000 readiness of key suppliers and customers.  The Company has developed a
worksheet  for all sites to utilize as an aid in  collecting  information  about
Year 2000 compliance  including that of business partners.  Initial emphasis has
been on partners with Electronic Data Interfaces ("EDI"),  with the second stage
being  communication  with key suppliers and customers on their  readiness.  The
Company's  largest  customer  accounts for less than 5% of net sales and the ten
largest customers account for approximately 23% of net sales.

         Due to the Company's decentralized operations,  and lack of reliance on
one Companywide IT system,  the Company  believes that the risk of isolated Year
2000 failures should not be material to the Company's  consolidated  operations.
However,  difficulties in making the Company's IT systems Year 2000 compliant in
a number of its significant geographic regions or the failure of a number of the
Company's  major  vendors,  customers  or other  material  service  providers to
adequately  address their Year 2000 issues would have a material  adverse effect
on the Company.

         Certain  of the  Company's  North  American  operations  implemented  a
significant  upgrade of their computer  operating systems (unrelated to the Year
2000 issue), which entailed the installation of certain modules of an enterprise
wide IT system. This system underwent extensive testing in the month of November
1998, and since December 1998 the system has been fully operational.

European Union Conversion to the "Euro"

         The  Company  has  instituted  a  "Euro"   conversion  team  and  begun
preliminary  preparation  for the  conversion  by  eleven  member  states of the
European Union to a common currency, the "Euro". Conversion to the Euro by these
member states of the Union will take place on a "no compulsion,  no prohibition"
basis  between  January  1, 1999 and  January  1,  2002.  By January 1, 2002 all
companies  operating  in the eleven  member  states will be required to be fully
operational  using the new  currency.  The Euro  conversion  team has  primarily
addressed the accounting and  information  systems changes that are necessary to
facilitate  trading in the Euro,  the  possible  marketplace  implications  of a
common currency and the currency  exchange rate risks, with the initial emphasis
placed on the system modifications. The Company has not completed the evaluation
of the possible effect of the changes to the Euro on foreign  currency loans, or
the  impact  if any,  on the  marketplace  implications  of a  common  currency.
Preliminary  assessments  indicate that the financial  impact of conversion to a
Euro based currency will not be material to the Company's consolidated financial
position, results of operations or cash flows.

Information Relating to Forward-Looking Statements

         This  Form  10-K of the  Company  includes  forward-looking  statements
within the  meaning  of  Section  21E of the  Securities  Exchange  Act of 1934,
including statements regarding, among other items, (i) the Company's development
of new products,  including,  among  others,  Percepta,  AO Compact,  Visuality,
Spectralite, ViZio, Access(R) and Matrix, (ii) the availability of raw materials
for the Company's products,  the costs of product  introductions,  and trends in
sales growth  (including  growth  related to new  products),  (iii)  anticipated
trends in the Company's business environment,  including competitive and pricing
pressures,  (iv) the Company's ability to continue to control costs and maintain
adequate  standards of customer service and product  quality,  (v) future income
tax rates and capital  expenditures  and working capital  requirements  and (vi)
statements  regarding the adequacy of the  Company's  planning for the Year 2000
and Euro issues.  These forward looking statements reflect the Company's current
views  with  respect  to future  events  and  financial  performance.  The words
"believe",    "expect",    "anticipate"   and   similar   expressions   identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these  forward-looking  statements,  which  speak  only as of their  dates.  The
Company   undertakes   no   obligation   to   publicly   update  or  revise  any
forward-looking  statements,  whether  as a result  of new  information,  future
events  or  otherwise.   Actual  results  could  differ   materially   from  the
forward-

                                       22

<PAGE>


looking  statements as a result of various factors  including those described in
"Business--Environmental   Matters"  and  "Factors  Affecting  Future  Operating
Results",  included in Exhibit 99.1,  of the Company's  Form 10-K for the fiscal
year ended March 31, 1999.


Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The financial  statements  required by this item are set forth on pages
F-1, and F3 through  F-27 and the related  financial  statement  schedule is set
forth on page S-1.


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

         Not applicable.

                                       23

<PAGE>


                                    PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The  following  table sets forth the names,  ages and  positions of the
Company's directors and executive officers.  All directors hold office until the
annual meeting of stockholders of the Company  following their election or until
their successors are duly elected and qualified.  Officers are appointed by, and
serve at the discretion of, the Board of Directors.


          Name                     Age                    Position
          ----                     ---                    --------
Irving S. Shapiro...............    82    Chairman of the Board
Douglas D. Danforth.............    76    Director
Hamish Maxwell..................    72    Director
Maurice J. Cunniffe.............    66    Director
Jackson L. Schultz..............    73    Director
A. William Hamill...............    51    Director
John E. Heine...................    55    President and Chief Executive Officer,
                                             Director
James H. Cox....................    50    Executive Vice President, Assistant
                                             Secretary and Assistant Treasurer
Steven M. Neil..................    46    Executive Vice President, Finance,
                                             Chief Financial Officer, Secretary
                                             and Treasurer
Stephen J. Lee..................    46    Vice President, Human Resources
Barry J. Packham................    52    Vice President, Manufacturing
                                             Development
Theodore Gioia..................    41    Vice President, Strategic Planning
Adrian Walker...................    46    Vice President, Regional Director,
                                             Asia
Alan S. Vaughan.................    55    Vice President, Worldwide Rx
                                             Operations


         The  principal  occupations  and  positions  for at least the past five
years of each of the  directors  and  executive  officers  of the Company are as
follows (references to the Company include its predecessors):

         Irving S. Shapiro has been  Chairman of the Board of the Company  since
December 1994. Mr. Shapiro is Of Counsel to Skadden, Arps, Slate, Meagher & Flom
LLP. He was Chairman and Chief Executive  Officer of E.I. du Pont de Nemours and
Company  from  1974 to 1981.  He is  Chairman  of the  Board of  Marvin & Palmer
Associates, Inc., and is a director of J.P. Morgan Florida Federal Savings Bank,
Pediatric Services of America Inc., and Gliatech, Inc.

         Douglas D. Danforth has been a director of the Company  since  December
1994.  He was  Chairman and Chief  Executive  Officer of  Westinghouse  Electric
Corporation from 1983 to 1987. He is a director of Daltile Inc.

         Hamish  Maxwell has been a director of the Company 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 is a
director  of Bankers  Trust  Company,  Bankers  Trust New York  Corporation  and
Chairman of WPP Group plc.

         Maurice J. Cunniffe has been a director of the Company since  December,
1996.  He  is  Chairman  and  Chief  Executive   Officer  of  American   Optical
Corporation, a company of which he has been sole shareholder since 1982.

                                       24

<PAGE>


         Jackson L.  Schultz has been a director of the Company  since  November
1995. Mr.  Schultz  joined Wells Fargo Bank in 1970,  retiring in 1990 as Senior
Vice President responsible for Public and Governmental Affairs.

         A. William  Hamill has been a director of the Company  since  December,
1996.  Mr. Hamill was Executive Vice  President and Chief  Financial  Officer of
Union Camp  Corporation from 1996 through April 1999. From 1993 through 1996, he
was a partner in SCI  Investors  Inc. and a director of Custom Papers Group Inc.
From 1991 to 1993, he was Senior Vice President and Chief  Financial  Officer of
Specialty  Coatings  International  Inc.. From 1975 through 1990, Mr. Hamill was
with Morgan Stanley & Co. Incorporated, where he was a Managing Director.

         John E. Heine has served as Chief  Executive  Officer and  President of
the  Company  since  November  1981 and served as  Chairman  of the Board of the
Company from  September  1993 to December  1994. Mr. Heine joined the Company in
1981 as Managing Director of Sola  International  Holdings,  Ltd. and previously
held general  management  positions  with  Southern  Farmers  Holdings,  Ltd. in
Adelaide and H.J. Heinz in Melbourne, Australia.

         James H. Cox was appointed  Executive  Vice President in December 1996,
Assistant Secretary and Assistant Treasurer of the Company in September 1993. He
was President of Sola Optical USA, the Company's  North  American  eyeglass lens
business  from  1991  to  1998.  He  joined  the  Company  as  Vice   President,
Manufacturing  in  1985.  Mr.  Cox was  formerly  Executive  Vice  President  of
Operations with Bausch & Lomb's Consumer Products Division.

         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.  He is a  member  of  the  Board  of  Directors  of
Intelligent Solutions, Inc.

         Stephen J. Lee was appointed  Vice  President,  Human  Resources of the
Company  in  1988  and was  formerly  Director  of  Personnel  for  Pilkington's
Ophthalmic and  Insulation  Divisions.  Mr. Lee joined the  Pilkington  Group in
1974.

         Barry J. Packham  joined the Company 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.

         Theodore Gioia has served as Vice President,  Strategic  Planning since
1992.  Mr. Gioia  joined the Company as Director of Strategic  Planning in 1989,
having sold the  start-up  recording  company he founded in 1987.  Mr. Gioia was
previously a consultant with McKinsey & Company and the Boston Consulting Group.

         Adrian P.  Walker  joined the  Company 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.

                                       25

<PAGE>


         Alan S. Vaughan was appointed Vice  President,  Worldwide Rx Operations
in June 1994, having  previously served as European  Manufacturing and Technical
Director.  Mr. Vaughan  joined the Company in 1978 as Managing  Director of Sola
ADC Lenses in Ireland.  He was previously  Director of Operations with Johnson &
Johnson (Ireland).


Item 11. EXECUTIVE COMPENSATION

         Incorporated  by reference to the material  included  under the caption
"Compensation  of Executive  Officers" in the Company's  proxy statement for the
fiscal year ended March 31, 1999.


Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Incorporated  by reference to the material  included  under the caption
"Security  Ownership of Certain Beneficial Owners and Managers" in the Company's
proxy statement for the fiscal year ended March 31, 1999.


Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Incorporated  by reference to the material  included  under the caption
"Certain  Transactions"  in the  Company's  proxy  statement for the fiscal year
ended March 31, 1999.

                                       26

<PAGE>


                                     PART IV

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

(a)  Documents Filed as Part of this Report:

         1. Financial Statements. See Index to Consolidated Financial Statements
            included on page F-1.

         2.  Financial  Statement  Schedules.  See  "Schedule II - Valuation and
             Qualifying Accounts" included on page S-1.

             Schedules  other than those listed  above have been  omitted  since
             they are either not required,  not applicable or the information is
             otherwise included.

         3. List of Exhibits. See Index of Exhibits included on page E-1.

(b)  Reports on Form 8-K:

         None.

                                       27

<PAGE>


                                   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 16, 1999                           By: /s/Steven M. Neil
      --------------                               -----------------------------
                                                   Steven M. Neil
                                                   Executive Vice President,
                                                   Finance, Chief
                                                   Financial Officer, Secretary
                                                   and Treasurer


<TABLE>
         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.

<CAPTION>
         Signature                                   Title                                          Date
         ---------                                   -----                                          ----
<S>                                    <C>                                                      <C>
/s/ Irving S. Shapiro
--------------------------             Chairman of the Board                                    June 16, 1999
Irving S. Shapiro


/s/ John E. Heine
--------------------------             President and Chief Executive Officer,                   June 16, 1999
John E. Heine                          Director (Principal Executive Officer)


/s/ Steven M. Neil
--------------------------             Executive Vice President, Finance, Chief                 June 16, 1999
Steven M. Neil                         Financial Officer, Secretary and Treasurer
                                       (Principal Financial and Accounting Officer)


/s/ Douglas D. Danforth
--------------------------             Director                                                 June 16, 1999
Douglas D. Danforth


/s/ Hamish Maxwell
--------------------------             Director                                                 June 16, 1999
Hamish Maxwell


/s/ Maurice J. Cunniffe
--------------------------             Director                                                 June 16, 1999
Maurice J. Cunniffe


/s/ A. William Hamill
--------------------------             Director                                                 June 16, 1999
A. William Hamill


/s/ Jackson L. Schultz
--------------------------             Director                                                 June 16, 1999
Jackson L. Schultz
</TABLE>

                                               28

<PAGE>


                             SOLA INTERNATIONAL INC.


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                            Page
                                                                            ----

Report of Ernst & Young LLP, Independent Auditors.......................... F-2

Consolidated Balance Sheets as of March 31, 1999 and 1998.................. F-3

Consolidated Statements of Income for the years ended March 31, 1999,
  1998 and 1997............................................................ F-4

Consolidated Statements of Shareholders' Equity for the years ended
  March 31, 1999, 1998 and 1997 ........................................... F-5

Consolidated  Statements  of Cash Flows for the years ended
  March 31, 1999, 1998 and 1997............................................ F-6

Notes to Consolidated Financial Statements................................. F-7

Quarterly Financial Data (unaudited)....................................... F-28

Financial Statement Schedule............................................... S-1

                                      F-1

<PAGE>


                Report of Ernst & Young LLP, Independent Auditors


Board of Directors and Shareholders

Sola International Inc.

         We have audited the  accompanying  consolidated  balance sheets of Sola
International  Inc. as of March 31, 1999 and 1998, and the related  consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended March 31, 1999. Our audits also included the financial
statement  schedule  listed  in the  index  at item  14(a).  These  consolidated
financial  statements  and  schedule  are the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements and schedule based on our audits.

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Sola  International  Inc.  as of March 31, 1999 and 1998,  and the  consolidated
results of its  operations and its cash flows for each of the three years in the
period ended March 31, 1999, in conformity  with generally  accepted  accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered  in  relation  to the basic  financial  statements  taken as a whole,
presents fairly in all material respects the information set forth therein.


                                                        /s/Ernst & Young LLP


Palo Alto, California
May 6, 1999

                                      F-2

<PAGE>


<TABLE>
                                                       SOLA INTERNATIONAL INC.

                                                     CONSOLIDATED BALANCE SHEETS
                                                (in thousands, except per share data)

<CAPTION>
                                                                                                     March 31,
                                                                                           ------------------------------
                                          ASSETS                                             1999                 1998
                                                                                           ---------            ---------
<S>                                                                                        <C>                  <C>
Current assets:
   Cash and cash equivalents ...................................................           $  21,578            $  34,444
   Trade accounts receivable, less allowance for doubtful accounts of
     $7,003 and $4,956 at March 31, 1999 and 1998, respectively ................             118,648              120,590
   Inventories .................................................................             168,755              169,756
   Other current assets ........................................................              20,486               16,798
                                                                                           ---------            ---------
     Total current assets ......................................................             329,467              341,588
Property, plant and equipment, at cost, less accumulated depreciation
     and amortization ..........................................................             153,000              132,778
Goodwill and other intangibles, net ............................................             195,345              198,341
Other long-term assets .........................................................              21,487               11,351
                                                                                           ---------            ---------
     Total assets ..............................................................           $ 699,299            $ 684,058
                                                                                           =========            =========

                           LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Current liabilities:
   Notes payable to banks ......................................................           $  17,490            $  10,095
   Current portion of long-term debt ...........................................               4,510                2,505
   Accounts payable ............................................................              50,854               60,254
   Accrued liabilities .........................................................              31,313               35,462
   Accrued payroll and related compensation ....................................              26,468               30,758
   Other current liabilities ...................................................               2,709                2,536
                                                                                           ---------            ---------
     Total current liabilities .................................................             133,344              141,610
Long-term debt, less current portion ...........................................               5,782                1,790
Bank debt, less current portion ................................................             103,000               95,000
Senior notes ...................................................................              99,632               99,596
Other long-term liabilities ....................................................              25,179               19,040
                                                                                           ---------            ---------
     Total liabilities .........................................................             366,937              357,036
Commitments and contingencies
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; 24,867 shares
     (24,723 shares as of March 31, 1998) issued and outstanding ...............                 249                  247
Additional paid-in capital .....................................................             280,525              278,688
Equity participation loans .....................................................                 (50)                (230)
Retained earnings ..............................................................              70,578               58,057
Cumulative other comprehensive income (loss) ...................................             (18,940)              (9,740)
                                                                                           ---------            ---------
     Total shareholders' equity ................................................             332,362              327,022
                                                                                           ---------            ---------
     Total liabilities and shareholders' equity ................................           $ 699,299            $ 684,058
                                                                                           =========            =========

<FN>
                             The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

                                                                F-3

<PAGE>


<TABLE>
                                                       SOLA INTERNATIONAL INC.

                                                  CONSOLIDATED STATEMENTS OF INCOME
                                                (in thousands, except per share data)

<CAPTION>
                                                                                      Year Ended March 31,
                                                                          -----------------------------------------------
                                                                            1999               1998               1997
                                                                          ---------          ---------          ---------
<S>                                                                       <C>                <C>                <C>
Net sales ..........................................................      $ 529,789          $ 547,735          $ 488,689
Cost of sales ......................................................        291,389            289,677            264,535
                                                                          ---------          ---------          ---------
   Gross profit ....................................................        238,400            258,058            224,154
                                                                          ---------          ---------          ---------
Research and development expenses ..................................         18,757             18,303             17,539
Selling and marketing expenses .....................................         96,609             93,993             92,387
General and administrative expenses ................................         57,977             53,056             47,381
Special charges ....................................................         27,306               --                 --
In-process research and development
   expense .........................................................           --                 --                9,500
   Operating expenses ..............................................        200,649            165,352            166,807
                                                                          ---------          ---------          ---------
   Operating income ................................................         37,751             92,706             57,347
Interest income ....................................................            913                664                640
Interest expense ...................................................        (18,472)           (17,418)           (16,601)
                                                                          ---------          ---------          ---------
   Income before provision for income taxes,
     minority interest and extraordinary item ......................         20,192             75,952             41,386
Provision for income taxes .........................................         (8,394)           (25,369)           (10,737)
Minority interest ..................................................            723                509                248
                                                                          ---------          ---------          ---------
   Income before extraordinary item ................................         12,521             51,092             30,897
Extraordinary item, loss on repurchase of
   senior subordinated notes, net of tax ...........................           --               (5,939)              --
                                                                          ---------          ---------          ---------
Net income .........................................................      $  12,521          $  45,153          $  30,897
                                                                          =========          =========          =========

Earnings (loss) per share - basic:
     Income before extraordinary item ..............................      $    0.51          $    2.09          $    1.31
     Extraordinary item ............................................           --                (0.24)              --
                                                                          ---------          ---------          ---------
     Net income ....................................................      $    0.51          $    1.85          $    1.31
                                                                          =========          =========          =========

Weighted average common shares outstanding .........................         24,794             24,400             23,561
                                                                          =========          =========          =========

Earnings (loss) per share - diluted:
     Income before extraordinary item ..............................      $    0.49          $    2.00          $    1.24
     Extraordinary item ............................................           --                (0.23)              --
                                                                          ---------          ---------          ---------
     Net income ....................................................      $    0.49          $    1.77          $    1.24
                                                                          =========          =========          =========
Weighted average common and dilutivesecurities outstanding .........         25,412             25,547             24,859
                                                                          =========          =========          =========

<FN>
                             The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

                                                                F-4

<PAGE>


<TABLE>
                                                       SOLA INTERNATIONAL INC.

                                           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                                (in thousands, except per share data)

<CAPTION>
                                                                                                              Cumulative
                                                                                                                Other
                                                                                                   Retained     Compre-      Total
                                                                          Additional   Equity      Earnings/    hensive     Share-
                                                         Common Stock       Paid-in  Participation(Accumulated  Income      holders'
                                                      Shares     Value      Capital     Loans       Deficit)    (loss)      Equity
                                                      ------    --------    --------   --------    --------    --------    --------
<S>                                                   <C>       <C>         <C>        <C>         <C>         <C>         <C>
Balances, March 31, 1996 ........................     21,797    $    218    $206,412   $   (421)   $(17,993)   $  4,025    $192,241
Net income ......................................                                                    30,897                  30,897
Foreign currency translation
  adjustments ...................................                                                                (3,771)     (3,771)
   Total comprehensive income ...................                                                                            27,126
Public Offering of 2.320 shares of
  $0.01 par value common stock, net of
  offering expenses .............................      2,320          23      62,742                                         62,765
146 shares of $0.01 par value common
  stock issued under stock option
  plans .........................................        146           2       1,747                                          1,749
Tax benefit from exercise of stock
  options .......................................                                266                                            266
Repayment of equity participation
  loans .........................................                                           151                                 151
                                                      ------    --------    --------   --------    --------    --------    --------
Balances, March 31, 1997 ........................     24,263         243     271,167       (270)     12,904         254     284,298
Net income ......................................                                                    45,153                  45,153
Foreign currency translation
  adjustments ...................................                                                                (9,994)     (9,994)
   Total comprehensive income ...................                                                                            35,159
460 shares of $0.01 par value common
  stock issued under stock option
  plans .........................................        460           4       5,330                                          5,334
Tax benefit from exercise of stock
  options .......................................                              2,191                                          2,191
Repayment of equity participation
  loans .........................................                                            40                                  40
                                                      ------    --------    --------   --------    --------    --------    --------
Balances, March 31, 1998 ........................     24,723         247     278,688       (230)     58,057      (9,740)    327,022
Net income ......................................                                                    12,521                  12,521
Foreign currency translation
  adjustments ...................................                                                                (9,200)     (9,200)
   Total comprehensive income ...................                                                                             3,321
144 shares of $0.01 par value common
  stock issued under stock option
  plans .........................................        144           2       1,534                                          1,536
Tax benefit from exercise of stock
  options .......................................                                303                                            303
Repayment of equity participation
  loans .........................................                                           180                                 180
                                                      ------    --------    --------   --------    --------    --------    --------
Balances, March 31, 1999 ........................     24,867    $    249    $280,525   $    (50)   $ 70,578    $(18,940)   $332,362
                                                      ======    ========    ========   ========    ========    ========    ========

<FN>
                             The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

                                                                F-5

<PAGE>


<TABLE>
                                                       SOLA INTERNATIONAL INC.

                                                CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                           (in thousands)

<CAPTION>
                                                                                    Year Ended March 31,
                                                                      -------------------------------------------------
                                                                        1999                1998                1997
                                                                      ---------           ---------           ---------
<S>                                                                   <C>                 <C>                 <C>
Cash flows from operating activities:
Net income ...................................................        $  12,521           $  45,153           $  30,897
Adjustments to reconcile net income to net cash
   provided by operating activities:
Minority interest in earnings ................................             (723)               (509)               (248)
Depreciation and amortization ................................           25,041              22,140              21,595
Inventory write-up ...........................................             --                  --                 7,216
In-process research and development ..........................             --                  --                 9,500
Provision for excess and obsolete inventory ..................            5,620               1,833               1,593
Provision for doubtful accounts ..............................            2,716               1,337               1,258
Increase (decrease) in net deferred taxes ....................           (7,855)              7,750              (3,644)
Gain on disposal/sale of property, plant and
   equipment .................................................              (65)                (82)               (272)
Changes in assets and liabilities:
   Trade accounts receivable .................................           (1,313)            (21,242)            (19,513)
   Inventories ...............................................           (5,358)            (38,231)            (24,464)
   Prepaids and other assets .................................           (3,847)             (6,022)               (725)
   Accounts payable--trade ...................................          (16,891)              2,710               6,258
   Accrued and other current liabilities .....................           (8,362)              3,652               1,803
   Tax benefit from exercise of stock options ................              303               2,191                 266
   Other long-term liabilities ...............................            1,460                 174                 898
                                                                      ---------           ---------           ---------
     Net cash provided by operating activities ...............            3,247              20,854              32,418
                                                                      ---------           ---------           ---------
Cash flows from investing activities:
Acquisition of American Optical, less cash and cash
   equivalents of $3,365 .....................................             --                  --              (108,594)
Purchases of businesses ......................................           (8,601)               --               (16,848)
Capital expenditures .........................................          (30,458)            (39,497)            (29,951)
Other investing activities ...................................              546              (1,730)                636
                                                                      ---------           ---------           ---------
     Net cash used in investing activities ...................          (38,513)            (41,227)           (154,757)
                                                                      ---------           ---------           ---------
Cash flows from financing activities:
Sale of common stock .........................................             --                  --                62,765
Payments on equity participation loans/exercise of
   stock options .............................................            1,716               5,374               1,900
Net receipts (payments) under notes payable to banks .........           15,611               2,731              (4,789)
Borrowings on long-term debt .................................            5,031                --                 4,081
Payments on long-term debt ...................................           (4,255)             (4,628)             (5,278)
Net receipts under bank debt .................................            4,427              22,374              66,626
Issuance of senior notes .....................................             --                99,596                --
Repurchase of senior subordinated notes ......................             --               (93,152)               --
                                                                      ---------           ---------           ---------
     Net cash provided by financing activities ...............           22,530              32,295             125,305
                                                                      ---------           ---------           ---------
Effect of exchange rate changes on cash and cash
   equivalents ...............................................             (130)             (1,879)               (959)
                                                                      ---------           ---------           ---------
Net increase (decrease) in cash and cash equivalents .........          (12,866)             10,043               2,007
Cash and cash equivalents at beginning of period .............           34,444              24,401              22,394
                                                                      ---------           ---------           ---------
Cash and cash equivalents at end of period ...................        $  21,578           $  34,444           $  24,401
                                                                      =========           =========           =========

<FN>
                             The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

                                                                F-6

<PAGE>


                             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.

         In June 1996, the Company acquired  substantially  all of the worldwide
ophthalmic   business   ("AO")  of  American   Optical   Corporation   for  cash
consideration  of  $103.6  million  (together  with the  assumption  of  certain
liabilities) (the "AO Acquisition").  The AO Acquisition was accounted for under
the purchase  method of accounting as of the closing  date.  The total  purchase
price of $110.2 million  (including  acquisition costs of $6.5 million) exceeded
the  historical  book  value of the net  assets  acquired  and such  excess  was
allocated to the assets and liabilities  based on their estimated fair values as
of the AO Acquisition date,  including in-process research and development ($9.5
million) with no alternative  future use.  Independent  appraisals were utilized
for  determining  the amounts  assigned to certain  purchased  assets  including
property, plant and equipment and in-process research and development.

         In July 1996 the Company acquired control of Neolens, Inc. ("Neolens"),
a Florida corporation that manufactured  polycarbonate eyeglass lenses and was a
supplier to the Company.  The Company acquired Neolens for cash consideration of
approximately  $15.5  million,  including  the  assumption  of Neolens debt (the
"Neolens  Acquisition")  and was  accounted  for  under the  purchase  method of
accounting as of the closing  date.  The total  purchase  price of $16.8 million
(including  acquisition  costs of $1.3 million) included $17.6 million allocated
to goodwill and other intangible assets. Results of Neolens prior to acquisition
were not material to the Company's consolidated results of operations.

         The accompanying  consolidated financial statements of the Company have
been prepared in accordance with U.S. generally accepted accounting  principles.
The Company's  fiscal 1997  financial  statements  presented  herein include the
results of operations  and cash flows of the AO business for the nine months and
ten days ended March 31, 1997 and the  results of  operations  and cash flows of
the Neolens  business  for the nine months  ended March 31, 1997  subsequent  to
their respective acquisitions.


2. Summary of Significant Accounting Policies

         Principles of Consolidation:

         The  consolidated  financial  statements  include  the  accounts of the
Company  and  its  wholly-owned  and  controlled   foreign   subsidiaries.   All
significant transactions between the entities have been eliminated.

         Cash and Cash Equivalents:

         Cash equivalents  consist  primarily of short-term  investments with an
original  maturity of three months or less,  carried at cost which  approximates
market value.

         Inventories:

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

                                      F-7

<PAGE>


                             SOLA INTERNATIONAL INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2. Summary of Significant Accounting Policies - (Continued)

         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  and  office  equipment--2  to  20  years).
Leasehold  improvements  and leased  equipment are amortized  over the lesser of
their useful lives or the remaining term of the related leases.

         Impact of recently issued accounting standards:

         In June 1998, the Financial  Accounting Standards Board ("FASB") issued
FASB  Statement No. 133,  "Accounting  for  Derivative  Instruments  and Hedging
Activities"  which is required to be adopted in years  beginning  after June 15,
1999. The Company is currently  evaluating the impact of the  application of the
new rules on the Company's consolidated financial statements.

         Intangible Assets:

         Intangible  assets,  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.  Goodwill, which represents the excess of
acquisition cost over the net assets acquired in business combinations amounting
to  $193.9   million  and  $196.5  million  as  of  March  31,  1999  and  1998,
respectively,  is being amortized on a straight-line  basis over periods ranging
from 10 to 40  years  (primarily  40  years).  As of  March  31,  1999  and 1998
accumulated amortization was $23.7 million and $17.9 million, respectively.

         Debt issuance  costs are being  amortized to interest  expense over the
respective lives of the debt  instruments  which range from 5 to 10 years. As of
March 31,  1999 and 1998,  accumulated  amortization  was $0.9  million and $0.4
million,  respectively.  As a result of repurchasing the Company's 9 5/8% Senior
Subordinated  Notes in fiscal 1998,  the Company  wrote off $1.5 million of debt
issuance costs  reflected on the statement of income,  together with the premium
over accreted value, as an extraordinary item, net of tax.

         Long-Lived Assets:

         In fiscal  year  1997,  the  Company  adopted  FASB  Statement  No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be  Disposed  of" ("SFAS  121").  The  adoption of SFAS 121 had no impact on the
Company's financial position or on its results of operations.

         In accordance  with FASB Statement No. 121  long-lived  assets held and
used by the Company are reviewed for  impairment  whenever  events or changes in
circumstances  indicate  that  the  carrying  amount  of an  asset  may  not  be
recoverable. For purposes of evaluating the recoverability of long-lived assets,
the  recoverability  test is  performed  using  undiscounted  net cash flows for
long-lived assets, primarily goodwill and property, plant and equipment.

                                      F-8

<PAGE>


                             SOLA INTERNATIONAL INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


2. Summary of Significant Accounting Policies - (Continued)

         Foreign Currency Translation:

         The assets and  liabilities  and revenue  and  expense  accounts of the
Company's foreign subsidiaries  operating in non-highly  inflationary  economies
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.

         The Company has  operations  in Brazil,  a  hyper-inflationary  country
until  recently,  for which the  functional  currency  is the U.S.  dollar.  All
translation and transaction  adjustments are included in determining net income.
In January 1999 the Brazilian  Real was devalued  resulting in pretax charges of
$5.9 million in the fourth quarter included in special charges (see Note 10).

         Revenue Recognition:

         Sales  and  related  cost of sales  are  recognized  upon  shipment  of
product.  The  Company's  principal  customers are  wholesale  distributors  and
processing laboratories,  retail chains, superoptical retail stores, independent
eyecare  practitioners  and  sunglass  manufacturers.   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.

         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  $9.3 million,  $12.3 million,  and $12.5 million for fiscal 1999,
1998, 1997, 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.

         Comprehensive Income:

         As of April 1, 1998,  the  Company  adopted  FASB  Statement  No.  130,
"Reporting  Comprehensive  Income" ("SFAS 130").  SFAS 130 establishes new rules
for the  reporting  and  display of  comprehensive  income  and its  components;
however,  the  adoption of this  Statement  had no impact on the  Company's  net
income  or  shareholders'   equity.  SFAS  130  requires  the  foreign  currency
translation  adjustments,  which prior to adoption were  reported  separately in
shareholders' equity, to be included in other comprehensive income. The currency
translation  adjustments  are not  adjusted  for income  taxes as they relate to
indefinite investments in non-U.S. subsidiaries. Prior year financial statements
have been reclassified to conform to the requirements of SFAS 130.

                                      F-9

<PAGE>


                             SOLA INTERNATIONAL INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


2. Summary of Significant Accounting Policies - (Continued)

         Reclassifications:

         Certain  prior year items have been  reclassified  to conform  with the
current  year's  presentation.  These  reclassifications  had no impact on total
assets or net income.

         Use of Estimates:

         The  preparation  of  the  financial   statements  in  conformity  with
generally accepted  accounting  principles 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.

         Concentration of Credit Risks:

         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.

         Financial Instruments with Off-Balance-Sheet Risk:

         The Company is a party to financial instruments with  off-balance-sheet
risk in the normal  course of  business to reduce its  exposure to currency  and
interest  rate  risk.  Gains  and  losses  due  to  rate  fluctuations  on  such
transactions  are recognized in the same period as the items being hedged.  Cash
flows  related to these gains and losses are  reported as operating or financing
activities in the  accompanying  consolidated  statements  of cash flows.  As of
March 31, 1999,  certain of the Company's foreign  subsidiaries had entered into
forward  contracts  for  intercompany  purchase   commitments,   which  are  not
significant,  in amounts other than their home currency.  The carrying amount of
the foreign exchange contracts approximates fair value, which has been estimated
based on current exchange rates. The forward exchange  contracts  generally have
varying maturities up to 9 months. Unless noted otherwise,  the Company does not
require  collateral  or other  security to support  financial  instruments  with
credit risk.

         Earnings (Loss) Per Share:

         In 1997,  FASB issued FASB  Statement  No.  128,  "Earnings  per Share"
("SFAS  128").  SFAS 128  replaced  the  previously  reported  primary and fully
diluted  earnings per share with basic and diluted  earnings  per share.  Unlike
primary  earnings  per share,  basic  earnings  per share  excludes any dilutive
effects of options,  warrants, and convertible securities.  Diluted earnings per
share is very similar to the  previously  reported  fully  diluted  earnings per
share.  All  earnings  per share  amounts  for all  included  periods  have been
presented,   and  where   necessary,   restated  to  conform  to  the  SFAS  128
requirements.

                                      F-10

<PAGE>


                             SOLA INTERNATIONAL INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


2.   Summary of Significant Accounting Policies - (Continued)

<TABLE>
     The  following  table  sets  forth the  computation  of basic  and  diluted
earnings per share for the fiscal years ended March 31, 1999, 1998 and 1997:

<CAPTION>

                                                                       Year Ended March 31,
                                                                ---------------------------------
                                                                 1999          1998        1997
                                                                -------      -------      -------
                                                              (in thousands, except per share data)
<S>                                                             <C>          <C>          <C>
Numerator:
Income before extraordinary item .........................      $12,521      $51,092      $30,897
Extraordinary item, loss on repurchase of
  senior subordinated notes, net of tax ..................         --         (5,939)        --
                                                                -------      -------      -------
   Net income ............................................      $12,521      $45,153      $30,897
                                                                =======      =======      =======

Denominator:
   Denominator for basic earnings per
      share -
   Weighted average common shares
     outstanding .........................................       24,794       24,400       23,561

   Effect of dilutive securities:
     Employee stock options ..............................          618        1,147        1,298
   Denominator for diluted earnings per
      share -
                                                                -------      -------      -------
   Weighted average common shares and
     dilutive securities outstanding .....................       25,412       25,547       24,859
                                                                =======      =======      =======

Basic earnings (loss) per share:
Income before extraordinary item .........................      $  0.51      $ 2.09      $  1.31
Extraordinary item .......................................         --         (0.24)         --
                                                                -------      -------      -------
   Net income ............................................      $  0.51      $ 1.85       $  1.31
                                                                =======      =======      =======

Diluted earnings (loss) per share:
Income before extraordinary item .........................      $  0.49      $  2.00      $  1.24
Extraordinary item .......................................         --          (0.23)        --
                                                                -------      -------      -------
   Net income ............................................      $  0.49      $  1.77      $  1.24
                                                                =======      =======      =======
</TABLE>


         Options to purchase  1.7 million  shares of common  stock at a range of
$16.50 to $41.44 were  outstanding as of March 31, 1999 but were not included in
the computation of the diluted earnings per share because the options'  exercise
price was greater than the average market price of the common shares.

                                      F-11

<PAGE>


                             SOLA INTERNATIONAL INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


3. Inventories

                                                             March 31,
                                                    ----------------------------
                                                      1999                1998
                                                    --------            --------
                                                           (in thousands)
Raw materials ..........................            $ 15,714            $ 16,714
Work in progress .......................               6,551               6,872
Finished goods .........................             102,862             104,966
Molds ..................................              43,628              41,204
                                                    --------            --------
                                                    $168,755            $169,756
                                                    ========            ========


         Molds  comprise  mainly   finished  goods  for  use  by   manufacturing
affiliates in the manufacture of spectacle lenses.

4. Property, Plant and Equipment

                                                                 March 31,
                                                           ---------------------
                                                             1999         1998
                                                           --------     --------
                                                              (in thousands)
Land, buildings and leasehold improvements ...........     $ 47,465     $ 40,467
Machinery and office equipment .......................      163,864      136,218
Equipment under capital leases .......................          463          593
                                                           --------     --------
                                                            211,792      177,278
Less accumulated depreciation and amortization .......       58,792       44,500
                                                           --------     --------
                                                           $153,000     $132,778
                                                           ========     ========

         Depreciation  expense for fiscal 1999, 1998 and 1997 was $18.6 million,
$14.3 million and $13.3 million, respectively.

5. Notes Payable to Banks

         Notes payable to banks at March 31, 1999 represent borrowings generally
denominated in foreign  currencies under several foreign credit  agreements with
lenders at interest  rates  ranging from 1.63% to 15.00%.  The weighted  average
interest rates as of March 31, 1999 and 1998 were 7.87% and 8.06%, respectively.
As of March 31, 1999, the Company had total unused lines of credit  amounting to
$27.2  million and was in  compliance  with  minimum net worth  requirements  of
agreements with certain foreign banks.

                                      F-12

<PAGE>


                             SOLA INTERNATIONAL INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


6.   Long-Term Debt
                                                                       March 31,
                                                                         1999
                                                                        -------
                                                                  (in thousands)

Uncollateralized  promissory  note,  interest  6.5% at March  31,
   1999, principal and interest payable through June 2001 ............. $ 5,000

Uncollateralized term loans, interest rates varying from 4.00% to
   17.2%  at March  31,  1999,  principal  and  interest  payable
   through December 2008 ..............................................   4,087

Uncollateralized  term loan,  interest  1.85% at March 31,  1999,
   principal and interest payable through June 2008 ...................     916

Loans  collateralized  by equipment  and other  assets,  interest
   rates  varying  from  4.78%  to  10.00%  at  March  31,  1999,
   principal and interest payable through March 2001 ..................     173

Other .................................................................     116
                                                                        -------
                                                                         10,292
Less current portion...................................................   4,510
                                                                        -------
Long-term debt, less current portion................................... $ 5,782
                                                                        =======


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

   Period Ending March 31,                                     (in thousands)
   -----------------------
   2000........................................................     $4,510
   2001........................................................      1,441
   2002........................................................      3,292
   2003........................................................        264
   2004........................................................        174
   Thereafter..................................................        611


         The Company  believes that as of March 31, 1999,  the fair value of its
long-term debt  approximates the carrying value of those  obligations.  The fair
value of the Company's long-term debt is estimated based on quoted market prices
for similar  issues with the same interest  rates that would be available to the
Company for similar debt obligations.

7. Bank Credit Agreement

         During fiscal 1998 the Company  amended its bank credit  agreement with
The Bank of America  National Trust and Savings  Association,  for itself and as
agent for a syndicate of other financial institutions ("Amended Agreement"). The
Amended Agreement  increased the Company's  multicurrency  revolving facility to
$300 million. Borrowings, amounting to $103,000 and $95,000 as of March 31, 1999
and  1998,  respectively,  are  divided  into two  tranches.  Tranche  A permits
borrowings up to $30 million in either U.S. dollars or foreign currencies, to be
used for  working  capital  and  consummating  certain  permitted  acquisitions.
Tranche B permits borrowings of up to $270 million and can be used for working

                                      F-13

<PAGE>


                             SOLA INTERNATIONAL INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


7. Bank Credit Agreement - (Continued)

capital  purposes,  outstanding  letters of credit ($2.4 million as of March 31,
1999) and consummating  certain permitted  acquisitions.  The Tranche A Facility
matures on October 31, 2000 and the Tranche B Facility  matures on May 31, 2001.
In addition, the Amended Agreement changed certain financial covenants,  removed
the requirement for foreign subsidiary  guarantees under the Tranche A Facility,
increased the basket for incurring other unsecured indebtedness to $150 million,
and deleted the term facility  portion.  As of March 31, 1999 unused  borrowings
under the facility amount to $194.6 million.

         Borrowings  under the  Tranche A and  Tranche B  revolvers  (other than
swing line  loans,  which may only be Base Rate  loans) may be made as Base Rate
Loans or LIBO Rate Loans. Base Rate Loans bear interest at rates per annum equal
to the higher of (a) 0.50% per annum above the latest Federal Funds Rate, or (b)
the Bank of America  Reference  Rate  (there were no base rate loans as of March
31,  1999 or 1998).  LIBO Rate Loans bear  interest at a rate per annum equal to
the sum of the LIBO Rate and a margin varying from 0.450% to 0.750% based on the
Company's  leverage  ratio (5.56% as of March 31, 1999 and 6.19% as of March 31,
1998).  Fixed rate  borrowings in foreign  currencies bear interest at rates per
annum equal to the referenced  currency's  local IBOR plus a margin varying from
0.450% to 0.750% based on the Company's leverage ratio. Local currency Base Rate
Loans are also  available  at a spread  similar to US Base Rate Loans  described
above.

         The Amended Agreement contains a number of covenants,  including, among
others,  covenants  restricting the Company and its subsidiaries with respect to
the incurrence of indebtedness (including contingent obligations),  the creation
of liens,  the making of certain  investments  and loans,  engaging in unrelated
businesses,   transactions   with   affiliates,   the  consummation  of  certain
transactions  such as sales of substantial  assets,  mergers or  consolidations,
margin  stock  purchases  and other  transactions.  The Amended  Agreement  also
restricts  the ability of the Company and its  subsidiaries  to make  restricted
payments in the nature of, among other things,  (i) declaring,  making or paying
dividends  or other  distributions  in  excess  of  prescribed  levels  and (ii)
purchasing,  redeeming  or retiring  shares of the  Company's  capital  stock in
excess of prescribed  levels. The Company and its subsidiaries are also required
to comply with certain financial tests and maintain certain financial ratios.

8.   Senior Notes

         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.

         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  believes the fair value of its
Senior Notes  approximates  the carrying value of those  obligations,  and as of
March 31, 1999, the Senior Notes were trading at a price of 92.982%.

                                      F-14

<PAGE>


                             SOLA INTERNATIONAL INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


8. Senior Notes - (Continued)

         During  fiscal  1998 the Company  repurchased  all of its 9 5/8% Senior
Subordinated Notes due 2003. As a result of the purchase the Company recorded an
extraordinary  charge  of $5.9  million  for  fiscal  1998  resulting  from  the
write-off of unamortized  debt issuance  costs and premium over accreted  value,
net of tax of $3.8 million.  The repurchase  was funded by borrowings  under the
Amended Agreement.

9.   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, 1999 and 1998,  loans amounting to  approximately  $0.1 million and
$0.2  million,  respectively,  bearing  interest  at  7.5%  per  annum,  payable
quarterly,  were outstanding under this plan.  Certain employees were granted an
extension on repaying  their notes,  which were due for repayment by December 1,
1998.  These loans are secured by the common stock and have been  reflected as a
reduction in shareholders' equity on the consolidated balance sheets.

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.

         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.

                                      F-15

<PAGE>


                             SOLA INTERNATIONAL INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


9.   Common Stock - (Continued)

         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").

         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 5.67%, 5.67% and 6.67%, no dividend yield,  volatility factors
of the expected  market price of the  Company's  common stock of .481,  .373 and
 .389, and a weighted-average  expected life of the option of 4 years, for fiscal
1999, 1998 and 1997, respectively.

                                      F-16

<PAGE>


                             SOLA INTERNATIONAL INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


9.   Common Stock - (Continued)

         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 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,  in
management's  opinion, 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
pro forma information follows:

                                                    Year Ended March 31,
                                        ----------------------------------------
                                          1999            1998           1997
                                        ----------     ----------     ----------
                                          (in thousands, except per share data)

Pro forma net income ..............     $   10,606     $   44,157     $   30,312
Pro forma earnings per share:
  Basic ...........................     $     0.43     $     1.81     $     1.29
  Diluted .........................     $     0.42     $     1.73     $     1.22


         The pro forma effect on net income  during the phase-in  period of SFAS
123 may not be  representative  of the effects on pro forma net income in future
periods.

                                      F-17

<PAGE>


                             SOLA INTERNATIONAL INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


9.   Common Stock - (Continued)

Option Activity

<TABLE>
         A  summary  of  the  Company's  stock  option  activity,   and  related
information for fiscal 1997, 1998 and 1999 follows:

<CAPTION>
                                                             Number of Securities     Weighted Average
                                                              Underlying Options       Exercise Price
                                                              ------------------       --------------
                                                               (in thousands, except per share data)
<S>                                                                   <C>                  <C>
Options outstanding as of March 31, 1996..................            2,227                $11.96
  Options granted during fiscal 1997......................              394                 34.01
  Options exercised in fiscal 1997........................             (145)                12.02
  Options cancelled in fiscal 1997........................              (47)                17.98

Options outstanding as of March 31, 1997..................            2,429                 15.43
  Options granted during fiscal 1998......................              413                 33.08
  Options exercised in fiscal 1998........................             (460)                11.53
  Options cancelled in fiscal 1998........................             (153)                34.44

Options outstanding as of March 31, 1998..................            2,229                 18.20
  Options granted during fiscal 1999 whose market price
     equals the grant price on date of grant..............              191                 32.25
  Options granted during fiscal 1999 whose market price
     is less than the grant price on date of grant........              424                 27.13
  Options exercised in fiscal 1999........................             (144)                10.89
  Options cancelled in fiscal 1999........................              (57)                30.18

Options outstanding as of March 31, 1999..................            2,643                $20.79

Options exercisable at:
  March 31, 1999..........................................            1,824                $16.51
  March 31, 1998..........................................            1,568                $14.14
  March 31, 1997..........................................            1,486                $12.47



Weighted average fair value of options granted during fiscal year:
1999 .....................................................                      $    7.83
1998 .....................................................                      $   12.46
1997 .....................................................                      $   13.65
</TABLE>
                                      F-18

<PAGE>


                             SOLA INTERNATIONAL INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


9.   Common Stock - (Continued)

<TABLE>
         The following table summarizes  stock options  outstanding at March 31,
1999:

<CAPTION>
                                              Weighted
                                              Average
                       Outstanding at         Remaining           Weighted          Exercisable at        Weighted
   Range of            March 31, 1999        Contractual           Average         March 31, 1999         Average
Exercise Price         (in thousands)           Life            Exercise Price     (in thousands)     Exercise Price
--------------         --------------           ----            --------------     --------------     --------------
<S>                        <C>                  <C>                <C>                 <C>                 <C>
$ 9.71-$ 9.71                988                4.82               $ 9.71                988               $ 9.71
$16.50-$25.25                451                5.99                17.49                421                17.19
$27.13-$36.44              1,107                8.57                30.35                385                31.32
$37.25-$41.44                 97                9.11                39.87                 30                40.27
-------------              -----                ----               ------              -----               ------
$ 9.71-$41.44              2,643                6.75               $20.79              1,824               $16.51
=============              =====                ====               ======              =====               ======
</TABLE>


10.  Special Charges

         In fiscal  1999,  primarily  during the  fourth  quarter,  the  Company
recorded special charges in the amount of $27.3 million, or $20.5 million, $0.81
per diluted  share,  after  consideration  of the  associated  tax benefit.  The
pre-tax special charges are comprised of the following:

(in thousands)

Charges   associated  with  the  consolidation  of  manufacturing
facilities in Mexico,  including asset write-downs and work-force
reductions ........................................................... $  7,994

Charges associated with work-force reductions designed to improve
the Company's operating performance ..................................    2,957

Accounts  receivable and inventory  write-downs  associated  with
economic slow-downs in Asia and South America, primarily Brazil ......    4,301

Charges  associated with the devaluation of the Brazilian Real in
January 1999 .........................................................    5,880

Net asset  write-down from reassuming  ownership of the Brazilian
frame and equipment business .........................................    6,174
                                                                       --------
Total ................................................................ $ 27,306
                                                                       ========


         Included in the Mexican manufacturing facilities consolidation total of
$8.0 million, are write-downs of redundant equipment ($0.7 million), write-downs
of  molds  ($2.3   million),   employee   termination   costs   ($0.7   million)
(approximately 330 manufacturing  employees) and costs associated with combining
the two manufacturing operations, including production cost inefficiencies ($4.3
million).  Approximately $0.1 million of the employee termination costs had been
paid by March 31, 1999 with  approximately  $0.6 million estimated to be paid by
September 1999.

         The special charge amount includes $3.0 million  relating to work-force
reductions in North America, Europe and Australia,  (approximately 102 employees
from manufacturing,  procurement,  marketing and  administration)  including the
closure of the European regional office in Farnham,  UK. The Company anticipates
an  additional  $2 million to $3 million  in  charges  associated  with  further
reductions  in  force  in the  first  half of  fiscal  2000.  Of the  work-force
reductions,  approximately $0.9 million had been paid by March 31, 1999 with the
remainder to be paid through March 31, 2000.

                                      F-19

<PAGE>


                             SOLA INTERNATIONAL INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


10.  Special Charges - (Continued)

         The economic  slow-down in Asia and South  America  during  fiscal 1999
significantly  affected  developing  markets  used by the Company to  distribute
aging or redundant product lines, and severely impacted  liquidity of customers.
The  Company  has  recorded  a charge of $4.3  million  for  provisions  against
inventories  scheduled  for sale in the affected  economies  and  collection  of
accounts receivable, primarily in Asia.

         The dramatic devaluation of the Brazilian Real in January 1999, and the
related impact on asset  realization,  including losses related to the Company's
inability  to collect the  accounts  receivable  from the  original  sale of the
Brazilian  frame and equipment  business,  which the Company  reassumed in April
1999, resulted in the Company recording a charge of $12.1 million.

11.  Defined Contribution Plans

         The  Company  sponsors  several  defined  contribution  plans  covering
substantially all U.S. and U.K. employees. The plans provide for limited Company
matching  of   participants'   contributions.   Contributions   to  all  defined
contribution  plans  charged to operations  were $1.3 million,  $1.2 million and
$1.0 million for fiscal 1999, 1998 and 1997, respectively.

12.  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").

         Effective  April 1, 1998,  the Company  adopted FASB Statement No. 132,
"Employers'  Disclosures  about  Pensions and  Postretirement  Benefits"  ("SFAS
132"),  which  standardizes  the disclosure  requirements for pensions and other
postretirement  benefits.  The Statement addresses  disclosure only. It does not
change the  measurement or  recognition  of these plans.  There was no effect on
financial position or net income as a result of adopting SFAS 132.

<TABLE>
         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.

<CAPTION>
                                                            Domestic Pension                 International Pension
                                                                  Plan                                Plan
Year ended March 31, (in thousands)                     1999               1998               1999               1998
                                                      --------           --------           --------           --------
<S>                                                   <C>                <C>                <C>                <C>
Reconciliation of benefit obligation
Benefit obligation - beginning of year .........      $ 16,884           $ 11,301           $ 11,484           $ 11,491
Service cost ...................................         2,637              1,862              1,217              1,433
Interest cost ..................................         1,117                810                647                650
Participant contributions ......................          --                 --                  248                200
Actuarial loss .................................           179              3,062               --                  726
Benefit payments ...............................          (141)              (151)            (1,295)            (1,238)
Other ..........................................          --                 --                   66                180
Effect of exchange rates .......................          --                 --                 (463)            (1,958)
                                                      --------           --------           --------           --------
Benefit obligation - end of year ...............      $ 20,676           $ 16,884           $ 11,904           $ 11,484
                                                      ========           ========           ========           ========
</TABLE>

                                                                F-20

<PAGE>


                             SOLA INTERNATIONAL INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


<TABLE>
12. Defined Benefit Retirement Plans - (Continued)

<CAPTION>
                                                               Domestic Pension              International Pension
                                                                     Plan                            Plan
Year ended March 31, (in thousands)                         1999             1998             1999            1998
                                                          --------         --------         --------         --------
<S>                                                       <C>              <C>              <C>              <C>
Reconciliation of fair value of plan assets
Fair value of plan assets - beginning of year ........    $ 10,441         $  6,021         $ 12,612         $ 13,333
Actual return on plan assets .........................         531            2,381            2,015            1,860
Employer contributions ...............................       2,453            2,190              328              493
Participant contributions ............................        --               --                248              200
Benefit payments .....................................        (141)            (151)          (1,295)          (1,238)
Other ................................................        --               --                 66              180
Effect of exchange rates .............................        --               --               (499)          (2,216)
                                                          --------         --------         --------         --------
Fair value of plan assets - end of year ..............    $ 13,284         $ 10,441         $ 13,475         $ 12,612
                                                          ========         ========         ========         ========


                                                               Domestic Pension              International Pension
                                                                     Plan                            Plan
Year ended March 31, (in thousands)                         1999             1998             1999            1998
                                                          --------         --------         --------         --------
Funded status
Funded status at March 31 ............................     $(7,392)         $(6,443)        $  1,571         $  1,128
Unrecognized transition asset ........................        --               --               (139)            (169)
Unrecognized prior-service cost ......................        --               --               --               --
Unrecognized (gain) loss .............................       2,262            1,754           (2,718)          (1,710)
                                                          --------         --------         --------         --------
Accrued pension cost .................................     $(5,130)         $(4,689)         $(1,286)         $  (751)
                                                          ========         ========         ========         ========
</TABLE>


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

                                                  Domestic Pension International
                                                       Plan        Pension Plan
Year ended March 31,                               1999    1998    1999    1998
                                                   ----    ----    ----    ----
Discount rate ..................................   6.50%   6.35%   6.25%   6.50%
   Expected long-term rate of return on plan
     assets ....................................   8.00%   8.00%   8.00%   7.50%
   Rate of increase in future compensation
     levels ....................................   5.00%   5.00%   4.00%   4.00%

                                      F-21

<PAGE>


                             SOLA INTERNATIONAL INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


12. Defined Benefit Retirement Plans - (Continued)

<TABLE>
         Net periodic pension costs include the following components:

<CAPTION>
                                                Domestic Pension Plan                 International Pension Plan
Year ended March 31, (in thousands)        1999          1998          1997          1999          1998          1997
                                          -------       -------       -------       -------       -------       -------
<S>                                       <C>           <C>           <C>           <C>           <C>           <C>
Service cost .........................    $ 2,637       $ 1,862       $ 1,662       $ 1,217       $ 1,433       $ 1,843
Interest cost ........................      1,117           810           702           647           650           731
Expected return on plan
   assets ............................       (942)         (576)         (317)         (924)         (895)       (1,036)
Amortization of transition asset .....       --            --            --             (23)          (26)         --
Amortization of prior service
   cost ..............................       --            --            --            --            --            --
Amortization of (gain) loss ..........         83          --            --             (34)          (34)         --
                                          -------       -------       -------       -------       -------       -------
Net periodic benefit cost ............    $ 2,895       $ 2,096       $ 2,047       $   883       $ 1,128       $ 1,538
                                          =======       =======       =======       =======       =======       =======
</TABLE>


13. Income Taxes

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

                                                      Year Ended March 31,
                                               --------------------------------
                                                 1999        1998       1997
                                               --------    --------    --------
                                                        (in thousands)
Domestic .................................      $ 9,681     $42,918     $14,351
Foreign .................................        10,511      33,034      27,035
                                                -------     -------     -------
                                                $20,192     $75,952     $41,386
                                                =======     =======     =======


         The components of the provision for income taxes are as follows:

                                                      Year Ended March 31,
                                               --------------------------------
                                                 1999        1998       1997
                                               --------    --------    --------
                                                        (in thousands)
Current:
  Federal and State ........................   $  6,128    $  9,082    $  6,142
  Foreign ..................................      4,025       8,006       7,178
Deferred:
  Federal and State ........................     (4,918)      7,808       1,720
  Foreign ..................................      2,270       4,891       1,534
Valuation allowance adjustment .............        889      (4,418)     (9,837)
Tax benefit allocated to reduction of
  goodwill .................................       --          --         4,000
                                               --------    --------    --------
                                               $  8,394    $ 25,369    $ 10,737
                                               ========    ========    ========

                                      F-22

<PAGE>


                             SOLA INTERNATIONAL INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


13.  Income Taxes - (Continued)

         During  fiscal  1999 and  1998,  the  Company  recognized  certain  tax
benefits  related to stock  option  plans in the amount of $0.3 million and $2.2
million,  respectively.  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  computed at the U.S.
federal  statutory  rate and the effective  rate  reflected in the statements of
income is as follows:

                                                       Year Ended March 31,
                                                      ----------------------
                                                      1999     1998     1997
                                                      ----     ----     ----
Provision at statutory rate ........................  35.0%    35.0%    35.0%
State tax provision, net of federal effect .........   3.9      3.5      4.0
Valuation allowance, excluding special charges .....  (5.7)    (5.8)   (23.8)
Valuation allowance, relating to special charges ...  10.1      --       --
Tax benefit allocated to reduction of goodwill .....   --       --       9.7
Income of foreign subsidiaries at differing
  statutory rates ..................................   2.1     (1.3)    (2.4)
Other ..............................................  (3.8)     2.0      3.4
                                                      ----     ----     ----
                                                      41.6%    33.4%    25.9%
                                                      ====     ====     ====

                                      F-23

<PAGE>


                             SOLA INTERNATIONAL INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


13.  Income Taxes - (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,
                                                               -----------------
                                                                1999      1998
                                                               -------   -------
                                                                 (in thousands)
Deferred tax assets:
  Accounts receivable, principally due to allowances for
    doubtful accounts ......................................   $ 2,361   $ 2,064
  Inventories, principally due to reserves .................     3,403     3,191
  Property, plant and equipment, principally due
    to differences in depreciation .........................     4,737     4,874
  Accruals for employee benefits ...........................     6,488     8,322
  In-process research and development ......................    10,733    12,281
  Other assets .............................................    15,319     3,610
  Net operating losses (NOL) ...............................     8,354     9,188
                                                               -------   -------
  Total gross deferred tax assets ..........................    51,395    43,530
  Less valuation allowance .................................    10,690     9,801
                                                               -------   -------
  Net deferred tax assets ..................................   $40,705   $33,729
                                                               =======   =======
Deferred tax liabilities:
  Property, plant and equipment, principally due
    to differences in depreciation .........................   $14,105   $12,102
  Inventories ..............................................     2,852     2,752
  Amortization of goodwill .................................     7,133     5,653
  Unremitted income of foreign subsidiaries ................     2,732     3,834
  Other ....................................................     6,807     4,071
                                                               -------   -------
  Net deferred tax liabilities .............................   $33,629   $28,412
                                                               =======   =======
  Net deferred tax assets less net deferred
    tax liabilities ........................................   $ 7,076   $ 5,317
                                                               =======   =======


         In fiscal 1999 a valuation  allowance of $2.0  million was  established
against unrealized losses related to reassuming ownership of the Brazilian frame
and equipment business. In fiscal 1997 a valuation allowance of $8.6 million was
established  against  deferred  tax  assets  acquired  in  the  AO  Acquisition.
Movements  in the  valuation  allowances  in fiscal  1999,  1998 and 1997 relate
primarily to realization of NOL's or changes in the Company's  evaluation of the
realizability of deferred tax assets.

         For tax purposes,  the  Company's  foreign  subsidiaries,  at March 31,
1999, had net operating  loss  carryforwards  of $37.1 million.  Of this amount,
$32.3 million does not expire,  and $4.8 million  expires between 2002 and 2009.
The deferred tax assets reflected in the Company's accounts as of March 31, 1999
before valuation allowances reflect these NOL's.

         The  Company  has not  provided  for U.S.  federal  income and  foreign
withholding  taxes  on  $32  million  of  non-U.S.  subsidiaries'  undistributed
earnings  as of  March  31,  1999  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

                                      F-24

<PAGE>


                             SOLA INTERNATIONAL INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


13.  Income Taxes - (Continued)

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.

14.  Commitments

         The Company  leases  certain  warehouse and office  facilities,  office
equipment and automobiles under  noncancelable  operating leases which expire in
1999  through  2012.  The  Company  is  responsible  for  taxes,  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:

Period Ending March 31,                                          (in thousands)
-----------------------
2000.............................................................     $3,985
2001.............................................................      3,250
2002.............................................................      2,571
2003.............................................................      2,252
2004.............................................................      2,068
Thereafter.......................................................      8,787


         Rent expense for fiscal 1999,  1998,  and 1997 was $7.2  million,  $7.8
million and $5.6 million, respectively.

15.  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.

         The Company is currently  participating in a remediation program of one
of its manufacturing facilities under the Comprehensive  Environmental Response,
Compensation and Liability Act and the Superfund  Amendments and Reauthorization
Act of 1986. Since March 1997 the Company has curtailed clean-up activities, and
continues to monitor contamination levels. During the quarter ended December 31,
1997 a report on contamination  levels, and the impact of curtailed  activities,
was submitted to the EPA, which indicates no significant impact on the site from
the curtailed activities,  and the EPA has consented to continued curtailment of
activities.  The Company expects continued  reduction of clean-up activities due
to relatively  low levels of  contamination  existing at the site.  Reserves for
these  clean-up and  monitoring  activities are considered to be adequate by the
Company and are immaterial to the Company's financial position.

         Under   the  terms  of  the  sale   agreement   with   Pilkington   plc
("Pilkington"),  for  the  purchase  of  the  Sola  business  in  December  1993
("Acquisition"),   Pilkington  has   indemnified  the  Company  with  regard  to
expenditures  subsequent to the  Acquisition for certain  environmental  matters
relating to  circumstances  existing at the time of the  Acquisition.  Under the
terms of the  indemnification,  the  Company  is  responsible  for the  first $1
million spent on such environmental matters, Pilkington and the Company

                                      F-25

<PAGE>


                             SOLA INTERNATIONAL INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


15.  Contingencies - (Continued)

share  equally  the cost of any further  expenditures  between $1 million and $5
million, and Pilkington retains full liability for any expenditures in excess of
$5 million.

         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 or financial position of the Company.

16.  Worldwide Operations

         The  Company  operates  in the  ophthalmic  industry  in the design and
manufacture of eyeglass lenses.

<TABLE>
     A  summary  of  information  about  the  Company's  geographic  areas is as
follows:

<CAPTION>
                                           North                          Rest of
(in thousands)                            America          Europe           World           Eliminations        Total
                                         ---------        ---------        ---------        ------------      ---------
<S>                                      <C>              <C>              <C>              <C>               <C>
Year Ended March 31, 1999
Revenue (a):
   External .........................    $ 263,687        $ 171,766        $  94,336        $    --           $ 529,789
   Internal .........................       43,823           58,715           52,269         (154,807)             --
Identifiable assets .................      384,771          158,265          161,494           (5,231)          699,299
Year Ended March 31, 1998
Revenue (a):
   External .........................    $ 281,158        $ 160,697        $ 105,880        $    --           $ 547,735
   Internal .........................       42,784           57,170           47,697         (147,651)             --
Identifiable assets .................      370,792          164,891          156,003           (7,628)          684,058
Year Ended March 31, 1997
Revenue (a):
   External .........................    $ 234,173        $ 150,013        $ 104,503        $    --           $ 488,689
   Internal .........................       30,129           59,455           43,894         (133,478)             --
Identifiable assets .................      327,590          151,033          131,906           (5,021)          605,508

<FN>
(a) Revenues  are  attributed  to regions  based on the location of Sola and its
subsidiaries' country or region of domicile.
</FN>
</TABLE>


         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.

         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, 1999,  Canadian and Mexican operations  accounted for less
than 5% of external  revenues and less than 2.5% 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.

                                      F-26

<PAGE>


                             SOLA INTERNATIONAL INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


17.  Pro Forma Data

         The  following pro forma data, as restated for the adoption of FAS 128,
was prepared to illustrate the estimated  effect of the AO  Acquisition  and the
financing  related  thereto,  as if  the  acquisition  had  occurred  as of  the
beginning of the year ended March 31, 1997:

                                                                     Year Ended
                                                                      March 31,
                                                                        1997
                                                                     -----------
                                                                  (in thousands,
                                                                except per share
                                                                        data)

Net sales ...............................................            $   507,713
                                                                     ===========

Net income ..............................................            $    41,968
                                                                     ===========

Earnings per share - basic:
  Net income ............................................            $     1.72
                                                                     ===========

Earnings per share - diluted:
  Net income ............................................            $     1.64
                                                                     ===========


         These pro forma results of operations have been prepared for comparison
purposes  only,  and do not purport to be  indicative  of what the results would
have been had the AO  Acquisition  occurred at April 1, 1996. As a result of the
AO  Acquisition  the Company  incurred two  non-recurring  charges during fiscal
1997: (i) a $7.2 million charge to cost of sales for the amortization associated
with an inventory  write-up to fair value during the six months ended  September
30,  1996;  and (ii) a $9.5  million  charge  for the  write-off  of  in-process
research and development all of which was recorded in the quarter ended June 30,
1996.  These  charges,  and the related  provision  for tax  thereon,  have been
excluded  from the pro forma  results as they are  non-recurring.  The pro forma
data above does not include pro forma adjustments for the Neolens Acquisition as
the results of Neolens prior to  acquisition  were not material to the Company's
consolidated results of operations.

<TABLE>
18.  Supplementary Cash Flow Data

<CAPTION>
                                                                              Year Ended March 31,
                                                                  ---------------------------------------------
(in thousands)                                                     1999               1998               1997
                                                                  -------            -------            -------
<S>                                                               <C>                <C>                <C>
Supplemental disclosures of cash flow information:
   Interest paid .........................................        $24,011            $23,411            $19,273
                                                                  =======            =======            =======
   Taxes paid ............................................        $16,274            $14,599            $14,075
                                                                  =======            =======            =======

Supplemental disclosures of non-cash investing
 and financing activities:
   Capital expenditures accrued but not paid .............        $ 7,115            $ 3,223            $ 3,701
                                                                  =======            =======            =======
</TABLE>

                                                                F-27

<PAGE>


<TABLE>
                                                       SOLA INTERNATIONAL INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                                               QUARTERLY FINANCIAL DATA
                                         (in thousands, except per share data)
                                                      (unaudited)

<CAPTION>
                                                                         Quarter Ended
                                              -------------------------------------------------------------------
                                               June 30,          Sept. 30,           Dec. 31,            March 31,
                                                1997               1997               1997                1998
                                              ---------          ---------          ---------           ---------
<S>                                           <C>                <C>                <C>                 <C>
Net sales ..................................  $ 137,621          $ 135,731          $ 129,272           $ 145,111
Gross profit ...............................     64,827             63,839             62,367              67,025
Operating income ...........................     21,257             21,883             20,983              28,583
Income before extraordinary item ...........     11,089             11,778             11,235              16,990
Net income .................................     11,089             11,778              5,312              16,974
Earnings (loss) per share - basic:
  Income before extraordinary item .........       0.46               0.48               0.46                0.69
  Extraordinary item .......................       --                 --                (0.24)               --
  Net income ...............................       0.46               0.48               0.22                0.69
Earnings (loss) per share - diluted:
  Income before extraordinary item .........       0.44               0.46               0.44                0.66
  Extraordinary item .......................       --                 --                (0.23)               --
  Net income ...............................       0.44               0.46               0.21                0.66



                                                                         Quarter Ended
                                              -------------------------------------------------------------------
                                               June 30,          Sept. 30,           Dec. 31,            March 31,
                                                1998               1998               1998                1999
                                              ---------          ---------          ---------           ---------
Net sales ..................................  $ 129,526          $ 132,668          $ 126,345           $ 141,250
Gross profit ...............................     60,431             59,731             57,277              60,961
Operating income (loss) ....................     20,935             17,220             11,058             (11,462)
Net income (loss) ..........................     11,297              8,803              5,176             (12,755)
Earnings per share - basic:
  Net income (loss) ........................       0.46               0.36               0.21               (0.51)
Earnings per share - diluted:
  Net income (loss) ........................       0.44               0.35               0.21               (0.51)
</TABLE>

                                                                F-28

<PAGE>


<TABLE>
                                                                                                                         SCHEDULE II

                                                       SOLA INTERNATIONAL INC.
                                                  VALUATION AND QUALIFYING ACCOUNTS
                                                           (in thousands)

<CAPTION>
                                                 Balance,        Charged                                        Balance,
                                                Beginning          to                                            End of
                                                of Period       Expenses     Deductions         Other(1)         Period
                                                ---------       --------     ----------         --------         ------
<S>                                               <C>            <C>            <C>             <C>              <C>
Year ended March 31, 1999
  Allowance for doubtful accounts ...........     $ 4,956        $ 2,716        $  (677)        $       8        $ 7,003
                                                  =======        =======        =======         =========        =======
  Allowance for excess and obsolete
     inventory ..............................     $ 4,360        $ 5,620        $  (666)        $     (78)       $ 9,236
                                                  =======        =======        =======         =========        =======
Year ended March 31, 1998
  Allowance for doubtful accounts ...........     $ 4,030        $ 1,337        $  (254)        $    (157)       $ 4,956
                                                  =======        =======        =======         =========        =======
  Allowance for excess and obsolete
     inventory ..............................     $ 4,471        $ 1,833        $(1,578)        $    (366)       $ 4,360
                                                  =======        =======        =======         =========        =======
Year ended March 31, 1997
  Allowance for doubtful accounts ...........     $ 5,424        $ 1,258        $(2,652)        $    --          $ 4,030
                                                  =======        =======        =======         =========        =======
  Allowance for excess and obsolete
     inventory ..............................     $ 3,434        $ 1,593        $  (556)        $    --          $ 4,471
                                                  =======        =======        =======         =========        =======

<FN>
--------------------
(1) Other relates primarily to foreign currency translation adjustments.
</FN>
</TABLE>

                                                                 S-1

<PAGE>


<TABLE>
                                               INDEX OF EXHIBITS

<CAPTION>
                                                                                  Page Number or
   Exhibit No.                       Description                          Incorporation by Reference to
   -----------                       -----------                          -----------------------------
<S>                     <C>                                           <C>
      2.1               Purchase agreement between Sola               Filed as Exhibit 2 to the Form 8-K of the
                        International Inc. and American Optical       Company, dated May 6, 1996, and
                        Corporation, dated as of May 6, 1996          incorporated herein by reference

      3.1               Amended and Restated Certificate of           Filed as Exhibit 3.1 to the Annual Report
                        Incorporation of the Company                  on Form 10-K of the Company for the
                                                                      fiscal year ending March 31, 1995, dated
                                                                      June 7, 1995, and incorporated herein by
                                                                      reference

      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 ending September 30, 1998, and
                                                                      incorporated herein by reference

      4.1               Rights Agreement dated as of August 27,       Filed as Exhibit 1 to the Form 8-A of the
                        1998 between Sola International Inc. and      Company, dated August 27, 1998, and
                        Bank Boston N.A.                              incorporated herein by reference

     10.1               Purchase Agreement, dated as of September     Filed as Exhibit 10.1 to the Registration
                        1, 1993 by and between Sola Holdings Inc.,    Statement, as amended, on Form S-1 of the
                        Pilkington plc and certain of Pilkington      Company (File No. 33-68824) and
                        plc's subsidiaries                            incorporated herein by reference

     10.2*              Confidential Severance Agreement between      Filed as Exhibit 10 to the Company's
                        Sola International Inc. and John E. Heine,    Quarterly Report on Form 10-Q for the
                        dated as of November 20, 1996                 period ending December 31, 1996, and
                                                                      incorporated herein by reference

     10.3*              Confidential Severance Agreement between
                        Sola International Inc. and James H. Cox,
                        dated as of January 1, 1997

     10.4*              Employment Agreement between Sola             Filed as Exhibit 10.2 to the Registration
                        International Inc. and Steven M. Neil,        Statement, as amended, on Form S-3 of the
                        dated as of September 2, 1997                 Company (File No. 333-45929) and
                                                                      incorporated herein by reference

     10.5*              Confidential Severance Agreement between
                        Sola International Inc. and Steven M.
                        Neil, dated as of October 13, 1997

     10.6*              Confidential Severance Agreement between
                        Sola International Inc. and Stephen J.
                        Lee, dated as of January 1, 1997

     10.7*              Confidential Severance Agreement between
                        Sola International Inc. and Theodore Gioia
                        dated as of January 1, 1997

                                                      E-1

<PAGE>


                                               INDEX OF EXHIBITS
                                                  (continued)

                                                                                  Page Number or
   Exhibit No.                       Description                          Incorporation by Reference to
   -----------                       -----------                          -----------------------------
     10.8               Multicurrency Credit Agreement, dated as      Filed as Exhibit 4 to the Report on Form
                        of June 14, 1996, among Sola International    8-K/A of the Company, dated May 6, 1996,
                        Inc., and the other Borrowers as the          and incorporated herein by reference
                        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

     10.9               Amendment No. 1 to the Multicurrency          Filed as Exhibit 10.1 to the Company's
                        Credit Agreement, dated as of June 14,        Quarterly Report on Form 10-Q for the
                        1996, among Sola International Inc., and      period ending December 31, 1997, and
                        the other Borrowers as the Borrowers, the     incorporated herein by reference
                        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

     10.10              Amendment No. 2 to the Multicurrency          As above except Exhibit 10.2
                        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

     10.11              Amendment No. 3 to the Multicurrency          Filed as Exhibit 10.1 to the Company's
                        Credit Agreement, dated as of June 14,        Registration Statement, as amended, on
                        1996, among Sola International Inc., and      Form S-3 of the Company (File No
                        the other Borrowers as the Borrowers, the     333-45929) and incorporated herein by
                        Subsidiary Guarantors, The Bank of America    reference
                        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

     10.12              Lease Agreement, dated May 10, 1993,          Filed as Exhibit 10.9 to the Registration
                        between Sola Optical Taiwan Ltd. and Chang    Statement, as amended, on Form S-1 of the
                        Jin Co., Ltd. (including English summary      Company (File No. 33-68824) and
                        of principal terms)                           incorporated herein by reference

     10.13              Lease Agreement between Optical Sola de       Filed as Exhibit 10.10 to the
                        Mexico and Messrs. Salvadore                  Registration Statement, as amended, on
                        Luttenroth-Camou and Carlos                   Form S-1 of the Company (File No.
                        Lutteroth-Lomeli (including English           33-68824) and incorporated herein by
                        summary of principal terms)                   reference

                                                      E-2

<PAGE>


                                               INDEX OF EXHIBITS
                                                  (continued)

                                                                                  Page Number or
   Exhibit No.                       Description                          Incorporation by Reference to
   -----------                       -----------                          -----------------------------
     10.14*             Sola Investors Inc. Stock Option Plan         Filed as Exhibit 10.11 to the Annual
                                                                      Report on Form 10-K of the Company, dated
                                                                      March 31, 1994, and incorporated herein
                                                                      by reference

     10.15              Amendment Number One to Sola Investors        Filed as Exhibit 10.21 to the
                        Inc. Stock Option Plan                        Registration Statement, as amended, on
                                                                      Form S-1 of the Company (File No.
                                                                      33-87892) and incorporated herein by
                                                                      reference

     10.16              Sola International Inc. Stock Option Plan     Filed as Exhibit 10.22 to the
                                                                      Registration Statement, as amended, on
                                                                      Form S-1 of the Company (File No.
                                                                      33-87892) and incorporated herein by
                                                                      reference

     10.17              Sola International Inc. Stock Option Plan,    Filed as Exhibit A and Exhibit B to the
                        Amendment Number One and Amendment Number     fiscal 1996 Proxy Statement of Sola
                        Two                                           International Inc., dated July 12, 1996,
                                                                      and incorporated herein by reference

     10.18              Amended and Restated 1998 Sola                Filed as Appendix A to the Fiscal 1998
                        International Inc. Stock Option Plan          Proxy Statement of Sola International
                                                                      Inc. dated June 30, 1998 and incorporated
                                                                      herein by reference

     10.19              Indenture by and between the Company and      Filed as Exhibit 10.21 to the Annual
                        State Street Bank and Trust Company of        Report on Form 10-K of the Company, dated
                        California, N.A., as Trustee, with respect    March 31, 1998, and incorporated herein
                        to the 6 7/8% Notes due 2008                  by reference

     10.20              Officers' Certificate Related to Senior       Filed as Exhibit 99.1 to the Company's
                        Notes                                         Quarterly Report on Form 10-Q for the
                                                                      period ending June 30, 1998, and
                                                                      incorporated herein by reference

     10.21              Form of Indemnification Agreement between     Filed as Exhibit 10.24 to the
                        the executive officers and directors of       Registration Statement, as amended, on
                        the Company and the Company                   Form S-1 of the Company (File No.
                                                                      33-87892) and incorporated herein by
                                                                      reference

     10.22              Sola International Inc. Management            Filed as Exhibit 10.25 to the
                        Incentive Plan                                Registration Statement, as amended, on
                                                                      Form S-1 of the Company (File No.
                                                                      33-87892) and incorporated herein by
                                                                      reference

     10.23              Sola Optical 401(k) Savings Plan              Filed as Exhibit 4.4 to the Registration
                                                                      Statement on Form S-8 of the Company
                                                                      (File No. 333-4489), filed with the
                                                                      Commission on May 23, 1996, and
                                                                      incorporated herein by reference

     10.24              Trust Agreement entered into as of May 15,    Filed as Exhibit 4.5 to the Registration
                        1996 between Sola Optical USA, Inc. and       Statement on Form S-8 (File No. 333-4489)
                        Chase Manhattan Bank, N.A.                    of the Company, filed with the Commission
                                                                      on May 23, 1996, and incorporated herein
                                                                      by reference

     12.1               Statement regarding ratio of earnings to
                        fixed charges

                                                      E-3

<PAGE>


                                               INDEX OF EXHIBITS
                                                  (continued)

                                                                                  Page Number or
   Exhibit No.                       Description                          Incorporation by Reference to
   -----------                       -----------                          -----------------------------
     21.1               List of subsidiaries of the Company

     23.1               Consent of Ernst & Young LLP, Independent
                        Auditors

     27.1               Financial Data schedule

     99.1               Factors Affecting Future Operating Results

<FN>
-------------------------
*Compensatory plan or management agreement
</FN>
</TABLE>

                                                      E-4