CONSOLIDATED FINANCIAL STATEMENTS OF 31st DECEMBER 2010

Safilo Group Directors’ report on operations

2 ______

Safilo Group Directors’ report on operations

SAFILO GROUP AND ITS BRANDS

Company profile

Safilo Group is the With more than 75 years of experience in the eyewear industry, Safilo Group is second largest eyewear manufacturer in the the world’s second largest manufacturer of and prescription world eyewear and is engaged in the creation, production and wholesale and retail

distribution of products for the eyewear market. The Group is a worldwide leader in high-end eyewear and is one of the world’s top three manufacturers and distributors of sports eyewear.

The Group manages a portfolio of its house and licensed brands, which are selected based on their competitive positioning and international prestige by way of a precise strategy of customer segmentation.

The Group designs, produces and distributes prescription eyewear, sunglasses, sports eyewear and high-quality accessories. Distribution takes place through sales to specialist shops and retail distribution chains.

The Group directly controls the entire production-distribution process, divided into the following phases: research and technological innovation, product design and development, planning, programming and purchases, production, quality, marketing and communications, sales, distribution and logistics. Safilo is strongly oriented towards product development and design; this activity is conducted by a team of designers able to ensure the continual stylistic and technical innovation which has always been a distinguishing feature of the Company.

The keys to the Group’s success, and which create a distinctive identity in the world’s eyewear industry, are its highly prestigious brand portfolio in the luxury and high-fashion segment, its excellence in design and innovation, the quality of its products, its coverage of the marketplace by way of a worldwide sales, distribution and customer service network, and the diverse nature of offering in terms of clientele and target markets.

______3

Safilo Group Directors’ report on operations

CONVENING OF SHAREHOLDERS’ MEETING

The Shareholders are hereby invited to attend the Ordinary Shareholders’ Meeting of Safilo Group S.p.A. (hereinafter, the “Company”) at its secondary office, located in Padua, at Settima Strada no. 15, to be held on April 27, 2011, at [2.00pm], in single call, to discuss and resolve upon the following:

AGENDA

1. Financial statements as of December 31, 2010 - Presentation of the consolidated financial statements as of December 31, 2010 – Reports of the Directors, the Board of Statutory Auditors and the Auditing Company – Pertinent and consequent resolutions

2. Appointment of the Board of Statutory Auditors and its Chairman, with the previous determination of their remunerations for the entire term of their office

Share capital and voting rights

The share capital of the Company is divided into no. 56,821,965 ordinary shares having a nominal value of Euro 5,00 each; every share gives the right to express one vote in the ordinary and extraordinary shareholders’ meetings of the Company.

Attendance to the Meeting

Pursuant to the provisions of law and article 10 of the Articles of Association, the entitlement to attend the meeting and to exercise the voting right is certified by an apposite notice to be delivered to the Company, in accordance with applicable law, by an authorized intermediary, on the basis of the evidence coming from its accounting books and records, in favour of the individual/entity who/which results to be entitled to vote as at the end of the seventh trading day prior to the date of the convened Meeting, i.e., April 14, 2011. The individuals/entities who/which result as the owners of the shares after the above mentioned deadline shall not be entitled to attend and vote at the Meeting. Therefore, all crediting and debiting entries made on the accounts opened by such individuals/entities with the authorised intermediaries after the aforesaid deadline shall have no relevance for the purpose of the entitlement to the voting right at the Meeting. In order to facilitate the verification on the entitlement, the concerned individuals/entities who/which have a copy of the notice delivered to the Company by their authorized intermediaries are invited to show such copy before the starting of the Meeting. The above mentioned notices shall be received by the Company from the authorized intermediary within the terms set forth by applicable law, i.e., by the end of the third trading day prior to the date of the convened Meeting. The entitlement to attend and vote at the Meeting is however not prejudiced if and to the extent that the notices are received by the Company after the above mentioned deadline, but still before the actual starting of the Meeting. The attendance to the Meeting is governed by the provisions of law and applicable regulations, as well as by the provisions of the “Rules for the conduct of the Shareholders’ Meetings” currently in force and available on the following website www.safilo.com/investors-en.html. The individuals/entities entitled to vote can be represented at the meeting through a written proxy, in the cases and within the limits set forth by applicable law and regulations. A form for the proxy is also available on the Company’s website at the following address www.safilo.com/investors-en.html as well as at the registered and secondary offices. The proxy can be delivered to the Company, at its registered office, by means of registered

4 ______

Safilo Group Directors’ report on operations

mail or by certified email (posta elettronica certificata - PEC) to be sent to the following email address [email protected].

Please be informed that the Company, availing itself of the faculty granted by law and in accordance with article 10 of the Articles of Association, does not appoint a representative for the purposes of section 135-undecies of the Italian Financial Act (T.U.F.).

Pursuant to article 127-ter of the Italian Financial Act (T.U.F.), the shareholders can submit questions on the items of the agenda, also before the day of the Meeting, by serving such questions through registered mail to the registered office of the Company or by email at the following email address [email protected]; the questions submitted before the Meeting will be answered during the Meeting at latest. The Company can give a sole answer to questions having the same content.

Integration of the agenda

Pursuant to section 126-bis of the Italian Financial Act (T.U.F.), shareholders which, also jointly among them, represent at least 2,5% of the share capital may request in writing, within 10 days from the publication of this notice of call, an integration of the items to be discussed at the Meeting, specifying in the request the additional proposed topics for discussion. Within the deadline for the presentation of their request to integrate the items on the agenda, the requesting shareholders shall submit to the Board of Directors a report on such additional items. No integrations to the agenda are permitted with respect to those items on which, by operation of law, same Meeting is called to resolve by the Board of Directors or on the basis of a plan or report prepared by same Board of Directors, other than the reports which are ordinarily prepared by the Board on the items of the agenda. With reference to the right of the shareholders to integrate the items on the agenda, reference is made, in any case, to the provisions of article 9 of the Articles of Association, available on the Company’s website www.safilo.com/investors-en.html, and of applicable laws and regulations.

Voting list mechanism for the appointment of the Board of Statutory Auditors

With reference to item no. 2 of the agenda, please note that, as set forth by article 27 of the Articles of Association:

- without prejudice to any provisions of law or regulations applicable in case of presentation of only one list or of lists submitted by shareholders which are related one with the other, the Board of Statutory Auditors shall be appointed on the basis of lists presented by shareholders which, alone or together with others, own a number of shares representing at least 2.5% of share capital consisting of shares with voting rights at Ordinary Shareholders' Meetings. The certificate attesting the ownership of at least the minimum shareholding required to present a list of candidates, determined having regard to the amount of shares registered in favour of the concerned shareholders on the same day when the lists are deposited with the Company, can be delivered to same Company also after the deposit of the lists, provided that such certificate is delivered at least 21 days before the date of the Meeting;

- without prejudice to any provisions of law or regulations applicable in case of presentation of only one list or of lists submitted by shareholders which are related one with the others, the lists, containing the names of the candidates in a progressive order and duly signed by the shareholders presenting them, shall be filed at the Company's registered offices at least 25 days in advance of the date set for the Meeting. The presented lists shall be accompanied by the documentation and declarations detailed under article 27, letter A), of the Articles of Association;

______5

Safilo Group Directors’ report on operations

- every individual/entity entitled to vote may vote, directly or indirectly, for one list only. The lists presented without complying with the provisions of article 27, letter A), of the Articles of Association will be deemed as not presented.

The shareholders presenting a “minority list” are reminded to read the recommendations provided by the Consob Communication no. DEM/9017893 of February 26, 2009, named “Appointment of the management and control bodies” and, in particular, to deposit, along with the list, a declaration attesting the absence of any of the (direct or indirect) relationships referred to under article 148, paragraph 2, of the Italian Financial Act (T.U.F.) and article 144-quinquies of the Consob Regulation adopted by means of resolution no. 11971 of May 14, 1999. In such declaration, any significant relationships with shareholders owning, individually or jointly with others, a controlling participation or a relative majority stake, if identifiable, shall be specified along with the reasons why such relationships have not been deemed material for the existence of an actual link with said shareholders. Alternatively, the shareholders presenting a “minority list” shall declare the absence of any of such significant relationships.

For any other information concerning the modalities of preparation, presentation and voting of the lists, reference is made to the provisions of article 27 of the Articles of Association available at the registered and secondary offices of the Company and published on the website at the following address www.safilo.com/investors-en.html.

In order to allow the Company to identify the depositing shareholders, such deposit of the lists, along with the ancillary documentation, can take place through (i) delivery by registered letter to SAFILO GROUP S.p.A. - Direzione Affari Legali e Societari - Settima Strada n. 15, 35129 Padova , or (ii) certified email (PEC) to be sent to the following email address [email protected].

Documentation

The Articles of Association of the Company and the “Rules for the conduct of the Shareholders’ Meetings”, the texts of which are available for the shareholders at the registered office of the Company, are also published on the following website www.safilo.com/investors-en.html. On the same website the documents and information referred to under section 125-quater of the Italian Financial Act (T.U.F.) are also published. The documentation relating to the convened Meeting, including the documentation referred to under 125-ter of the Italian Financial Act (T.U.F.) (the report on the items on the agenda), will be made available to the public, simultaneously with the publication of this notice of call, at the registered and secondary offices of the Company and at Borsa Italiana S.p.A., as well as on the Company’s website at the following web address www.safilo.com/investors- en.html. The documentation concerning the annual financial statements (including the annual financial report, the report of the accounting firm and the report of the statutory auditors) will be published within April 5, 2011. The shareholders are entitled to obtain a copy thereof.

Padua, March 17, 2011

For the Board of Directors

Melchert Frans Groot

Chairman

6 ______

Safilo Group Directors’ report on operations

CONTENTS

Board of Directors and auditors as at 31st December 2010 9 Chairman's letter 10 Chief Executive Officer's letter 11 Summary of key consolidated performance indicators 13

Safilo Group - Directors' report on operations and consolidated financial statements as of December 31st, 2010

Directors' report on operations Information on the operations 16 Group economic results 18 Analysis by distribution channel - Wholesale / Retail 22 Condensed balance sheet 23 The financial situation 26 History of the Group 28 Group Structure 30 Critical factors for the Group's success 31 Critical risk factors for the Group 33 Primary Group processes and activities 38 Human resources and the environment 60 Safilo in the stock exchange and investor relations 63 Corporate governance 66 Reconciliation of the parent company's net profit and Shareholders' equity 79 with the consolidated balances Significant events after year-end and outlook 80

Consolidated financial statements Consolidated balance sheet 82 Consolidated income statement 84 Consolidated statement of comprehensive income 85 Consolidated statement of cash flows 86 Consolidated statement of changes in equity 87

Notes to the consolidated financial statements General information 88 Summary of accounting principles adopted 88 Risk management 106 Notes to the consolidated balance sheet 115 Notes to the consolidated income statement 146 Transactions with related parties 157 Contingent liabilities 159 Commitments 160 Significant events after year end and outlook 160 Significant non recurring events and transactions 160 Transactions resulting from unusual and/or atypical transactions 160

APPENDIX Information requested by Art. 149-duodecis of the "Regolamento emittenti" issued by Consob 161 Attestation of the consolidated financial statements pursuant to art. 154-bis of 162 Legislative Decree 58/98

Report of Independent Auditors 163

______7

Safilo Group Directors’ report on operations

8 ______

Safilo Group Directors’ report on operations

Board of directors and auditors as at 31st December 2010

Board of Directors

Chairman Melchert Frans Groot

Chief Executive Officer Roberto Vedovotto

Director Giovanni Ciserani Director Jeffrey A. Cole Director Marco Jesi Director Eugenio Razelli Director Massimiliano Tabacchi

Board of Statutory Auditors

Chairman Franco Corgnati Regular Auditor Lorenzo Lago Regular Auditor Giampietro Sala

Alternate Auditor Nicola Gianese Alternate Auditor Ornella Rossi

Internal Control Committee

Chairman Eugenio Razelli Marco Jesi Giovanni Ciserani

Remuneration Committee

Chairman Jeffrey A. Cole Melchert Frans Groot Marco Jesi

Corporate Governance Committee

Franco Corgnati Eugenio Razelli Maurizio De Gasperis

Independent Auditors

PricewaterhouseCoopers S.p.A.

______9

Safilo Group Directors’ report on operations

CHAIRMAN’S LETTER

Dear Shareholders,

I am pleased to comment on one of the most important periods in Safilo's long history, after the significant decrease in consumer confidence, which resulted in recessionary trends in most of the Group’s markets and a temporary shift of the business model.

Safilo was responsive, selective and adapted itself to the new challenge, with the support of its main strategic partners who once again recognized in the Group a trusted partner, thanks to its efforts to continuously increase its standards of excellence in creativity, operations, technology and design.

In 2010, Safilo started to implement a number of significant changes in its corporate governance, business, and organizational models which will support the Group’s strategic direction for the coming years.

In this context a new Board of Directors was elected in 2010 and now includes highly experienced industry leaders who provide strategic guidance to the management team. At the same time the management team was strengthened during the last twelve months.

We are committed to dedicate all the necessary resources to make our new journey together as exciting and rewarding as possible for all stakeholders.

The effort of all Safilo’s teams will make this possible and I am convinced that the Group's fundamentals are solid and offer a competitive platform to remain one of the market leaders in the industry.

On behalf of the entire Board I would like to take this opportunity to thank all Safilo’s employees for their dedication, commitment and trust and wish you all a successful 2011.

Chairman Mel Groot

10 ______

Safilo Group Directors’ report on operations

CHIEF EXECUTIVE OFFICER’S LETTER

Dear Shareholders,

It is an honor to have the opportunity to address you, at the end of this extremely important year for the Safilo Group, which marked the beginning of a new journey for a Company which represents the history and the future of the eyewear industry.

We went through two difficult years, on the back of a very challenging macroeconomic and industry environment characterized by unprecedented changes in many respects.

In March 2010, we successfully completed an important recapitalization plan for the Company, which was strongly supported by the market and allowed the Group to regain an adequate capital and financial structure.

It is in this direction that Safilo worked at full speed already in 2010, in order to improve its competitive position in the reference markets and strengthen the reputation of excellence for which it has always been renown.

In 2010, Safilo is back to growth, thanks to its strong portfolio of brands, the appeal of its products and the depth of its collections, also in the context of the growing consumer demand for medium-high end eyewear products, in particular in the emerging markets.

We are satisfied with the progress achieved at the economic and financial level as well as at the operational level.

The Group achieved net sales growth of 6% at constant perimeter and exchange rate and improved its profitability and net financial position in the context of a healthier economic environment, although still volatile in selected European countries.

In 2010, we were able to return to break even at the net-result level, closed the year with a financial leverage (Net Debt/EBITDA) of 2.4x, the lowest level in the last ten years.

In line with our strategy and objectives, in 2010 we renewed our partnership with some of the most prestigious fashion and luxury brands, leveraging on our business proposition.

During the year, we continued to strengthen the Company’s fundamentals through targeted projects aimed at the development of a leaner and more efficient organizational structure, with selective investments in our core business.

In particular, we strengthened our management team with the appointment, in June 2010, of a new Chief Financial Officer, and the arrival, in the first months of 2011, of the Global Supply Chain, Logistics and Production Operations Officer and the new Global Head of the Licensed Brands Division, two of the most critical and strategic business areas for the future development of the Group.

In December 2010, we also finalized the refocusing of our business model around the wholesale business via the sale of our retail operations in Mexico, as part of the recapitalization transaction agreement.

On the back of the recent experience during the crisis, we truly believe that we will be able to continue to build new growth for the Group as a team, for the benefit of all parties involved and with the prospect of creating long-term value for all shareholders.

Chief Executive Officer Roberto Vedovotto

______11

Safilo Group Directors’ report on operations

12 ______

Safilo Group Directors’ report on operations

SUMMARY OF KEY CONSOLIDATED PERFORMANCE INDICATORS

______13

Safilo Group Directors’ report on operations

Economic data (Euro in millions) 2010 % 2009 % Net sales 1,079.9 100.0 1,011.2 100.0 Cost of sales (450.0) (41.7) (438.8) (43.4) Gross profit 629.9 58.3 572.5 56.6 Ebitda 107.8 10.0 58.2 5.8 Ebitda pre non-recurring 107.8 10.0 65.7 6.5 Operating profit/(Loss) 67.8 6.3 (270.7) (26.8) Operating profit/(Loss) pre non-recurring 67.8 6.3 16.1 1.6 Group profit (Loss) before taxes 28.7 2.7 (324.6) (32.1) Profit (Loss) attributable to the Group 0.7 0.1 (351.4) (34.8) Profit/(Loss) attributable to the Group pre non-recurring 0.7 0.1 (33.7) (3.3)

Balance sheet data (Euro in millions) 2010 % 2009 % Total assets 1,486.3 100.0 1,390.6 100.0 Total non-current assets 845.8 56.9 811.8 58.4 Capital expenditure 29.4 2.0 36.9 2.7 Net invested capital 1,023.2 68.8 1,034.0 74.4 Net working capital 287.5 19.3 327.1 3.5 Net financial position (256.2) 17.2 (588.0) 42.3 Group Shareholders' equity 756.0 50.9 438.4 31.5

Financial data (Euro in millions) 2010 2009 Cash flow operating activity 97.6 11.5 Cash flow investing activity (23.3) (22.3) Cash flow financing activity 16.3 15.4 Closing net financial indebtedness (short-term) 72.5 (20.9)

Financial and economic indicators (Euro in millions) 2010 2009 ROS 6.3% 1.6% ROI 6.6% 1.6% ROE 0.1% -7.7%

Group personnel 2010 2009 Punctual at December 31 8,148 7,931 Average in the financial year 8,244 8,380

2009 Pro Data per share (in Euro) 2010 forma (**) 2009 Earnings/(losses) per share pre non-recurring 0.015 (2.364) (0.118) Earnings/(losses) per share 0.015 (24.629) (1.231) Group Shareholders' equity per share 13.30 30.72 1.54

2009 Pro Share and market data (in Euro) 2010 forma (***) 2009 Share price at the end of the financial year 13.31 7.92 0.58 Maximun share price of the financial year 13.77 10.36 0.76 Minimum share price of the financial year 6.09 3.87 0.28 No. shares in share capital at December 31 56,821,965 285,394,128 Stock Market value at the end of the financial year 756,300,354 165,528,594

(*) pre non-recurring items (**) Only for comparative purposes, 2009 data have been recalculated according to the reverse share split in the measure of one new share per twenty old shares as voted by the 30 April 2010 Shareholders’ Meeting. (***) Only for comparative purposes, 2009 share prices data, have been adjusted to take into consideration the share capital increase of March 2010 and the following reverse share split in the measure of one new share per twenty old shares as voted by the 30 April 2010 Shareholders’ Meeting.

14 ______

Safilo Group Directors’ report on operations

It should be noted that:

• certain figures in the Directors’ Report on operations have been subject to rounding adjustments. Accordingly, figures shown for the same category presented in different tables may vary slightly and figures shown as totals in certain tables may not be algebraic sums of the figures which precede them. • The percentage variations and incidences in the tables have been calculated on the basis of data expressed in thousands and not those which are shown, rounded to the nearest million.

Certain “alternative performance indicators”, which are not foreseen in the IFRS accounting principles and are applied to the financial statements being audited, have been used in this Report. Their meaning and content is given below: • “EBITDA” stands for Earnings Before Interest, Taxes, Depreciation and Amortisation and is also stated before impairment losses to intangible assets such as goodwill; • “Capital expenditure” refers to purchases of tangible and intangible fixed assets. • “Net invested capital” refers to the algebraic sum of shareholders’ equity of the Group and minority interests and the “Net financial position” (see below). • “Net working capital” means the algebraic sum of inventories, trade receivables and trade payables. • “Net financial position” means the sum of bank borrowings, short, medium and long-term borrowings, net of cash held in hand and at bank. • “ROS” is the ratio between operating profit and sales. • “ROI” is the ratio between operating profit and net invested capital. • “ROE” is the ratio between Group net profit (loss) and Group shareholders’ equity. • “Non-recurring changes” refers to charges not related to ordinary operations and include: restructuring charges, the impairment of goodwill, losses on the sale of the retail companies, and the write-down of deferred tax assets.

Disclaimer This report and, in particular, the section entitled “Significant events after December 31st 2010” contains forward looking statements based on current expectations and projects of the Group in relation to future events. Due to their specific nature, these statements are subject to inherent risks and uncertainties, as they depend on certain circumstances and facts, most of which being beyond the control of the Group. Therefore actual results could differ, even to a significant extent, with respect to those reported in the statements.

______15

Safilo Group Directors’ report on operations

DIRECTORS’ REPORT ON OPERATIONS

INFORMATION ON THE OPERATIONS

Safilo Group returns to In 2010, after completing the recapitalisation project that enabled the Group to growth rebalance its financial and capital structure, Safilo returned to growth, benefiting from both the trend reversal in mature market economies and above all its own competitive

position in emerging countries (Asia and Latin America in particular). Growth in consolidated Group revenues compared with the previous year was almost 7% on a

reported basis, but taking into account that at the end of 2009, the Group substantially reduced its presence in the retail channel by selling its retail chains in Spain and Australia, growth in revenues at constant perimeter and current exchange rates was

approximately 11%.

The general market situation improved, but remained uncertain in some countries.

Whereas some areas registered a significant recovery in consumer spending and a renewed interest in high-end fashion accessories, sales in many countries remained far from the levels recorded a few years ago. 2010 may be considered as a year in which the market stabilised after a period of change in final consumers’ approach to

purchases, with trends varying according to country and product type.

After two years of falling sales, following the crisis that hit western economies and the

luxury sector in particular, a gradual return of consumer interest in medium/high end models occured, particularly in the sunglasses business. This market trend favoured all licensed brands positioned in the high-end segment, particularly the top world- renowned brands. 2010 also saw the continuation of the notable success of the house

brand Carrera, with a sharp rise in sales outside Italy, thanks to the strong expansion of the brand in other European countries and in the US, demonstrating its growing reputation.

The recovery of sales and the results of the reorganisations implemented in recent years therefore enabled the Group to recover industrial and operating profitability. Growth in sales volumes led to an improvement in production capacity utilisation of the

Italian and Slovenian plants, while the industrial facility in China, with the first phase of construction complete, guaranteed production levels in line with expectations, both in terms of service and quality in processing.

In 2010, the Group’s operating performance improved considerably thanks to a leaner Improvement in retail organisational structure as well as more efficient management of commercial and operating profitability marketing expenses. The strong reduction of net financial costs helped the Group to and break-even at break even at net profit level. bottom line The results obtained in the generation of financial resources were particularly positive: Cash generation and the improved profitability, along with the careful management of working capital, balanced financial enabled the Group to generate substantial positive cash flows. The capital increase and structure operating cash generation thereby led to a significant reduction in Group net debt, as also testified by the improvement in the rating confirmed, in early 2011, by the major

16 ______

Safilo Group Directors’ report on operations

ratings agencies.

During 2010, the Group also achieved significant success in terms of licence renewals and the launch of new collections. Renewal of strategic licences and launch of In April, the licensing agreement with Marc Jacobs and Marc by Marc Jacobs was collections of new extended until the end of 2015, while in May, the Group renewed its agreement with licences the US brand Juicy Couture.

In autumn, the Group launched the first collections of the new Tommy Hilfiger licence, signed in December 2009, and the new eyewear collection of the Boss Orange brand

( Group).

Of particular importance was the renewal of the licensing agreement with Dior (LVMH

Group) until 31 December 2017. This is fundamental to the Group’s future growth, as it strengthens and extends the relationship with one of the biggest brands in the luxury sector, with recognised leadership in the high-end segment of the eyewear market. In December, the Group renewed its licensing agreements with two prestigious brands

belonging to the PPR Group, Yves Saint Laurent and Bottega Veneta, thereby further

strengthening its portfolio in this segment.

Sale of non-strategic In the last month of the year, it also completed the project to sell its non-strategic chains completed chains of retail stores, with the disposal of the Mexican stores, as set out in the Group restructuring and recapitalisation plan.

______17

Safilo Group Directors’ report on operations

GROUP ECONOMIC RESULTS

Consolidated statement of operation % % Change

(Euro in millions) 2010 2009 %

Net sales 1,079.9 100.0 1,011.2 100.0 6.8%

Cost of sales (450.0) (41.7) (438.8) (43.4) 2.6%

Gross profit 629.9 58.3 572.5 56.6 10.0%

Selling and marketing expenses (428.3) (39.7) (427.3) (42.3) 0.2%

General and administrative expenses (136.0) (12.6) (131.4) (13.0) 3.5%

Other operating income/(expenses), net 2.2 0.2 2.3 0.2 -6.5%

Restructuring cost non recurring - - (7.4) (0.7) n.s. Impairment loss on goodwill and loss on disposal of retail subsidiaries - - (279.4) (27.6) n.s.

Operating profit (Loss) 67.8 6.3 (270.7) (26.8) n.s.

Interest expense and other financial charges, net (39.1) (3.6) (53.9) (5.4) -27.5%

Profit (Loss) before taxation 28.7 2.7 (324.6) (32.1) n.s.

Income taxes (24.2) (2.2) (26.2) (2.6) -7.7%

Net profit (Loss) 4.5 0.4 (350.8) (34.7) n.s.

Net profit attributable to minority interest 3.8 0.4 0.7 0.1 n.s.

Net profit (Loss) attributable to the Group 0.7 0.1 (351.4) (34.8) n.s.

EBITDA 107.8 10.0 58.2 5.8 85.1%

Economic indicators pre non recurring items 2010 % 2009 % Change

EBIT pre non recurring 67.8 6.3 16.1 1.6 n.s.

EBITDA pre non recurring 107.8 10.0 65.7 6.5 64.2%

Net profit (Loss) attributable to the Group pre non recurring 0.7 0.1 (33.7) (3.3) n.s.

Percentage impacts and changes have been calculated on figures in thousand.

18 ______

Safilo Group Directors’ report on operations

Group revenues In 2010, consolidated Group revenues were EUR 1,079.9 million, up 6.8% versus the previous up by 6.8% year. Neutralising the effects of exchange rate fluctuations and the exit from the retail chains sold, like for like growth was 6.0% versus 2009.

Performance was better in the fourth quarter of the year, with growth of 10.7% on a reported

basis and 8.0% at constant perimeter and exchange rates.

In general, 2010 was marked by the conclusion of certain situations that had characterised the

period of crisis on western markets. Consumers again began to allocate a portion of their resources to the purchase of high-end fashion accessories, including sunglasses. In 2010, the focus on brands at the medium/high end of the market again increased, not yet evenly in all markets, with a positive impact on the mix and average prices of products sold. Furthermore,

the significant growth in sunglasses confirms the recovery in consumption of products

appreciated more for their aesthetic rather than medical qualities.

Sales of sports products also recovered well, owing to both favourable weather conditions and consumers’ increasing awareness of the importance of using protective accessories, such as ski helmets.

Net sales by geographical area Full year (Euro in millions) 2010 % 2009 % Change %

Europe 440.4 40.8 444.7 44.0 -1.0 The Americas 460.5 42.6 400.0 39.6 +15.1 Asia 161.6 15.0 130.6 12.9 +23.7 Rest of the world 17.4 1.6 35.9 3.5 -51.5

Total 1,079.9 100.0 1,011.2 100.0 6.8

An analysis by geographical region shows that the European market in particular registered a

Analysis by more moderate recovery in sales, with growth of 2.3% at constant perimeter and exchange geographical rates. In 2010, France, Spain, Portugal and more generally large clients, registered more region significant growth following the success of the largest licensed brands and also thanks to the renewed reputation of Carrera products. The Italian market remained broadly stable, even following the significant rationalisation of some distribution channels conducted by the Group over the year. In contrast, the situation remained particularly weak in Greece, where the

economic environment led to a contraction in sales of around 24%.

After the serious drop in consumption in 2009, sales on the American continent recovered well.

Whereas independent opticians’ segment, which represents the biggest portion of the market, remained broadly stable, the Department Stores channel registered significant growth, after having absorbed the greatest impact of the economic crisis in 2009. The Solstice chain in the US also recorded good results, confirming the strong improvement in the sunglasses business.

The performance of Latin American countries, particularly Brazil, was very positive, confirming

that this area may be considered a source of potentially substantial growth in future years.

______19

Safilo Group Directors’ report on operations

With the exception of Japan, Asia was undoubtedly less affected by the global economic crisis. Sales in most countries closed the year well above 2009 levels. The most significant growth was

in China, where also thanks to a sharp rise in the high-end segment of the market, the Group

increased its revenues of 73%. The situation was rather different in Japan, where, after a not very encouraging first half, the first signs of recovery were evident starting from the third quarter of the year.

The performance of the travel retail business, duty free, was also very positive, influenced by a general recovery in tourism and business travel.

Net sales by product Full year (Euro in millions) 2010 % 2009 % Change %

Prescription frames 410.9 38.0 402.0 39.8 +2.2 Sunglasses 586.2 54.3 524.6 51.9 +11.7 Sport products 70.3 6.5 60.1 5.9 +17.0 Other 12.5 1.2 24.5 2.4 -49.0

Total 1,079.9 100.0 1,011.2 100.0 6.8

An analysis by product type confirms that sales of sunglasses, the hardest hit during the crisis

years, are also those following economic recovery most quickly. Prescription frames, particularly in western countries, are seen by many consumers as medical products, and are therefore less exposed to changes in consumer propensity to buy driven by the general economic cycle.

The recovery in sales and the effects of the industrial restructuring undertaken in the last two years have led to a significant improvement in operating profitability.

After a few years of slowdown in production, the utilization of internal capacity again started to rise in 2010, in all the Group’s main sites. This led to an improvement in manufacturing efficiency and a greater absorption of plant costs, benefiting gross profit, which improved versus 2009 both on a quarterly and annual basis (58.3% of revenues versus 56.6% in the previous year).

Operating profit benefited from a clear improvement in the management of commercial expenses and also of marketing costs which were lower in percentage terms than in the previous year, despite the significant investment to support the strong expansion of Carrera in other European countries apart from Italy continued.

The incidence of overhead costs was also down. The improvement is mainly due to the fact that some retail companies that weighed on the Group’s general costs are now no longer part of the basis of consolidation. However, even on a like-for-like basis, 2010 saw a slight reduction in the incidence of fixed overhead costs, as they remained broadly stable while sales grew.

The EBIT margin, at 6.3%, therefore registered a clear improvement on the previous year

20 ______

Safilo Group Directors’ report on operations

(1.6% pre non-recurring charges). Similarly, EBITDA also registered a significant improvement, reaching EUR 107.8 million, equivalent to 10.0% of net sales (+64.2 % versus the previous year, when EBITDA pre non-recurring charges was EUR 65.7 million, or 6.5% of net sales).

Interest expenses were also down sharply, thanks to the significant reduction in average debt following the Company’s recapitalisation, and the cash generation registered over the year. Exchange rate differences had a negative overall impact (positive in 2009), owing to currency fluctuations.

The increase in sales, better operating profitability and the significant reduction in debt enabled the Group to close the year with a net result attributable to the Group broadly at break-even level (positive at EUR 0.7 million), after two years of net losses caused by the economic crisis and non-recurring charges.

______21

Safilo Group Directors’ report on operations

ANALYSIS BY DISTRIBUTION CHANNEL – WHOLESALE / RETAIL

The table below shows key data by operating segment:

WHOLESALE RETAIL Change Change (Euro/000) 2010 2009 Change % 2010 2009 Change %

Net sales to 3rd parties 992.9 904.4 88.5 9.8% 87.1 106.8 -19.7 -18.5%

EBITDA 106.1 64.9 41.2 63.5% 1.7 (6.7) 8.4 n.s. % 10.7% 7.2% 2.0% -6.2%

EBITDA pre non recurring 106.1 72.4 33.7 46.7% 1.7 (6.7) 8.4 n.s. % 10.7% 8.0% 2.0% -6.2%

In 2010, Group revenues in the wholesale segment grew by 9.8% at current exchange rates and 5.3% at constant exchange rates. As described above, this was achieved thanks to a significant increase in volumes and an improvement in the price mix of products sold, testifying to the return of consumer interest in models at the medium/high end of the market. These trends were particularly evident in the sunglasses segment and in the American and Asian markets.

EBITDA of the segment was boosted by the improvement in gross profit mainly related to the greater absorption of production capacity, a more efficient sales organisation and the stabilisation of general and administrative expenses.

After the sale at the end of 2009 of the Spanish and Australian chains, in 2010 the Group remained present in the retail segment with the US stores Solstice and the Mexican chain. In 2010, the retail channel registered a strong increase in sales of 14.3%, an improvement consistent throughout the year. This result enabled the chains to make up much of the contraction in sales registered in 2009.

The profitability of the segment therefore improved, thanks to both the positive sales trend and cost controls, leading to a positive EBITDA figure after many years of negative results.

Considering the market situation, the number of stores was not increased in 2010. At the end of the year, in implementation of the agreement that had led to the previous sale of the chains in Spain and Australia, the Group sold its stake in the Mexican chain.

At 31 December 2010, the Group had 161 stores with the US chain Solstice.

22 ______

Safilo Group Directors’ report on operations

CONDENSED BALANCE SHEET

Main balance sheet items The table below shows the highlights from the balance sheet as at 31 December 2010 compared with those of 31 December 2009:

Balance sheet December 31, December 31, Change (Euro in millions) 2010 2009

Trade receivables 271.3 268.8 2.5 Inventory, net 220.4 208.4 12.0 Trade payables (204.2) (150.1) (54.1)

Net working capital 287.5 327.1 (39.6)

Tangible assets 203.7 208.6 (4.9) Intangible assets and goodwill 563.7 536.5 27.2 Financial assets 13.2 12.0 1.2

Net fixed assets 780.6 757.1 23.5

Employee benefit liability (43.4) (41.8) (1.6) Other assets / (liabilities), net (1.5) (8.4) 6.9

Net invested capital 1,023.2 1,034.0 (10.8)

Cash in hand and at bank 88.3 37.4 50.9 Short term borrowings (56.6) (178.1) 121.5 Long term borrowings (287.8) (447.3) 159.5

Net financial position (256.2) (588.0) 331.9

Group Shareholders' equity (756.0) (438.4) (317.6) Minority interest (11.0) (7.6) (3.4)

Total shareholders' equity (767.0) (446.0) (321.0)

______23

Safilo Group Directors’ report on operations

Net working capital

Net working capital Net working capital was reduced in 2010, even though sales volumes increased. This continues to fall result was obtained in light of the broad stability of receivables from clients, growth in inventories, which was concentrated particularly in the last few months of the year in accordance with sales targets and the service levels set for 2011, and the significant increase in trade payables, which grew in the last quarter following the seasonal peak in purchases.

Net working capital December 31, 2010 December 31, 2009 Change ( Euro in millions)

Trade receivables, net 271.3 268.8 2.5 Inventories 220.4 208.4 12.0 Trade payables (204.2) (150.1) (54.1) Net working capital 287.5 327.1 (39.6) % net sales rolling last 12 months 26.6% 32.3%

NWC as a percentage of Net working capital as a percentage of sales also improved, owing to both the reduction revenues also improves of NWC in absolute terms and an increase in revenues that did not absorb financial resources.

Fixed assets and investments in tangible and intangible fixed assets

Investments reduced At the end of 2010, fixed assets totalled EUR 780.6 million, up on the previous year, mainly owing to exchange rate fluctuations. The impairment analysis showed that the value of goodwill did not need to be written down, as happened in 2009.

In light of the market situation, which has yet to stabilise, particular attention was paid to the resources allocated to investments. These were reduced further compared with previous years, also following the decision to sharply reduce the Group’s presence in the retail business, which required significant investment.

24 ______

Safilo Group Directors’ report on operations

The normal improvement and renewal of the plant and equipment of the production facilities in Italy and Slovenia accounted for nearly half of all investments, while roughly a third went to the production site in China.

______25

Safilo Group Directors’ report on operations

FINANCIAL SITUATION

The main items of the net financial position at 31 December 2010, as well as free cash flow figures, are reported below in comparison with the previous year:

Net financial position

Net financial position 31 December 31 December Euro in millions 2010 2009 Change

Current portion of m/l term loans (1.3) (77.3) 76.0 Short-term bank debt (15.8) (58.3) 42.5 Other short-term loans and financial payables (39.6) (42.5) 2.9 Cash in hand and at bank 88.3 37.4 50.9 Short-term net financial position 31.6 (140.7) 172.3 Medium/long-term loans (287.8) (447.3) 159.5 Long-term net financial position (287.8) (447.3) 159.5

Net financial position (256.2) (588.0) 331.8

Group net debt more The Company’s recapitalisation which was completed in the first quarter of the than halved year, led to a significant reduction in the Group net debt. In addition, the Group achieved good results in 2010 in the management of the cash flow, and

this enabled it to close the year with a short-term debt figure more than offset by available cash.

The Group’s current debt is therefore represented by the bond issue maturing in 2013 and some medium/long-term lines used to finance operations and current investments.

26 ______

Safilo Group Directors’ report on operations

Free cash flow

2010 financial 2009 financial Free cash flow Change Euro in millions year year

Cash flow from operations 97.6 11.5 86.1

Cash flow used in investment activities (23.3) (22.3) (1.0)

Free cash flow 74.3 (10.8) 85.1

Free cash flow positive The considerable cash generated over the year was due exclusively to the thanks to ordinary improved management of operations, and in particular the management of operations working capital, which, as highlighted above, was reduced considerably, despite the increase in business volumes.

______27

Safilo Group Directors’ report on operations

HISTORY OF THE GROUP

Safilo was founded in 1934 when Guglielmo Tabacchi (father of Vittorio Safilo was founded in 1934 Tabacchi) assumed control over the company “Società Azionaria Fabbrica Italiana Lavorazione Occhiali” which produced lenses and frames. This company had been founded in 1878 in northeast Italy with its production unit

in Calalzo di Cadore (Belluno), the region that houses the eyewear district. In 1964 the second production unit in Santa Maria di Sala (Venice) was

inaugurated and the production of acetate and cellulose frames was transferred there. In the Seventies the production unit in Calalzo di Cadore was extended and the offices in Padua were opened; the latter currently serve as the secondary office and main distribution centre for the Group (1975 - 1977).

In the 1980s, the first commercial subsidiaries were opened in Belgium, Spain, The first commercial subsidiaries were Germany and France. From 1983 to 1986, a controlling interest was acquired opened in Europe and in Starline Optical Corp. (now Safilo USA Inc.), a leading U.S. commercial firm the USA in the 1980s active in the eyewear industry that had been a distributor of the Group’s

products in the United States since 1962.

The industrial development plan was implemented in 1989 when the

production facility in Longarone (Belluno) was built, and is still the largest Italian unit in the Group. It became operative in 1990; it was and continues to

be one of the most technologically advanced factories in the eyewear industry in Europe. In 2001, the central, automated distribution centre was inaugurated

in the Padua headquarters.

Over the last 15 years the Group has pursued a policy to strengthen and expand the distribution network by opening subsidiaries in the most promising markets with the final aim of directly controlling distribution in the main

geographic regions. In order to implement this strategy, relationships with the Group’s clients have been constantly strengthened.

The first commercial In 1994, Safilo Far East, the distribution branch in Hong Kong was established, subsidiary was opened in the Far East in the thereby opening the gateway to the Asian and Australian markets. At the end 1990s of the Nineties, the Group’s presence in Europe was further strengthened by

opening subsidiaries in the United Kingdom, Greece, Austria, Portugal and Switzerland, and in the rest of the world in Australia, South Africa, Japan, Brazil, India, Singapore, Hong Kong and Malaysia. Finally, in 2004, a branch

was opened in Shenzhen - China, one of the markets with greatest growth potentials.

In 1996 the acquisition of a business unit of Carrera GmbH, a specialised manufacturer of sports eyewear, led the Group to acquire the know-how of Optyl for the production of plastic frames as well as the two factories in Traun

(Austria) and in Ormoz (Slovenia). Due to these acquisitions, Safilo has

28 ______

Safilo Group Directors’ report on operations

become one of the leading manufacturers and distributors of sports eyewear

and ski goggles in Europe. The acquisition in the same year of the American company Smith Sport Optics Inc. added a range of sports goggles - specifically

addressed to the American market - to the Group collections.

In July 2001, Vittorio Tabacchi, acquired a majority stake in the Company and Delisting in 2001 launched a public takeover bid through a special-purpose vehicle, Programma 2002 S.p.A. The initial bid was at a price of EUR 12.50 per share, for a total value of EUR 161.3 million. The bid on the remaining shares was launched at a price of EUR 14.48, for a total value of EUR 9.4 million. After the takeover bid

was completed, Safilo S.p.A. was delisted in December 2001, almost 14 years after it was first listed in 1987.

Leveraged buy-out in During 2002, Safilo S.p.A. was incorporated into the aforementioned 2002 by Cavalier Vittorio Tabacchi Programma 2002 S.p.A., which in turn was incorporated into Programma 2001, another vehicle company owned by Vittorio Tabacchi’s family; the name “Safilo S.p.A.” was retained.

In December 2002, the parent company Safilo Holding S.p.A. (now Sàfilo Group S.p.A.) acquired 100% of the remaining share capital in Safilo S.p.A. by

a contribution in kind. In December 2002 two vehicle companies, SunlightLuxco S.à.r.l. and SunlightLuxco II S.à.r.l., directly controlled by CSFB Private Equity, became shareholders of the parent company. Their

shareholdings were then later transferred respectively to SunlightLuxco A S.à.r.l. and SunlightLuxco III S.à.r.l.

On 14 September 2005, further to a resolution by an extraordinary In 2005 Safilo Group shareholders’ meeting, the parent company changed its name from Safilo was back on the Stock Holding S.p.A. to Safilo Group S.p.A. Exchange after the delisting in 2001; listing of Safilo Group S.p.A. On 9 December 2005, the shares of Safilo Group S.p.A. were listed on the Stock Exchange at an opening price of EUR 4.90 per share.

Capital increase and In March 2010, the capital increase of the parent company was concluded, and entry of new reference shareholder, HAL led to the entry of HAL Holding N.V., an international investment company, as Holding N.V., in 2010 the new reference shareholder.

HAL is both a financial and industrial partner for the Group, and has had a presence in the eyewear retail sales sector since 1996, through a vast retail network that includes chains such as Grand Vision, Pearle, Solaris and Avanzi.

In the new shareholding structure, HAL as reference shareholder has a stake in the capital of Safilo Group S.p.A. of 37.2%, while the Tabacchi family retains a stake of 10.0% through the holding Only 3T. The remaining shares are owned by smaller shareholders, and are traded on the electronic stock market managed by Borsa Italiana.

______29

Safilo Group Directors’ report on operations

GROUP STRUCTURE

30 ______

Safilo Group Directors’ report on operations

CRITICAL FACTORS FOR THE GROUP’S SUCCESS

The Group owes its success to a number of areas of strength, which, taken Safilo Group’s business model is together, distinguish it within the worldwide eyewear industry: based on product quality, a portfolio of prestigious brands, - design excellence, innovation and product quality: the Group’s products production flexibility, are very well received by eyewear resellers and by the consumer due to international distribution their superior quality and their innovation in both materials and design. capabilities, and The Group sees quality to be key to success in the high end of the product diversity market and in effectively managing its brand portfolio;

- a highly prestigious brand portfolio and a high-profile presence in the luxury segment and in fashion: the Group manages a portfolio of brand names selected according to criteria which take into consideration specific competitive positioning and international prestige, based on a precise strategy of customer segmention and the desire to reduce exposure to the risk of relying upon any one brand in particular which is typical in the luxury segment. To this end, the Group has gradually and carefully integrated its own brands and various licensed brands, for which it has established long-term partnerships (on average 5-8 years) with the fashion houses through contracts that have been repeatedly renewed over the years;

- production flexibility: for a number of years, the Group has been engaged in rationalising its organisation and production processes in order to increase efficiency and productivity and to reduce total production times. The use of outsourcing also provides the necessary flexibility in production in order to manage peaks and troughs in demand;

- global distribution platform and territorial coverage: the Group’s logistics platform represents a key competitive advantage in supporting the business model thanks, above all, to the high level of coverage of all of the world’s main markets. This plays a significant role both in supporting development strategies worldwide for fashion’s leading labels and in enhancing the brand portfolio emerging in local markets, and the distribution system is designed to reach more than 80,000 select points of sale in 130 nations. The Group ensures its market presence through a mixed distribution model comprising direct management (presence in 40 of the most important markets, with approximately 1,300 sales agents) and indirect management, through exclusive agreements with independent distributors (approximately 70 in the optical channel and more than 100 in the sports channel). Factors behind its success include the high level of training of the sales force, which focuses on certain product lines. Through its sales network, the

______31

Safilo Group Directors’ report on operations

Group maintains relations with and effective control over its customers, the high quality of which ensures a suitable position of house and licensed brands. In particular, the strategic selection of retailers and the positioning of Group’s products in their points of sale is a key to success in relations with prestigious brand licensors and is a distinctive feature of the Group in comparison to its leading competitors;

- excellence in customer service: the Group is a recognised leader in providing excellent levels of customer service, which features: (i) a large, expert sales force with agents able to cover the entire market; (ii) a team of key account managers dedicated to assisting the main distribution chains; and (iii) modern, multi-language call centres to manage orders and customer service, using specialised developed software, such as the so-called CRM – customer relationship management – which enables monitoring the market, storing data and creating precise customer profiles so as to personalise the services even further;

- diversification in revenues: diversification in the portfolio of house and licensed brands and in the target markets and customer segments concerned enables the Group both to mitigate the risks related to potential slowdowns in the performance of specific markets and the general risk of changes in customer buying habits, as well as to take advantage of opportunities in emerging markets and customer segments.

32 ______

Safilo Group Directors’ report on operations

CRITICAL RISK FACTORS FOR THE GROUP

The Group implements all the possible measures to contrast any risks and uncertainties arising from its business. The risks are both internal and external and are explained below.

Internal risks

Strategic risks

The Group could be unable:

- to take advantage of business opportunities in the market segments and geographic areas in which it operates;

- to allocate the resources to the most profitable and potential markets, or to more economically beneficial initiatives;

- to protect its brands and patents;

- to maintain the licence contracts required for its business and fulfil the relative obligations and commitments;

to contrast the competition by not sufficiently maintaining and strengthening its own distribution and sales networks.

Operating risks

The Group business is subject to:

- the risk of being unable to organise and coordinate integrated supply/production/logistics and commercial processes in order to provide a rapid response to the needs of the increasingly attentive and discerning customers;

- the risk of being unable to identify and purchase raw materials, semi- processed and finished products of a sufficient quality to support the Group’s very high quality standards;

- the operational risks of industrial facilities, distribution centres and supplier relationships; for example: there could be the risk of the outsourcing relationships being broken off with Asian suppliers, or halts in work in the industrial units or distribution centres due to broken equipment, lack of labour, natural disasters and the like;

- the risk of being unable to launch innovative products on the market

______33

Safilo Group Directors’ report on operations

that meet consumer tastes and follow the fashion trends;

- the risk of non-compliance with internal control procedures as well as the Italian and foreign legislation that are applicable to the Group (for example local tax laws).

External risks

Business risks

In terms of business risks, the Group is exposed to:

- policies implemented by the competition and the possible entry of new market players;

- the effects of the macro-economic and political and social environment, in terms of changed consumer buying power and their level of loyalty and buying trends, also considering the instable political and social climates;

- changes in National and International regulations that could condition the competitive advantage that has been reached (for example, legislation changes that allow or eliminate the refund by social security institutes of the costs for buying prescription lenses or any possible customs restrictions);

- climatic conditions, such as very bad weather in the spring or summer which could drastically reduce sales of sunglasses;

- the diffusion of alternative products and techniques to correct eyesight, other than glasses, for example, laser surgery.

Financial risks

The Group pays The Group constantly monitors the financial risk it is exposed to in order to constant attention to assess in advance any possible negative impact and to undertake corrective financial risk measures aimed at mitigating or correcting the risks in question. management The Group is exposed to a variety of risks of a financial nature: credit risk, market risks and cash flow risks, which are centrally managed on the basis of hedging policies which also include the use of derivatives in order to minimise the effects deriving from fluctuations in exchange rates (especially of the American dollar) and interest rates.

34 ______

Safilo Group Directors’ report on operations

Credit risks

The Group minimises The Group strives to reduce risk deriving from the insolvency of its customers risk through through rules ensuring that sales are made to reliable and soluble customers. instruments to control Such rules, based on the available information on client solubility and reliable customer insolvency historic data, combined with exposure limits per individual client, allow a limited concentration of credit and thus minimise the relative risk. Credit exposure is, moreover, divided among a large number of counterparties and clients.

Significant positions in terms of amounts for which the Group identifies situations of objective, total or partial, non-recoverability, taking into consideration any guarantees obtained and the costs and expenses of recovery, are written off individually.

It is deemed that the maximum theoretical exposure to credit risk is represented by the book value of the financial assets present in the financial statement.

Market risks

Market risks can be divided into the following categories:

Exchange rate risk Exchange rate risk. The Group operates on an international level and is therefore exposed to exchange rate risk.

The Group holds shares in subsidiaries in countries not belonging to the Euro area; as a result, the variations of shareholders’ equity deriving from fluctuations in exchange rates between the local currency and the Euro are

booked within a reserve of the consolidated shareholders’ equity denominated “translation difference reserve”.

Some companies operate in currencies other than the local currency and these operations primarily involve the U.S. dollar given that a significant part of the transactions of these companies are conducted in U.S. dollars.

The Group constantly tries to reduce the effects deriving from fluctuations in the American currency by getting its supplies from local suppliers in areas where purchases are made in American dollars and thus implementing a sort

of “natural hedging”. For incomes in dollars not compensated by the expenditures for purchases, the Group policy is to use hedging instruments such as forward contracts in dollars. Exposure is thus covered by simple forward contracts (“plain vanilla”) whose duration is always less than twelve

months. Information on the fair value and on the method of accounting of derivatives is given in the notes to the financial statements.

______35

Safilo Group Directors’ report on operations

Changes in fair value risk Changes in fair value risk. The Group holds some assets and liabilities subject to changes in value over time depending on the fluctuations of the market

where they are traded.

Interest rate risk. Borrowing from banks exposes the Group to the risk of Interest rate risk variations in the interest rates. Specifically, loans at variable rates determine the risk of a change in cash flow.

The Group regularly assesses its exposure to the risk of interest rate fluctuations and manages such risk through the use of derivatives, denominated interest rate swaps (I.R.S.); the latter are used solely for the purpose of hedging cash flows. The counterparties are primary financial institutions and, for these contracts, at the beginning of the hedge operation, there is a formal designation and documentation relative to the hedge.

Liquidity risk

The Group constantly This risk could generate the inability to find, at economic conditions, the monitors its cash flows financial resources needed to sustain operations in the necessary time. Cash flows, the need for borrowing and company liquidity are constantly monitored at a central level by the Group treasury in order to ensure effective and efficient management of the financial resources.

In the first quarter of 2010, the Group fully implemented its recapitalisation The capital increases and financial restructuring plan, which, through a reserved capital increase and a rights issue, enabled it to generate new financial and equity resources totalling approximately EUR 270 million. These resources redressed the

financial balance of the Group, thereby minimising the risks relating to insufficient liquidity and the raising of financial resources.

The senior loan contracts, which have been granted to certain Group The agreement to companies by a banking pool coordinated by Unicredit Bank AG, include a restructure the Group’s series of operational and financial obligations. In particular, the defined levels financial debt of the covenants must be respected and they are normally calculated on the basis of final consolidated financial statement data at the end of each half- year. If these parameters are not respected, the conditions to continue the

loan agreement must be renegotiated, the so-called waivers or the suitable

adaptations to the parameters. If this were not the case, an event of default could arise, which would involve the compulsory advance payment of the loan. The main covenants in the current contractual agreement are calculated as a ratio between net financial position and EBITDA and EBITDA and net interest

expenses. Following changes to agreements signed on 5 February 2010 as part of the Group’s wider recapitalisation and financial restructuring plan, the

36 ______

Safilo Group Directors’ report on operations

recognition of these covenants was suspended until 30 June 2012. Furthermore, as part of the same agreements, as better described in the

Notes to the Financial Statements, the average maturity of the financing has

been extended, up to 30 June 2015 for the EUR 200 million revolving line.

In terms of the high yield bond, as part of the Group’s recapitalisation and financial restructuring, HAL Holding N.V. undertook, among other things, to HAL’s commitment to grant, directly or indirectly, Safilo Capital International S.A., subject to the finance part of the continuation of certain conditions, a loan aimed at redeeming the HY bonds in redemption of the high- the event that, at the final maturity of the HY bonds (2013), the Group has yield bonds at maturity insufficient funds (including those of the revolving line of credit of the senior loan) to redeem them. The loan would be for a maximum amount equal to the difference between the principal amount of the bonds acquired by HAL Holding N.V. in the context of the HY Tender Offer and the overall price paid for their acquisition. The loan shall have the same financial conditions and guarantees as the Senior Loan, in accordance with the pari passu principle.

______37

Safilo Group Directors’ report on operations

PRIMARY GROUP PROCESSES AND ACTIVITIES

Production and On the basis of the success factors described above and in an attempt to reduce distribution chain the risk factors as far as possible, Safilo Group directly controls the entire production-distribution chain; the latter is divided into the following phases and processes:

Research, development and design

Research and development mainly focuses on two types of activity: R&D is based on product design and - product design; the development of new materials and - research and development of new materials, technologies, production production processes processes and instruments/machinery.

Product design is carried out by three internal styling departments, the Stylistic Department in Italy, and two local structures in the US and Hong Kong) focused

on the specific design requirements of the different markets they operate in,

while the research and development on materials, production processes and machinery is performed by an internal department “The Research and Technological Innovation Division”.

Product design

Product design, and In relation to the development of products positioned at the high-end of the constant attention paid to the market market, the Group has, for over a decade, identified the design of the product as and consumer tastes are fundamental a strategic feature.

The Group’s constant attention to consumer tastes, fashion trends and

technological innovation all imply the constant introduction of new models and the updating of current ones.

Research and development of the design consists, amongst other activities, in the development of forms and combinations of colours/materials for the creation

of new models. This task is carried out by three structures called Style Centres, comprising designers and staff responsible for producing prototypes. The main

Style Centre is in Italy, while the other two, situated in the United States and Hong Kong, perform specific stylistic activities for collections suited to their

respective areas. In particular, the Group develops special Asian fitting frames

38 ______

Safilo Group Directors’ report on operations

for products marketed in Asia; these frames are specifically adapted to the features of the Asian population with specific focus on the Japanese market. Product design function, given its strategic nature, has been constantly

strengthened over the years.

The Style Centres of the Group, on average, develop more than 2,500 new

models of prescription frames, sunglasses and sports products every year, providing the public with more than 4,500 models of eyewear. The Group’s products stand out for their high complementary nature, as sunglasses are mainly linked to fashion trends while prescription frames are mainly linked to

population dynamics. Furthermore, the different product lines are addressed to different consumer targets, with products positioned in the top end retail

brackets.

Research and development of materials, production processes and instruments/machinery

Research and development into materials and production processes aims, on one Constant research is hand, to improve the technical characteristics of the products and, on the other, applied to new to develop innovations of the production process which increase its efficacy, materials and more effective and efficiency and quality. efficient production processes Safilo has always believed in investing in research and development with its own R&D Centre, which was opened in the beginning of the Seventies and operates with a team of 20 expert engineers and researchers who are constantly

employed in researching new cutting edge techniques.

Due to the considerable efforts that go into research and development, the

Group is able to constantly introduce new models and update the current ones, following consumer tastes, fashion trends and technological innovations.

During the course of 2010, the Research and Technological Innovation Division focused on the:

- research of new materials in order to improve the characteristics of resistance and duration of the products; - innovation of the sports products;

- innovation of sunglass lenses, both as an aesthetic and a protective factor;

- study of new solutions aimed at achieving increasingly lightweight, comfortable to wear and variable fit frames, particularly in the sports

sector and specifically in bicycles and skis;

- design and construction of new machinery which could improve the efficiency and quality of the production process.

- both for the sports sector and for eyewear, a new branch was opened

in order to research new eco-sustainable materials with a low

______39

Safilo Group Directors’ report on operations

environmental impact, to be used in the manufacture of our products.

Such activity, over recent years, has led to the registration of numerous patents, such as elastic frames, fixtures for the nose and face, the “base” of the lenses, nose pads, and internal and external protection of ski goggles.

Research and development activity into instruments/machinery is aimed at internally designing and developing precision instruments and moulds with the

purpose of improving the efficacy, efficiency and quality of the production process. Management believes that the organisation of this activity within the Company allows the reduction of the products’ time-to-market, thereby obtaining constant savings in production costs.

Production is The entire industrialisation process, from design to production, is directly planned on the basis controlled; this helps to even further reduce the time between product of information that is gathered internally development and marketing so that the latest news is always on the market in and externally time.

Planning, programming and purchases

The Planning Office uses the information that has been collected internally

(regarding sales activities, promotional campaigns, sales forecasts and historic data) and externally (such as customer orders, feedback from trend setter

customers about market trends) so as to define the production needs on a weekly basis which are then submitted to the Programming Office.

The Programming Office analyses the production needs received from Planning in order to develop a weekly production plan and order the materials by taking

into account the warehouse stocks, the models to be produced and the production capacity limitations. Programming uses an analysis system called the

Global Planning System (GPS). GPS corrects the weekly production plan every day and breaks it down between internal production and external purchases.

The Purchasing Department is mainly responsible for buying the raw materials (such as resins and catalysis for Optyl, steel, acetate, metal, lenses, cases and

other components) and other semi-finished products, such as arms, noses, etc. This function is managed by the Central Buying Office in Padua.

In order to ensure the quality of raw materials and semi-finished goods, the

Group carefully selects suppliers and evaluates them on an ongoing basis based on their delivery times and their ability to ensure certain quality standards, as well as on their available production capacity.

Internal production The provisioning of raw materials and semi-finished goods is done both in is carried out in six factories divided Europe and in other markets. The takeover of Lenti S.r.l. in 1996 now means between Italy and that Safilo has the know-how to produce lenses for sunglasses. abroad

40 ______

Safilo Group Directors’ report on operations

Production and quality control

Safilo products are produced both within the facilities of the Group and by third parties. Safilo directly produces roughly 40% of the prescription frames and sunglasses in five of its six facilities – in Italy, Slovenia, China and the U.S. – with the remainder being produced by third parties in Asia and Italy. There is a

specific team that controls the quality of the bought-in products to ensure their

quality is in line with the elevated standards of the Group.

Between 2006 and 2008, the Group completed its Lean Manufacturing and Time to Market projects, through which it was significantly able to reduce internal production lead times and production costs, and to manage new product development more effectively and efficiently. The results achieved with these projects have now been fully consolidated in the current organisation.

Internal production

The processes have been simplified over recent years to improve production efficiency and flexibility. The rationalisation of production resulted in a specialisation of each plant based on the materials and production technologies applied.

In 2008, the Group launched production at its plant in Suzhou (China), dedicated to the manufacturing of unfinished components in metal and acetate. As at the end of 2010, the plant employed more than 1.100 people, with production growing rapidly.

As a result of the industrial reorganisation in 2009, direct production by the Group is now conducted in three plants in Italy, by the plant in Ormoz, Slovenia, and the one in Suzhou, China, as well as in the plant in Salt Lake City, Utah (USA) for ski goggles.

The following table illustrates the sites and area of specialisation of our production units on the date of the Financial Statements:

Division Production unit Country Production specialisation

Plastic materials Santa Maria di Sala (VE) Italy Finished products Ormoz Slovenia Semi-finished and finished goods, Optyl, and injection Suzhou China Acetate semi-finished goods

Metals and semi- Longarone (BL) Italy Finished products finished goods Martignacco (UD) Italy Components and accessories Salt Lake City U.S.A. Ski goggles

______41

Safilo Group Directors’ report on operations

Outsourced production

Outsourcing policies aim at optimising production capacity and reducing costs. Outsourced We work with manufacturers in Italy, Asia and the USA. The decision to assign a production aims at reducing costs and product to an Italian or Asian contractor is based on specific product quality obtaining greater parameters, origins and special production needs. production flexibility This policy means we are able to manage both production peaks and drops in demand, and to concentrate our production on products for the luxury sector.

Quality control

High product quality is one of the key elements of the Group’s strategy, which is The quality control procedures focus why quality control is handled directly by personnel within the Group. both on product The quality control process seeks to provide our customers with products that safety and quality not only comply with legal requirements with regard to safety, but also meet the highest quality standards applied within Safilo. We conduct tests on the raw materials and semi-finished products we purchase,

and on the production and distribution processes and finished products. Finished products from third-party suppliers are inspected when they arrive at distribution centres. The Group has several quality control teams with a great deal of experience in the sector, based within the facilities in Parsippany and

Hong Kong, and at the headquarters in Padua.

All Group products comply with the laws in force in the countries in which they

are sold. With regard to European Union legislation in particular, when required, products have the EC marking. In addition, after obtaining ISO 9001:2004 certification in 1996, Safilo has now been ISO 9001:2000 (i.e. “vision 2000”) certified since 2003. The certification body used by Safilo is DNV – Den Norske

Veritas.

Marketing and communications

The Marketing and communications campaigns to support the Group’s house brands, the licensed brands and the products are one of the key factors for the Marketing actions are defined at world Group’s success and continuously growing profit. level on the basis of medium-long term plans The main aims of the Group marketing strategies include:

- guaranteeing the correct position for all the brands in the portfolio, with special focus on the high-end range and high fashion and luxury

sectors;

- guaranteeing the development of the house brands, through a correct marketing mix and adequate investments in product development, communications and trade marketing;

- to communicate the distinctive features in terms of design and technology of products in the different categories (prescription,

42 ______

Safilo Group Directors’ report on operations

sunglasses, sports).

The Group develops its global marketing and advertising strategy through the marketing plan. The plans consider market information, end consumer and

customer needs and tastes as well as competitive factors such as price, product type and advertising and promotion investments.

The Group develops a specific market plan for each brand in its portfolio, adopting different strategies and actions in order to guarantee the best position

for each one. For licensed brands, the Group develops the strategy in close partnership with the licensors.

In 2010, the Group’s total investment in marketing and communication came to EUR 98.2 million (vs. EUR 93.9 million in 2009), equal to roughly 9.1% of consolidated revenues for the Group (vs. 9.3% in 2009).

Marketing and communications activities mainly consist of direct consumer campaigns and trade marketing activities focused on customers’ points of sale.

Consumer-oriented activities account for roughly two-thirds of the Group’s marketing and advertising investment, and the main outlets used are the press (both weekly and monthly publications), billboards, sponsorships (mainly in Marketing actions are addressed to sports for the brands Carrera and Smith), and public relations with journalists consumers on one hand and to sales and opinion leaders in fashion and the sports and entertainment industries. points of customers and the Group on Trade marketing actions focus on the main customers’ points of sale and account the other (trade marketing) for about one third of the Group’s advertising and promotion costs; they are of fundamental importance to guide the end customer’s choice to the Group brands

and products and to build up customer loyalty. The main instruments for this purpose include in-store display materials (posters, banners, displays, duratrans),

special window displays, combined consumer promotion campaigns addressed to both consumers and the leading optician customers, training courses and

training materials, and updating into the features of the Group’s brands and products for the sales assistants in the opticians.

The Group also attributes great importance to corporate communication, which it develops as a priority with its participation in the main international fairs in the sector and with internet communication through the sites www.safilo.com, www.carreraworld.com, www.smithoptics.com and www.oxydo.net.

The creative communications strategy is always in line with the Group’s specific

choices but is adapted to specific market needs to guarantee it will reach the set target groups. Corporate communication The media strategy is managed at Group level, but with specific optimisation campaigns in the single local markets.

______43

Safilo Group Directors’ report on operations

Sales and distribution

Distribution

The products are Selective distribution takes place through three main distribution centres based distributed through in Padua, Parsippany (New Jersey, USA) and Hong Kong as well as through other specialised distribution centres minor distribution centres in Denver (Colorado) and Utah (USA), Japan, Australia, in Italy, the USA and India, South Africa, Canada, Greece, Brazil, Singapore and China, each one the Far East serving its own specific geographic region.

The Group has developed a common information platform for the main European companies, for Safilo Far East Ltd. in Hong Kong and for Safilo South Africa. This platform permits direct linking, from the logistics standpoint, of the highly automated Padua distribution centre in Italy with individual European opticians, Asian distributors and South African customers. The platform enables the Group to offer customers direct shipment from the Padua distribution centre to the individual retailers without the need to ship the products to any intermediate warehouse. This logistical organisation provides both excellent service to the customer and allows stocks of finished products to be constantly monitored.

By means of its distribution centres around the world, the Group can ensure an excellent level of customer service in all its current markets.

In order to guarantee minimum shipment times and reduced costs, shipping agents and couriers are selected on the basis of their efficiency and reliability. Our European suppliers mainly ship by road while Asian suppliers ship by sea. Finished products are sent from Asia both by sea and air.

Once the production process is complete the finished products are sent to the

44 ______

Safilo Group Directors’ report on operations

Padua warehouse. Shipment orders, related costs and courier orders are processed overnight. The system processing all this data takes into account the destination to which products have to be shipped so as to minimise freight costs and the number of trips needed to supply each individual customer. Once the orders and transport plans have been prepared, the products are collected and prepared for distribution in the morning. On average, telephone orders can guarantee delivery to Italian customers within 24-48 hours and to European customers within 48-72 hours.

Distribution through the wholesale channel

Safilo Group sells its products in around 130 countries, in many cases through The Group operates in its own 32 sales branches and through more than 170 independent distributors 130 countries through its own branches and in the other countries. Each Group branch coordinates a solid network of local independent agents with exclusive contracts, reaching the clientele of more than 80,000 distributors points of sale including opticians, optometrists, ophthalmologists, distribution chains, department stores, specialised retailers, our licensors’ own stores, duty free shops and sports shops.

In our leading markets like Europe and the USA, we have created sales teams managed by Key Account Managers; the latter directly manage the main chains of eyewear in the reference regions.

The Group maintains efficient customer relations and controls and the high Group quality standards ensure the right positioning for both proprietary and

licensed brands. In particular, the strategic choice of selecting retailers for the products and their position within the points of sale is one of the strengths in our relationships with the licensors of the top brands and marks us out with respect to our main competitors. Distribution agreements with local partners

usually establish purchase quantity minimums and impose territorial restrictions. In addition, to the extent allowed by local legislation, we authorise distribution of our products solely via authorised retail stores and qualified

sales agents.

Over recent years the Group has opened showrooms in highly prestigious locations in Milan, New York, London, Paris, Barcelona, Madrid and New Delhi

to present products to clientele.

Our distribution network is geographically organised in 3 divisions, which The wholesale distribution network is respectively cover North and South America, Asia and Australia, and Europe structured in 3 divisions plus countries elsewhere in the world, such as India and South Africa (EMEIA). managed by top managers reporting to Each division is managed by a top manager who reports directly to the Global the Global Sales Director Sales Director who is responsible for coordinating them.

Below is a brief description of the 3 divisions:

______45

Safilo Group Directors’ report on operations

EMEIA (Europe, India and South Africa) Europe. The main centre is in Padua in Italy. The division manager is also responsible for other areas in the world, including the Middle East, Africa,

India and South Africa. The Group’s European clientele is very varied: in Italy, the majority of customers are independent opticians, in the UK they are mainly chain stores, while in Germany the main customers are buying groups and distribution chains. We directly distribute our products to 25 European countries. Around 60% of the more than 600 sales representatives are

independent and paid on a commission basis, while the remainder are employees in accordance with specific local legislation, and receive a basic

salary plus commission. Most of the sales force is linked by PC to the central computerised distribution system so as to reduce order processing time. Sales and other marketing data can therefore be obtained on a daily basis. There is also a division specifically dedicated to sports products (ski goggles and glasses, helmets and other sports eyewear). A key account manager has also

been created and is based in Padua with the task of centrally managing the leading European distribution chains. In those countries where the Group has no sales branches, long-standing relationships have been established with the

local distributors, the majority of them having exclusive agreements with us. Thanks to the inauguration of local representation offices, the Group has been operating directly in the Baltic republics since the beginning of 2007. During 2008 Safilo S.p.A. set up stable organisation units (i.e. branches) in the Czech

Republic, Slovak Republic and Hungary for direct coverage of these markets, considered to offer high growth potential and where consumers pay great attention to high-end products and to “Made in Italy” design.

2009 marked the start of operations of our new, wholly owned, Russian sales branch, Safilo CIS-LLC. The branch, founded with registered offices in Moscow on 29th October 2008, brings the entire Safilo brand portfolio to Russia, with

special attention to the luxury market. This is a direct approach to the market through four regional offices in extremely interesting locations which offer great opportunities for the Group, with the precise aim of serving around 400 selected points of sale of opticians and department stores in the medium

term.

ASIA - PACIFIC Asia - Pacific. The head office is in Hong Kong. The division manager is also responsible for Oceania, as well as for global duty-free business via the

key account managers specifically assigned to the latter. The Group currently distributes its products in this region through sales branches in China, Australia, Hong Kong, Japan, Malaysia, Singapore and South Korea, and through outside distributors with exclusive distribution contracts in other key markets. The clientele is very varied and mainly

comprises independent opticians and department stores.

AMERICAS Americas. This divisional manager is responsible for markets in the USA, Canada, and the main South and Central American countries. The Americas’

46 ______

Safilo Group Directors’ report on operations

division headquarters is in New Jersey, USA.

Marketing and distribution in the USA is implemented through three distribution channels: (i) opticians, ophthalmologists and optometrists; (ii) the

retail market, comprising department stores and specialised shops; (iii) sports stores. Sales are made directly to opticians, ophthalmologists and optometrists organised in large retail chains and to individual stores.

More than 500 independent agents manage the American markets. About 60 operate in Canada, while in the USA, of the some 460 independent agents,

about 320 handle opticians, ophthalmologists and optometrists, about 30 focus on retail stores, i.e. department stores and specialist stores, and about

100 handle a specific product category, like sports eyewear, for example. The Group has a showroom in New York that presents all its product lines. The major retail chains are handled by the key-account organisation. All

Central and South American distributors are managed by the Miami-based sales office of Sàfilo U.S.A.

In 2009, in order to gain a direct presence on the Mexican market, the Group

acquired 100% ownership of Safint de Mexico S.A. de C.V., a sales company based in Cancun, with a view to developing business within the area, which is considered to offer high growth potential.

______47

Safilo Group Directors’ report on operations

Distribution through the retail channel

In the last ten years, Safilo Group has pursued a growth strategy in the retail Group presence in the sector. It recently decided to focus on the wholesale segment, and retail market consequently sold all the retail chains it owned, with the exception of Solstice

in the US.

Therefore, to date, based on the sequence of events mentioned below, Safilo

Group’s presence in the Retail sector is mainly limited to the Solstice chain which operates exclusively in the USA and represents a significant lever for

commercial presence and visibility of the Safilo brands and products in a highly competitive channel.

Solstice was taken over The Group entered the US retail market with the acquisition from the LMVH in 2002 Group of Solstice, a retail store chain specialised in the sale of sunglasses positioned in the high-end and luxury segments of the market. At the

beginning of 2002, at the time of acquisition, the US chain numbered 6 stores. Since then, the Group’s strategy has focused on the quest for attractive sales

space, also able to assure fast and adequate return on investment. Based on these criteria, over the years numerous stores have been opened, both in

prime metropolitan locations and in top-quality shopping malls, leading to achievement of a total of 161 stores at 2010 year-end.

In 2006 the Spanish As of November 2006, the Group entered the retail market in mainland chain, Loop Vision was taken over Europe, thanks to the acquisition of Loop Vision. The Spanish chain (mainly active in the prescription eyewear segment) manages stores located both in

downtown locations and in shopping malls. Since the takeover the strategy for this chain has focused on refurbishing certain stores which were not

considered up to the Group’s standard, in accordance with the aim of repositioning the product range within the “medium-high bracket” and developing and upgrading back-office structures.

During 2007 the Group’s International retail network continued to grow, both Two new companies were set up in 2007, internally (organic growth) and through acquisitions. To enter two retail one in Asia and the markets considered very attractive in terms of future growth potential, i.e. other in Australia Hong Kong and Australia, two new companies were set up for the sole purpose of managing retail initiatives: Optifashion Hong Kong Ltd., based in Hong Kong and Optifashion Australia Pty Ltd., based in Sydney.

In 2008 the acquisition In 2008, the Group acquired via its subsidiary Optifashion Australia Pty the of the Just Spectacles chain in Australia and Just Spectacles chain, present on the Australian market for over 20 years, and Sunglass Island in a 60% stake (with a call option on the remaining 40%) in Tide Ti S.A. de C.V., Mexico a Mexican company owning the Sunglass Island and Island Optica chains. These two stores are positioned in the luxury segment of the local eyewear market, both prescription and sunglasses.

In 2009 refocusing of During 2009, further to the continuation of the global economic crisis and Group strategy and considering the economic results of these acquisitions, the Group – as part of disposal of non- strategic chains its financial structuring plan – decided to sell the retail chains considered non- strategic to HAL Holding N.V. The latter is the Group’s partner in the 48 ______

Safilo Group Directors’ report on operations

restructuring operation and is already present in the retail eyewear segment, where it has been active since 1996, via an extensive retail sales network including chains such as Grand Vision, Pearle, Solaris and Avanzi.

The above disposal plan involves the retail chain Loop Vision in Spain, Sunglass Island and Island Optical in Mexico, and Just Spectacles in Australia, as well as 5 retail stores present in China.

The process of selling the retail chains considered non-strategic, which began at the end of 2009 with the sale of the Spanish and Australian chains, was completed at the end of 2010 with the sale of the Group’s stake in subsidiary Tide Ti S.A. de C.V., a Mexican company that owns the Sunglass Island and Island Optica chains.

______49

Safilo Group Directors’ report on operations

The Group’s own and licensed brands

The Group’s portfolio The Group’s brand portfolio is composed of its own proprietary brands, used contains both own and licensed brands for prescription frames, sunglasses and sports goggles as well as licensed brands for collections of frames and sunglasses. The latter are mainly

positioned at the high end of the market with a strong presence in the luxury segment. Safilo has gradually completed its portfolio of house brands with others from the luxury and fashion world, setting up long-term agreements with the licensors for an average of 5 to 8 years, the majority of which are

constantly renewed. 2010 sales for inwardly licensed brands accounted for 77% of the total in line with the previous year.

In order to minimise the risk associated with the volatility of consumer tastes, the Group pursues a policy aimed at constituting a brand portfolio that is diversified in terms of geographic position, age, gender, income targets and final consumer requirements.

As part of its diversification policy, the Group generally concludes global licensing contracts, except when the brand in question has a strong resonance

limited to a specific region.

The Group’s licensed brand portfolio includes luxury brands of global renown

(e.g. Armani, Dior and Gucci) and locally famous brands (for example, Liz Claiborne and Nine West in the North American market).

The specific actions undertaken by the Group to minimise the impact of the non-renewal of licences on Group revenues included the signing of new licensing agreements with leading fashion houses. Starting in 2006 the Group renewed the licence agreements for brands already in its portfolio, due to

expire in 2006, 2007, 2008. In this respect, the 10-year renewal of the licence agreement for the Gucci brand must be particularly highlighting. This renewal in fact provides recognition of the Group’s product quality, design and image in the luxury eyewear segment.

Renewal of licensing During 2010, the Group registered important successes in terms of licence agreements of strategic renewals and the launch of new collections. importance for the Group in 2010 In April, the licensing agreement with Marc Jacobs and Marc by Marc Jacobs

was extended until the end of 2015, while in May, the Group renewed its agreement with US brand Juicy Couture.

Of particular importance was the renewal of the licensing agreement with Dior (LVMH group) until 31 December 2017. In December, the Group renewed licensing agreements with two prestigious brands belonging to the PPR Group, Yves Saint Laurent and Bottega Veneta, thereby further strengthening its portfolio in this segment.

In autumn, it launched the first collections of the new Tommy Hilfiger licence, signed in December 2009, and the new eyewear collection of the Boss Orange

50 ______

Safilo Group Directors’ report on operations

brand (Hugo Boss group).

At the end of 2010, the licensing agreement for the production and distribution of Diesel eyewear reached its natural expiry.

As at 2010 year-end, the Group’s brand portfolio consisted of 38 main brands, including the two outgoing Diesel brands, 29 of which are licensed and 9 are own brands.

______51

Safilo Group Directors’ report on operations

Own brands

The strategic Own brands are of extreme strategic importance for the Group’s expansion importance of own objectives in the medium/high end of the market and for the Fashion and brands Casual-Sport segments in all product categories (frames, sunglasses and sports products such as ski goggles and helmets and technical goggles for various sports).

Safilo is the Group’s historic brand and has been the backbone of development of prescription frames since the 1930s. Today, the Safilo brand benefits from the prestigious signature of the Company name and offers a

high-quality product that represents a valid alternative to other brands. The Safilo prescription frames collection targets both mature male and female customers looking for an elegant and distinctive product. Men and women who choose Safilo frames pay attention to stylistic details,

design and the quality of materials. Safilo also has a specific range of prescription frames that target young people, with the Seventh Street collection that contains youthful and current

coloured models. There are also lines dedicated to a target that chiefly seeks practicality and functionality in their frames, such as Library, for reading glasses.

The new Oxydo collection of sunglasses and prescription frames represents a radical repositioning for the product. The new Oxydo models are firmly

focused on design and quality, with stylistic details that set the products apart from those of its competitors, while maintaining an advantageous price

positioning. Oxydo targets men and women aged between 25 and 35.

The new positioning is supported by a campaign conceived and developed to leverage the value of the product and by a media mix designed to hit the target.

Blue Bay: this is a collection of sunglasses and prescription frames with a modern style and cool colours, with very attractive models for teenagers and the younger generation. The simple, chic style is based on a myriad of colours that emphasise the brand’s affinity to a young and modern world.

Carrera: this collection of sunglasses originally targeted mostly adult males, who followed the new fashions, styles and technology. With this classic basis they were targeted at adult males between 25 and 35 years old. However, as new models have been developed with a new creative strategy, the Carrera target has been moved to a specific social target with a much more exciting

appeal and now the Carrera core target also includes the 16 to 30 year old age group, both male and female; these new models adapt perfectly to this group and are characteristic of the success of the new unisex collections. 52 ______

Safilo Group Directors’ report on operations

There are two souls to this brand in terms of product and message:

RACING – models that carry the sporting soul of the brand into the collections of both sunglasses and prescription frames; the sporting spirit is crucial in Carrera history, like its bond with concepts of performance and

technology (the latest collections include ultrapolar polarised crystal lenses made by Barberini, an internationally famous name for its high quality).

VINTAGE – models designed with great focus and on the basis of trends

emerging in the fashion world, they are positioned in the vintage sector which is the main trend at the moment. The winning strategy was to bring Carrera closer to the vintage market, thereby fitting in perfectly with the brand’s DNA.

In fact, the most successful models, Champion and Safari, recall the 1980s but with a modern style. The models have been designed in a rich colour range,

guaranteed by Made in Italy and the Carrera logo on the front of the frames.

Smith was born in 1965 when Mr Bod Smith invented the first sports goggles with double lenses. Today Smith Optics is one of the leading manufacturers of skiing and motorbike goggles, sunglasses and ski helmets. Further to the takeover by Safilo in 1996, Smith continued to grow both in Europe and the rest of the world, especially in the sunglasses sector. Designed for active

sports lovers, such as snowboarding, freestyle or off-track skiing, surf and mountain biking, Smith products target young people who are interested in technological innovation with a high design and fashion content.

The own brand portfolio also includes other minor local brands, mainly for the North American market, such as Adensco, Chesterfield, Denim and SunCloud.

______53

Safilo Group Directors’ report on operations

Licensed brands

A very important brand Each of our licensed brands is designed and positioned for a specific market portfolio sector and target consumer. Safilo Group's portfolio of licensed brands is one of the most important and diversified in the eyewear market. Numerous fashion houses rely on the Group, many of them world-famous brands such as Armani, Dior, and Gucci, and others which are solely associated with certain specific countries, such as Kate Spade, Nine West and Saks Fifth Avenue. The Group’s licences with these brands are regulated by exclusive contracts that provide for the recognition of royalties to the licensors, calculated as a percentage of net sales generated from the collections and with minimum annual guaranteed amounts. In many cases such guaranteed annual royalties are based on a percentage of the turnover achieved by the licensed brand in the previous year while, in a few cases, they consist of sums defined in advance.

54 ______

Safilo Group Directors’ report on operations

Below is a summary and a brief description of the licensed brands:

Alexander McQueen. The Alexander McQueen brand was launched in April 2004 and belongs to the Gucci Group. It contains creativity and innovation, using unusual materials and very exclusive colours. It mainly targets women aged 25 to 45, and is positioned within the premium segment. Alexander McQueen eyewear is sold worldwide.

A/X Armani Exchange. Young, urban-minded and fun-loving, the A|X customer is likely to be edgy and innovative, loves music and going out, and is very attentive to new style and fashion trends. A|X serves as an entry point to the Armani family of brands for a younger consumer. Merging a youthful brand image with the power of the Armani name, Armani Exchange occupies a unique position in the over 18s market. The A|X collection with its unmistakable edgy style is distributed in America and Asia and in the A|X boutiques worldwide.

Balenciaga. Rich in Cristobal Balenciaga’s heritage, defined as “The couturier of the couturiers”, Balenciaga embodies the spirit of experimentalism in a luxury way. The eyewear collections feature both avant- garde and vintage shapes with constant research into exclusive materials. The models mainly target women aged 25 to 50 who exemplify the “No Compromise” attitude of the House in their own lives. The products are positioned in the high-end segment and sold through an international distribution network in line with the Balenciaga image.

Banana Republic. Banana Republic is a global brand of accessible luxury offering the best of urban style. With high design content and luxury processing, Banana Republic lifestyle collections include clothing, shoes, bags, jewellery and perfume. Since its launch in 2008, the eyewear collection has enjoyed great success. This is also the merit of “Made in Italy” materials and items, sophisticated colours, and special treatments of arms and components that highlight the brand, to create a collection with timeless appeal.

BOSS – HUGO BOSS. This brand embodies class and elegance, attention to detail and to high-quality materials. The Boss Black collection offers contemporary styles with moderate fashion inspiration, clean and understated design that expresses the wearer’s personality, a versatile collection that can be worn on almost every occasion.

HUGO – HUGO BOSS. The HUGO collection, characterized by valuable and quality materials (titanium and beta-titanium), offers a wide range of non- conventional contrasts in line with post-modern tastes.

BOSS Orange. A modern and casual brand for a young and up-to-date target, cool and contemporary design for individual style seekers. The collection was presented to the market in August 2010: easy-to-wear styles with a modern appeal and contemporary design that adapt to an inner-city ______55

Safilo Group Directors’ report on operations

metropolitan lifestyle.

Bottega Veneta. The first Bottega Veneta collection was launched in March 2003 and communicates an exclusive and elegant impression of expert craftsmanship. The models are very distinguished, characterized by a superior quality and the brand’s iconic elements such as the plaited motif, the butterfly and the 5 studs. Bottega Veneta collections fall into the luxury sector and are mainly addressed to a female public between 30 and 45 years of age. The products are sold worldwide.

Dior. “Maison de Couture”, a fabulous laboratory of ideas and a trend setter and leader in the luxury sector. Dior products have the right balance between creativity, aesthetics, comfort and quality. Dior is an aspirational brand thanks to its unique heritage from which it draws inspiration for inventing new and advanced concepts. Dior eyewear seduces thanks to the sophisticated shapes which are inspired by vintage concepts and the exceptional world of Haute Couture inherent to the brand’s DNA. Dedicated and elegant colours, sophisticated materials and quality craftsmanship make Dior eyewear unique and distinctive. The collection is mainly aimed at a female consumer aged 25 years or above, a fashion trend setter, but always elegant and attentive to detail.

Dior Homme. Combines elegance with a natural look and reshuffles the masculine codes by mixing day and evening, smart and casual, tradition and avant-garde, masculinity and vulnerability. A new classicism for the Dior Homme eyewear collection, identified and diversified collections: tailoring, couture, comfort, savoir-faire, elegance, design, luxurious materials, rigorous cuts, graphic colours, avant-gardism. High attention to details, enduring quality and finishings. The target consumer is male, aged 20 years and above, trend setter and trendy but elegant and with high attention to details.

Emporio Armani. Emporio Armani is a casual, versatile and across the board brand targeting youth of both genders. It is a fashion brand that is trendy and sporty at the same time, with a wide range of concepts inspired by the Emporio Armani lifestyle and the use of different materials in the same product. The sunglasses and prescription frame collections are sold worldwide.

Fossil. Fossil is inspired by the typical designs of the mid 1920s mixed with the desires of modern consumers. This “modern vintage” philosophy alludes to both classical and contemporary aesthetics. The collection targets consumers looking for fashionable sunglasses with clean and coloured shapes.

Giorgio Armani. The Giorgio Armani style means elegance and exclusiveness, characterized by essential styles with utmost attention paid to details and finishings. Top quality exclusive materials are used for this brand and each model has its own exclusive features. The product is functional and comfortable and is the result of advanced technology which guarantees refined and sophisticated styles for both men and women. The products are sold

56 ______

Safilo Group Directors’ report on operations

worldwide.

Gucci. This is one of the most famous brands in the world and definitely one of the most recognised in the eyewear market. There is a wide range of models which combine style and class with the typical Gucci elegance and unmistakeable iconic features of the brand. The products are sold worldwide and target male and female consumers in the luxury sector.

Jennifer Lopez. The J.LO collection by Jennifer Lopez is unique and has a very audacious and reassuring appeal with an elegant style for top quality products at an accessible price for individual, self-assured, fashionable and practical women.

Jimmy Choo. An icon of luxury and quality accessories, positioned in the high-end sector with glamorous and sophisticated collections of sunglasses and ophthalmic frames. The innovative design emphasizes the fresh and distinctive Jimmy Choo style, with original colours and luxury trimmings, that recall the must-haves of the brand. An elegant and timeless brand, which represents a status symbol.

Juicy Couture. Juicy Couture is known throughout the world for the style of its tracksuits and soon became one of the fastest growing fashion brands in the world. The collections combine classical forms with the unmistakable details of the Juicy world and style, with logos and slogans recognisable to fans of the brand.

Kate Spade. Inspired by a timeless chic style, the Kate Spade collection recalls the 60s and their influence is seen in both the design and the colours. The ophthalmic sunglass lenses contain many of the fine and distinctive details of the bags and accessories from this brand, with audacious yet sophisticated collections as well as very attractive and easy to wear shapes and typically feminine colours.

Liz Claiborne. The Liz Claiborne collection of prescription frames and Rxable sunglasses, like the women’s clothing collections, target women who want a modern, top quality style where fit means design ranging from classic to modern.

Marc Jacobs. The brand is positioned at the high-end of the luxury market. The Marc Jacobs eyewear collection, featuring sophisticated and slightly retro shapes, stands out for its exclusive, sophisticated and glamorous style. A discreet collection with a very sophisticated image, heightened even further by the top quality materials and scrupulous attention paid to details. The collection targets women between 25 and 45 years of age who want to affirm their identity and personality.

Marc by Marc Jacobs. Young and irreverent, the chic design of Marc by Marc Jacobs combines practical urban style with irony and colourful details. The vintage-inspired collection combines the styles of the moment. Young and

______57

Safilo Group Directors’ report on operations

modern, this collection has been created for people who, aware and confident of their own style, seek quality products and the original Marc Jacobs details, but at an affordable price. Marc by Marc Jacobs targets young people aged 16 to 35 looking to create New York’s cosmopolitan image.

Max Mara. Max Mara is an expression of femininity and truly timeless elegance. It is marked by the high quality of its materials, its modern design and its tailored style. Max Mara products combine modernity and tradition, elegance and simplicity. The Max Mara brand targets modern women, aged 30 to 50, financially independent, looking for elegant and sophisticated eyewear with classical and unostentatious details. The products are sold worldwide, particularly in Europe and the Far East.

Max & Co. The Max&Co. brand mainly targets young (18-35 years), fashion-conscious, female consumers. The first Max&Co. eyewear collection was presented to the market in 2007. Young and easy to wear shapes with a modern fresh and feminine taste, colours, personalized plastics and details inspired from fabrics and garments of the Max&Co. world.

Nine West. Nine West is an iconic women’s footwear brand founded in 1978. Today it is one of the liveliest and most distinctive brands on the market. In effect, women consider Nine West their favourite footwear brand and describe it as fashionable, sexy and modern. The eyewear collections are inspired by the philosophy of the Nine West brand of satisfying the continuous search for the latest in fashion, at affordable prices. The collection offers a wide range of products, ranging from the latest fashions to timeless classics. They are extremely wearable, with clean lines, feminine shapes and distinctive details, for women of all ages.

Pierre Cardin. The Pierre Cardin products are typically refined, confirming a style that characterises successful products. Classical yet always current, they are also adorned with precious and classy details. This is a very-well known and esteemed brand, with a contemporary design; eyewear collections are sold at very affordable prices. The collection goes beyond tradition, exploring new routes in style: some models take inspiration from a futuristic design, made in keeping with the elegance of the brand.

Saks Fifth Avenue. The Saks Fifth Avenue collection is addressed to smart, stylish, practical women who love fashion. The collections of prescription frames and sunglasses are refined and classic with beautiful details that capture the attention of women between 25 and 55 years of age.

Tommy Hilfiger is one of the most famous names in the fashion design sector. The Group creates and sells high-quality collections with men’s, women’s, children’s and denim clothing lines. The eyewear collection epitomizes the brand’s “preppy” image, the icon of the American cool spirit. The collections are characterized by a young style, combining coloured materials with unexpected details, creating a complete range of prescription

58 ______

Safilo Group Directors’ report on operations

frames and sunglasses, from the smart casual to the businessman. The collection embodies the Tommy Hilfiger brand essence, merging both vintage and modern styles.

Valentino. The Valentino brand is the flag bearer of Italian style, creativity and elegance. Valentino products stand out for their special, precious details with very sophisticated and elegant lines. The collections are aimed at men and women aged 25 to 50, and are positioned in the luxury segment of the market. The products are sold worldwide.

Yves Saint Laurent. A sophisticated luxury fashion house, expressing a subversive modernity based on its strong heritage and incarnation of French chic. The eyewear collections are characterized by classical and refined design, exclusive materials, variety of shapes, and emblematic icons which make every YSL creation unmistakably recognizable. YSL is designed for sophisticated, trendy, sleek men and women aged 25 to 50, and is positioned in the premium segment of the market. The products are sold worldwide.

______59

Safilo Group Directors’ report on operations

HUMAN RESOURCES AND THE ENVIRONMENT

Human Resources

Group workforce At the end of 2010, the Group had 8,148 employees compared to 7,931 at the end of 2009, an overall increase of 217.

Growth in employee The reduction in staff numbers as a result of the sale of the Mexican retail numbers in the production area chain at the end of December was more than offset by a rise in employees at the production facilities.

This increase was mainly related to the Chinese production plant, which in 2010 increased headcount by 449 to 1,104.

The Group recognises The Group recognises the fundamental contribution of human resources and the key contribution of the importance of using the value of its human assets to boost its its staff competitiveness. The development of culture, and the conduct that is an expression of it, are strongly linked to the Group’s determination to optimise

technical expertise and management capacity through training and development courses that are truly able to favour the personal and

professional development of individuals. The guiding principles on which the Group bases its work in this regard are the central importance of the customer, teamwork, entrepreneurship and a focus on results.

Responsibility, results and leadership are the cornerstones by which the Group

recognises the contribution of individuals. Structured processes and modern

tools ensure that staff are appraised correctly, starting from the recruitment phase, via constant monitoring of the contribution they make to company results and of individual progress.

Selection must guarantee that qualified, skilled and motivated people are 60 ______

Safilo Group Directors’ report on operations

Selection employed by the Group. The Safilo brand and visibility guarantee a constant inflow of CVs, which the Group monitors and assesses carefully, in search of

people able to enrich existing assets, contributing diversity, innovation and energy. During 2010 there were some 5,000 recruitment interviews, both for

specific positions and for training internships.

Beyond any rhetoric, Safilo is firmly convinced that people make the Training and difference. For this reason, it works to design, implement and monitor development development initiatives able to optimise empowerment and the performance of individuals and teams. To develop its staff in this sense, Safilo works to create

constant growth and career opportunities for its employees, in line with the

expected results of the business. In 2010 the Group therefore continued to invest in training and development, further increasing, in respect of the previous year, the financial and time resources dedicated to this end.

Safety at work

Safilo Group is Safilo Group is committed to developing initiatives to guarantee its personnel’s constantly committed health and safety at work by constantly improving working conditions and to pursuing workplace reducing the risks of accidents and correlated effects. health and safety During 2010 the processes were consolidated for:

- implementing the health plan;

- auditing the production units;

- improving safety on production machinery;

- updating operators and management in the prevention and protection service;

- carrying out fire-fighting practice, with evacuation tests and training operators in emergency management;

- updating the risk assessment document based on recent regulatory developments and ongoing updating based on regulatory evolution;

- environmental analysis to control the correspondence to chemical and acoustic pollution, with technical/organisational/procedural actions to reduce the relative risks;

- implementing a continuous improvement process of ergonomics in the workstations, experimenting and implementing actions to reduce risk.

______61

Safilo Group Directors’ report on operations

Environment

Safilo Group is Safilo Group is aware of its social responsibility and of the performance of aware of its social relevant duties in relation to the development and wellbeing of the and environmental communities where it operates. The Group strategy is based on optimising the responsibilities use of Energy sources and natural resources as well as reducing negative environmental effects and spreading a correct approach to the environment,

with the specific aim of progressively improving the Group’s environmental performance.

Safilo pays continuous attention to the environment and to running its Cooperation with activities in strict observance of the principles of environmental conservation Universities and and protection. The Group - also due to collaboration agreements and Research Centres is memorandums of intent with leading public institutions and university bodies - fundamental places great importance on the identification and use of technologies which respect the environment in addition to investigating innovative elements able to lead to greater environmental sustainability.

62 ______

Safilo Group Directors’ report on operations

SAFILO IN THE STOCK EXCHANGE AND INVESTOR RELATIONS

Safilo in the stock exchange

In 2010, Safilo’s 2010 was a historic year for Safilo, and an important period of recovery both performance in the as regards business performance and a more stable financial and liquidity stock exchange turned situation. The first few months of the year were centred on the Group around following the recapitalisation, which was successfully concluded at the end of March 2010, Group’s recapitalisation. and strengthened the financial and capital structure. Following the operation the Dutch Group HAL has become the new reference shareholder in Safilo,

with a stake of 37.2%.

These events, received very positively by the financial market, represented a fundamental starting point for the recovery registered over 2010 by the Safilo share on the stock market.

Note that on 10 May 2010, the Group carried out a reverse stock split in the

ratio of 1 new ordinary Safilo share for 20 existing shares, thereby grouping the share capital in 56,821,965 ordinary shares (from 1,136,439,310 shares following the capital increase). Among other things, this operation increased

the value of shares (on the day of the stock split, the value of the share rose from approximately EUR 0.44 to EUR 8.89).

Annual increase of Over 2010, the Safilo share made up part of the ground lost over the previous 68.2% and stock years, closing the year with a reference price of EUR 13.31, an increase of market capitalisation of 68.2% versus the EUR 7.92 figure of end-2009. During the year, daily trading approx. EUR 756 volume averaged at approximately 300,000, with particularly heavy trading in

______63

Safilo Group Directors’ report on operations

million at 31 December February and March around the time of the capital increase. At the end of 2010 December 2010, the Group’s market capitalisation was around EUR 756 million.

The sound performance of the Safilo share followed the positive newsflow relating to the Group’s business and financial results, which were generally ahead of financial market expectations.

The general sentiment regarding the Company was boosted by the renewal of strategic licence agreements, primarily with Dior, as well as other important brands such as Marc Jacobs and Marc by Marc Jacobs, Juicy Couture, and towards the end of the year, Yves Saint Laurent and Bottega Veneta.

The performance of the stock also benefited from the rating upgrades on the Company’s debt by Standard & Poor’s and then Moody’s, and the strengthening of the management team following the appointment of a new Chief Financial Officer (CFO).

Safilo’s recovery in 2010 should be seen within the context of an uncertain market environment marked by the diverging performances of the various financial markets and the different sectors.

The Milan Stock Exchange ended 2010 with the general FTSE MIB index down by 13.2%, while the index that includes Safilo stock, the FTSE Italia Mid Cap index, registered a smaller fall of 2.9%. Luxury stocks performed very well in general, and registered average increases of more than 50% in 2010.

Investor relations

Investor relations In 2010, Investor Relations activity, directed towards the public of analysts activity intensifies and and institutional investors, gained renewed impetus following the completion improvements in online of the restructuring plan. As well as the usual conference calls and meetings financial organised at the Company’s offices in Padua, Milan, London and Paris, the communication Group intensified contact with the financial community, also by participating in continue different conferences, such as the XIII Unicredit Italian Conference (May 2010) and the Global Consumer and Retail Conference organised in London by Bank

of America - Merrill Lynch (September 2010).

Over the year, the Company results were presented to the market through the

traditional presentations via conference calls and webcasts.

2010 also saw the continuation of the project to improve online institutional and financial communication, by updating the graphics of the main web pages

64 ______

Safilo Group Directors’ report on operations

and constantly enhancing their content.

The Investor Relations section now also contains a new Company Profile in PDF format, which, updated on a quarterly basis, offers in particular retail investors approaching the Company for the first time an accurate summary of the Group’s business model, main activities and results.

Having received important recognition in 2009 in the H&H Webranking Italia Top100 study, in 2010, the Safilo website continued to improve its position in the ranking of Italian sites, and reached 15th place.

Financial calendar

Board of Directors’ meetings planned for 2011:

16 March Draft Financial Statements for 2010

27 April Interim Report on Operations for the 1st quarter 2011

2 August Interim Report on Operations for the 2nd quarter and 1st half 2011

7 November Interim Report on Operations for the 3rd quarter and 1st nine months 2011

______65

Safilo Group Directors’ report on operations

CORPORATE GOVERNANCE

Corporate bodies and officers as at 31st December 2010

Information on shareholders (pursuant to Article 123-bis, paragraph 1, of Italian Consolidated Finance Act)

Shareholding structure At 31 December 2010 the share capital of Safilo Group S.p.A. comprised of Safilo Group S.p.A. 56,821,965 ordinary shares with a face value of EUR 5.00 each, of which 37.232% were held by the company Multibrands Italy BV, with registered office in the Netherlands, and 10.018% were held by Only 3T. S.r.l. (previously Only 3T. S.p.A.).

The following chart shows owners of Safilo Group ordinary shares as at 31 December 2010 with shareholdings exceeding 2% of share capital.

Transfer restrictions As at 31 December 2010 there were no restrictions either of share transfer or of shareholders’ voting rights.

Restrictions on the Regarding the existence of shareholders’ agreements relevant for the purposes right to vote and special rights of Article 122 of the CFA, it is pointed out that, as at 31 December 2010, there were no shareholders’ agreements in respect of the Company.

For the purpose of providing complete information, it should be noted that in 66 ______

Safilo Group Directors’ report on operations

2010, two shareholders’ agreements ceased to be effective: - The first between HAL Holding N.V., Only 3T. S.p.A. and SAFILO GROUP S.p.A.; and

- the second between HAL Holding N.V. and Mr. Roberto Vedovotto

both signed on 19 October 2009, within the framework of the operation designed to redress the financial and capital balance of the Company and of Safilo Group.

The constitution and/or change and/or extinction of these agreements was

announced to the public in accordance with the laws in force. For more information, please see the Investor Relations/Shares/Relevant Shareholders

section of the website.

The Articles of Association do not provide restrictions to the right to vote and

the Company has not issued shares with special controlling rights.

During the year, Safilo Group S.p.A. did not buy or sell any of its own shares, Own shares nor shares in subsidiaries, directly or through subsidiaries, trust companies or third parties.

______67

Safilo Group Directors’ report on operations

The Board of Directors

Melchert Frans Groot Roberto Vedovotto Giovanni Ciserani

(Chairman) (Chief Executive Officer) (Director)

Born in the Hague, Netherlands, Born in Bassano del Grappa in Born in Verona, on July 8th, on October 22nd, 1959. He 1965. He graduated in Business 1962. He graduated in Business graduated in Civil Engineering from Administration from Bocconi Administration from Bocconi the Technical University of Delft, University in Milan and then gained University in Milan. In 1987 he and subsequently gained a his Master Degree in Finance at joined Procter&Gamble Group, Master’s in Business Administration the London Business School. He where he today holds the role of from Columbia University in New worked for Morgan Stanley for 11 President Western Europe York. After his first work years. From 2002 to 2006 he was Operations. Previously he gained experience in Philips, in 1989 he Chief Executive Officer of Safilo various important management joined HAL Holding N.V. where he Group and was responsible, positions in the companies of has been a member of the amongst other duties, for P&G Group. Amongst his various Executive Committee since 2003. reorganising the Group’s financial Association positions, he is Presently he is also Chairman of structure and its subsequent listing President of the Board of AIM the Supervisory Board of on the Stock Exchange. From 2006 (Association des Industries de to December 2008 he was Head of Marque/European Brands GrandVision B.V.. In the past, he the Investment Banking in Italy of association) and a Board held important roles in different Lehman Brothers and then of member of ECR Europe (Efficient companies of the Group HAL. Nomura in addition to being a Consumer Response). Amongst these, he was CEO of member of the European Executive Pearle Europe and GrandVision. Committee and Chairman of the Luxury Goods. He is member of the Advisory Board of the Bocconi University in Milan and of the Global Advisory Board of the London Business School.

68 ______

Safilo Group Directors’ report on operations

Jeffrey A. Cole Marco Jesi Eugenio Razelli Massimiliano Tabacchi

(Director) (Director) (Director) (Director)

Born in Cleveland, Ohio Born in Milan, on Born in Genova, on June Born in Padova, on - USA, on May 20th, October 12th, 1949. He 18th, 1950. He graduated October 10th, 1970. He 1941. He graduated graduated in Law from in Electrical Engineering graduated in Mechanical from the Harvard the Università Statale in from Genova University. Engineering from the Business School. Today Milan. Today Chairman Today Chairman and CEO University of Padova. He member of the of the Board of of Magneti Marelli, he began his career in Safilo Supervisory Board of Directors of Limoni began his career in Fiat Usa and at Safilo’s GrandVision B.V, from Profumerie S.p.A. and Auto and Zanussi, and production site in Santa 1983 to 2003, he was of Argenta S.p.A., he became CEO of Gilardini Maria di Sala (Venice). He Chairman and CEO of started his professional Industriale. In 1993 he then continued his Cole National career at Unilever moved to Pirelli Cavi, professional training with Corporation, a leading Group, to then gain eventually serving as Otis, a leading company optical retailer in the significant experience Senior Executive Vice in the sector of elevators US. In 2010, he co- in other large President of the Telecom and lifts, first as Contract Division first and then of Project Manager and then founded and became international Groups of the Energy Division. He in the Special Projects Chairman and CEO of the consumer goods held the position of section. He was Co-Chief Fraimz llc, a start-up industry such as Kraft, President & CEO of Executive Officer and internet prescription Johnson Wax and Fiamm and he was Senior subsequently Executive eyewear business. Pepsi Cola. In the past, Vice President for Vice Chairman of Safilo he was Chairman and Business Development of Group. Chief Executive Officer Fiat S.p.A.. Amongst his of Galbani S.p.A. and various Association President of PepsiCo positions, he is Chairman Europe. of ANFIA.

______69

Safilo Group Directors’ report on operations

Below is the structure of the Corporate Bodies and Committees of Safilo Group S.p.A.:

Corporate Governance Committee

Franco Corgnati Eugenio Razelli Maurizio De Gasperis

Internal Control Committee

Chairman Eugenio Razelli Marco Jesi Giovanni Ciserani

Remuneration Committee

Chairman Jeffrey A. Cole Melchert Frans Groot Marco Jesi

70 ______

Safilo Group Directors’ report on operations

The Board of Statutory Auditors (*)

Franco Corgnati Giampietro Sala Lorenzo Lago

(Chairman) (Standing Statutory Auditor) (Standing Statutory Auditor)

Born in Milan in 1942, he is a Born in Vicenza in 1938, he is Born in Padua on February 1st, 1966 graduate in Economics & graduated in Economics & he graduated in Business Economics Commerce of Padua University. Commerce. He has been from the Cà Foscari University. He He was registered in the Vicenza registered within the Vicenza has been registered in the Vicenza Chartered Accountants’ Register Chartered Accountants’ Register Chartered Accountants Register since in 1970 and since then has since 1967. He was appointed 1997. He has been registered in the worked exclusively as a Official Accounts Auditor in 1983 Legal Auditors Register since 2000. chartered accountant. He has and then Auditor. He has acted He has been working exclusively as a been registered in the Legal as section vice present as Tax chartered accountant since 1997. He Auditors Register since 1995. Judge of the Vicenza Tax holds office as a standing statutory From 1997 to 2007 he was a Tribunal from 1973 to 1999. He auditor and chairman of the board of member and from 2000 to 2007 holds directorships and statutory auditors in industrial, vice president of the Vicenza statutory-auditor offices in commercial and financial companies. Order of Chartered Accountants. several industrial companies. He acts as the liquidator of industrial He was and still is a statutory and commercial companies and as a auditor for companies listed on bankruptcy receiver for the Vicenza the Italian Stock Exchange as courts, Bankruptcy Section. well as other industrial, commercial, financial and para- banking companies in addition to collective trust companies and municipal companies.

(*) The Board of Statutory Auditors with this membership was elected by the Shareholders Meeting held on 27 th April 2009, which had been called to supplement this control body.

______71

Safilo Group Directors’ report on operations

Corporate Governance Report

The complete version The complete version of the report on corporate governance, which is of the report on corporate governance highlighted in just the main points below, is available in the Group website can be found in the (www.safilo.com), in a printed version in the Company headquarters and it’s Investor Relations section of the site available on Borsa Italiana S.p.A. web site (www.borsaitaliana.it). www.safilo.com The Company adopts a traditional governance method in that:

- the Company’s management body is the Board of Directors,

- the Corporate Governance Committee, which ensures compliance with the law, the Articles of Association and correct administration principles is the Board of Statutory Auditors;

- the independent audit company performs auditing tasks.

Corporate governance, in accordance with the Articles of Association and in line with current legislation and regulations, and as provided by the Self- Governance code for listed companies (below the Code) published in March 2006 by Borsa Italiana S.p.A., is entrusted to the following bodies:

The Board of Directors

Governance is based on The Board of Directors has aligned the Company’s corporate governance the criteria and principles of the Self- system to the principles and application criteria introduced by the Code. Governance Code for listed companies In compliance with regulatory obligations, in particular with the requirements of article 123-bis of the Italian Consolidated Finance Act, and following adherence to the Code, every year the Company publishes a report on adherence to codes of conduct, in the ways and terms established by article 89-bis of the Issuers’ Regulation. The report can be consulted in the Group website in the section Investor Relations/Corporate Governance, and should be referred to for more detailed and precise information about the Company and Group corporate governance system, in compliance with article 123-bis of the Consolidated Financial Act.

The Board of Statutory Auditors Appointing auditors The Board of Statutory Auditors is appointed and replaced in compliance with article 24 of the Articles of Association, published in the website in the section IR/Corporate Governance, and should be referred to for details.

In particular, the auditors are appointed by the Shareholders’ Assembly on the basis of lists presented by the shareholders, to allow minority shareholders to appoint a statutory auditor and a substitute auditor.

In compliance with the Italian Civil Code and Principle 10.P.2. of the Code,

72 ______

Safilo Group Directors’ report on operations

Auditors act autonomously and independently and therefore are not representatives of the majority or minority that proposed or elected them.

The Board of Statutory Auditors ensures compliance with the law and the Articles of Association as well as with the principles of correct administration. It also monitors the adequacy of the Company’s organisation structure, for those matters of its responsibility as well as the internal control system and the administration and accounts system in order to verify the reliability of the same to correctly represent company facts and the adequacy of the dispositions given by the Company to its subsidiaries, in compliance with article 114, paragraph 2 of the Consolidated Financial Act.

In compliance with Application Criteria 10.C.5. and 10.C.6. of the Code, the Board of Auditors: (i) controls the independence of the Audit Company, checking it respects the legislation, nature and the entity of the services other than accounts audits that the Audit Company may provide to the Company and its subsidiaries, and (ii) can ask the internal audit office to carry out controls on certain operations areas or on Company operations.

In compliance with article 159 of the Consolidated Financial Act., as later amended and integrated the Board of auditors is able to make a motivated proposal relative to granting the audit appointment by the Shareholders’ Assembly.

The Board of Statutory Auditors, as part of its legal responsibilities, checks the correct application of the criteria and procedures to control independence that are adopted by the Board of directors to appraise the independence of its members; the outcome of the control is notified to the market every year, as part of the Company governance report or in the Auditors’ report to the Shareholders’ Assembly.

The Audit Company

PwC appointed until The Shareholders Assembly of 14 September 2005 entrusted 2013 PricewaterhouseCoopers S.p.A. with the mandate of auditing the yearly and consolidated financial statements for 2005, 2006, 2007 as well as the half-year audits on 30 June 2005, 2006 and 2007. With the Shareholders’ Assembly resolution on 14 May 2007 the PWC appointment was extended and integrated until approval of the Financial Statements of 31 December 2013, further to the changes in the provisions of the Consolidated Financial Act, which govern accounts audits of issuers and relative groups, and particularly in accordance with the amendments to article 159 of Law 262 of 28 December 2005 and Legislative Decree 303 of 29 December 2006.

______73

Safilo Group Directors’ report on operations

Financial reporting manager

Appointment of the Further to L. 262/2005 the Financial Reporting Manager must prepare the financial reporting adequate administration and accounts procedures for drafting the annual manager financial statements, the consolidated financial statements and any other financial communications and documents, and he must certify that the procedures:

• have been defined in line with the administration-accounts system and the structure of the Company;

• have been assessed for their adequacy;

• have been effectively applied during the period relative to the annual

financial statement, the consolidated financial statement and any other financial communication or document.

Given that article 154-bis of the Consolidated Financial Act does not recall a specific model for assessing the adequacy of the administration and accounts procedures, to satisfy the needs for applying the regulations, the Company has opted for applying a theoretic reference model that is universally recognised

and is the most accredited: the CoSO Report – Internal Control Integrated Framework.

The activities required to assess the adequacy and effectiveness of the procedures and processes that generate financial statement are as follows:

• Identifying the control systems necessary to reduce the identified risks.

• Carrying out the control tests.

• Implementing corrective actions that may be required to adapt the control system.

So far, the actions have been completed to highlight the processes and their tests, and the corrective actions are being implemented.

On 29 March 2010, the Board of Directors confirmed as the manager

responsible for drawing up corporate financial reporting documents (hereinafter “Financial Reporting Manager”), the Group’s Administration & Control Officer, a position currently held by Mr. Francesco Tagliapietra – in confirmation of the Board of Directors’ resolution of 27 June 2007, after receiving the favourable opinion of the Board of Auditors - who possesses the

professional requisites, including specific skills as well as many years of experience in accounting and financial matters, required for the performance of the tasks assigned by the regulations in force to the Financial Reporting

Manager. Moreover, it has been established that the manager thus appointed will hold office until his resignation or revocation by the Board of Directors.

74 ______

Safilo Group Directors’ report on operations

Article 36 CONSOB Regulation 16191/2007

Article 36 CONSOB In compliance with article 2.6.2. of the Regulations for markets organised and Regulations managed by Borsa Italiana S.p.A., Safilo Group S.p.A. declares the existence of 16191/2007 conditions pursuant to article 36 of CONSOB Regulation 16191/2007, letters a), b) and c).

______75

Safilo Group Directors’ report on operations

Shares held by Directors and Statutory Auditors and Managers with strategic responsibilities (article 79 of CONSOB Regulations, resolution no. 11971 of 14 May 1999)

Stock option plans

Resolution for the The Extraordinary Shareholders’ meeting of 5 November 2010 voted to “2010-2013 Plan” increase the share capital by a maximum par value of EUR 8,500,000.00 through the issue of a maximum number of new ordinary shares of 1,700,000

with a face value of EUR 5.00 each, to be offered to directors and/or employees of the Company and its subsidiaries (“Stock Option Plan 2010-

2013”).

This Plan – intended to increase incentives for and the loyalty of directors and/or employees/managers of the Company and/or its subsidiaries – is to be carried out through the free allocation, in several tranches, of a maximum

number of 1,700,000 options, which will give each beneficiary the right to

subscribe to newly-issued ordinary shares in the Company – with a face value of EUR 5.00 each, resulting from the aforementioned rights issue in tranches, with no subscription rights pursuant to article 2441, paragraph 4, sentence 2 of the Civil Code - in the ratio of one share for every option.

The Plan has a total duration of nine years (from 2010 to 2019). The options

assigned to the beneficiaries may be exercised after three years from the

allocation date (with the exception of the first tranche, which will benefit from a shorter vesting period).

Specifically, four different allocation dates will be assigned to the options. The first tranche (“First Tranche”), was allocated at the Board of Directors’ meeting held following the shareholders' meeting called to vote on the

adoption of the Plan, the second tranche (“Second Tranche”) will be assigned at the Board of Directors’ meeting that will approve the Company results for the year ending 31 December 2010; the third tranche (“Third Tranche”) will be allocated at the Board of Directors’ meeting that will approve the Company 76 ______

Safilo Group Directors’ report on operations

results for the year ending 31 December 2011, and the final tranche (“Fourth Tranche”) will be allocated at the Board of Directors’ meeting that will approve the Company results for the year ending 31 December 2012. The options thus assigned will mature when both of the following conditions are met:

(a) except for specific exceptions provided for in the event that the employment and/or director relationship is terminated, for all options allocated, the relationship between the Company and the beneficiary must still be in place at the maturity date for the options, and furthermore

(b) with reference to the options allocated within the First Tranche, under the circumstances that the EBIT contained in the Company’s consolidated financial statements for any one of the financial years ending 31.12.2010, 31.12.2011 or 31.12.2012 is at least EUR 60,000,000 (“First Target”); with reference to the options allocated within the Second Tranche, under the circumstances that the EBIT contained in the Company’s consolidated financial statements for any one of the financial years ending 31.12.2011, 31.12.2012 or 31.12.2013 is at least EUR 66,000,000 (“Second Target”); with reference to the options allocated within the Third Tranche, under the circumstances that the EBIT contained in the Company’s consolidated financial statements for any one of the financial years ending 31.12.2012, 31.12.2013 or 31.12.2014 is at least EUR 72,500,000 (“Third Target”); with reference to the options allocated within the Fourth Tranche, under the circumstances that the EBIT contained in the Company’s consolidated financial statements for any one of the financial years ending 31.12.2013, 31.12.2014 or 31.12.2015 is at least EUR 80,000,000 (“Fourth Target”).

For the purposes of determining that these targets have been achieved, EBIT means net operating profit of a particular year, adjusted to take into account any investments or divestments made, emerging from the certified financial statements that will be approved by the Company’s Shareholders’ meeting or as determined by the Company’s Board of Directors.

The subscription price must correspond to the weighted average of the prices registered by Safilo Group S.p.A. ordinary shares on Italy’s electronic stock market (MTA) organised and managed by Borsa Italiana S.p.A. in the month preceding the Board of Directors’ meeting that will allocate the option rights issued within the Plan (“preceding month” shall mean the period ending the day before the Board of Directors’ meeting that will allocate the options and beginning with the same day of the previous calendar month, it being understood that in this period, for the purpose of calculating the weighted average, only stock market trading days will be considered), with the exception of the First Tranche, for which the price has been set at EUR

______77

Safilo Group Directors’ report on operations

8.0470, determined on the basis of the weighted average of process registered by Safilo Group S.p.A. ordinary shares on the stock market organised and managed by Borsa Italiana S.p.A. in July 2010, which corresponds to the date on which the Remuneration Committee first submitted for approval to the Board of Directors the guidelines for the share-based incentive plan to be adopted.

For more detailed information on the Plan, please refer in full to the prospectus prepared pursuant to article 84-bis of the Issuer Regulations as amended, as well as all other documents relating to this Plan, prepared in accordance with the laws in force, and all available in the Investors Relations - Corporate Governance section of the website.

78 ______

Safilo Group Directors’ report on operations

RECONCILIATION OF THE PARENT COMPANY’S NET PROFIT AND SHAREHOLDERS’ EQUITY WITH THE CONSOLIDATED BALANCES

Equity as of Net Equity as of Net December profit/(loss) December profit/(loss) Euro in millions 31, 2010 of the year 31, 2009 of the year

Balances as per Safilo Group S.p.A.'s statutory financial statements 745.7 (4.5) 489.5 (360.0) Shareholders' equity of consolidated companies 1,597.6 23.9 1,335.3 1.0 Write-off of the book value of consolidated subsidiaries (2,024.8) (2.8) (1,799.5) 383.5 Goodwill 510.2 (0.1) 475.8 (254.7) Fair value attributable to tangible assets 9.4 (0.5) 10.0 (0.5) Elimination of dividends paid within the Group - (7.0) - (114.7) Elimination of intercompany gains within the Group (39.5) 2.4 (41.9) 2.6 Elimination of intercompany profits included in inventory (32.0) (10.7) (20.5) (1.0) Investments in associates - equity method 7.0 0.3 6.2 0.2 Other consolidated entries (6.6) 3.8 (8.7) (7.0)

Total shareholders' equity 767.0 4.6 446.0 (350.8)

Equity attributable to minority interests 11.0 3.8 7.6 0.7

Shareholders' equity attributable to the Group 756.0 0.7 438.4 (351.4)

______79

Safilo Group Directors’ report on operations

SIGNIFICANT EVENTS AFTER THE YEAR-END AND OUTLOOK

Moody’s and In light of the strong financial results and cash generation of 2010, all the ratings Standard & Poor’s agencies have revised up their ratings on the Group’s financial stability. In improve the February, both Moody’s and Standard & Poor’s upgraded the Company’s Corporate rating corporate rating, to B3 (from Caa1) and B- (from CCC+) respectively.

In the first months of 2011, Safilo Group continues to register positive trends across all its main product categories. As evident in the previous year, the Outlook for the year American and Asian markets are recording the best performance, while the

recovery remains more moderate in Europe, still weak in some areas.

For the Board of Directors Chief Executive Officer Roberto Vedovotto

80 ______

FINANCIAL STATEMENTS AND NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS as of 31st December 2010

______81 Consolidated Financial Statements Safilo Group S.p.A.

Consolidated financial statements as of and for the years ended 31 December 2010 and 31 December 2009

Consolidated balance sheet

of which of which December 31, related December 31, related (Euro/000) Notes 2010 parties 2009 parties

ASSETS

Current assets Cash in hand and at bank 4.1 88,267 37,386 Trade receivables, net 4.2 271,317 12,561 268,750 15 Inventories 4.3 220,443 208,373 Derivative financial instruments 4.4 - - Other current assets 4.5 60,471 64,311 419 Total 640,498 578,820

Total current assets 640,498 578,820

Non-current assets Tangible assets 4.6 203,680 208,579 Intangible assets 4.7 13,731 18,106 Goodwill 4.8 550,013 518,419 Investments in associates 4.9 13,202 12,032 Available-for-sale financial assets 4.10 540 806 Deferred tax assets 4.11 50,705 41,718 Derivative financial instruments 4.4 177 228 Other non-current assets 4.12 13,763 11,916 Total non-current assets 845,811 811,804

Total assets 1,486,309 1,390,624

82 ______Consolidated Financial Statements Safilo Group S.p.A.

of which of which December 31, related December 31, related (Euro/000) Notes 2010 parties 2009 parties

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities Short-term borrowings 4.13 56,643 178,124 Trade payables 4.14 204,189 5,186 150,068 5,956 Tax payables 4.15 17,795 18,651 Derivative financial instruments 4.4 1,827 5,549 Other current liabilities 4.16 72,298 63,437 Provisions for risks and charges 4.17 6,679 4,087 Total 359,431 419,916

Total current liabilities 359,431 419,916

Non-current liabilities Long-term borrowings 4.13 287,794 98,657 447,282 Employee benefit liability 4.18 43,419 41,818 Provisions for risks and charges 4.17 19,392 20,968 Deferred tax liabilities 4.11 1,708 3,531 Derivative financial instruments 4.4 265 - Other non-current liabilities 4.19 7,265 11,117 Total non-current liabilities 359,843 524,716

Total liabilities 719,274 944,632

Shareholders' equity Share capital 4.20 284,110 71,349 Share premium reserve 4.21 461,491 745,105 Retained earnings (losses) and other reserves 4.22 9,689 (26,605) Fair value and cash flow reserves 4.23 (21) 32 Income (loss) attributable to the Group 731 (351,448)

Total shareholders' equity attributable to the Group 756,000 438,433

Non controlling interests 11,035 7,559

Total shareholders' equity 767,035 445,992

Total liabilities and shareholders' equity 1,486,309 1,390,624

______83 Consolidated Financial Statements Safilo Group S.p.A.

Consolidated Income statement

of which of which related related (Euro/000) Notes 2010 parties 2009 parties

Net sales 5.1 1,079,937 35,493 1,011,236 70 Cost of sales 5.2 (450,026) (16,897) (438,752) (13,952)

Gross profit 629,911 572,484

Selling and marketing expenses 5.3 (428,297) (258) (427,271) General and administrative expenses 5.4 (135,987) (1,294) (131,402) (1,200) Other oper. income (expenses), net 5.5 2,178 305 2,330 Restructuring cost non recurring 5.6 - (7,422) Impairment loss on goodwill and loss on disposal of retail subsidiaries 4.8-5.7 - (279,400)

Operating profit/(loss) 67,805 (270,681)

Share of income/(loss) of associates 5.8 500 360 Int. expenses and other fin. charges, net 5.9 (39,555) (9,496) (54,257)

Profit/(Loss) before taxation 28,750 (324,578)

Income taxes 5.10 (24,186) (26,211)

Net profit/(loss) 4,564 (350,789)

Net profit/(loss) attributable to: The Group 731 (351,448) Non controlling interests 3,833 659

Earnings/(losses) per share - basic (Euro) 5.11 0.015 (24.629)

Earnings/(losses) per share - diluted (Euro) 5.11 0.015 (24.629)

84 ______Consolidated Financial Statements Safilo Group S.p.A.

Consolidated statement of comprehensive income

(Euro/000) Notes 2010 2009

Net profit (loss) for the period 4,564 (350,789)

Gains/(Losses) on cash flow hedges 4.23 (26) 5,518 Gains/(Losses) on fair value of available-for-sale financial assets 4.23 (27) 2,134 Gains/(Losses) on exchange differences on translating foreign operations 4.22 55,308 (6,921) Other Gains 4.22 446 2,281 Other comprehensive income/(loss), net of tax 55,701 3,012

Total comprehensive income/(loss) 60,265 (347,777)

Attributable to: Group 55,734 (348,171) Non controlling interests 4,531 394 Total comprehensive income/(loss) 60,265 (347,777)

______85 Consolidated Financial Statements Safilo Group S.p.A.

Consolidated statement of cash flows

(Euro/000) Notes 2010 2009

A - Opening net cash and cash equivalents (net financial indebtedness - short term) (20,919) (20,442)

B - Cash flow from (for) operating activities Net profit (loss) for the period (including minority interests) 4,564 (350,789) Depreciation and amortization 4.6 - 4.7 40,040 49,530 Impairment loss on goodwill and other non current assets 4.8 - 257,716 Loss on disposal of retail subsidiaries 5.7 - 21,684 Stock option 4.24 167 - Share (income)/loss on equity investments 4.9 – 4.10 (44) 1,910 Net movements in the employee benefit liability 4.18 1,771 2,468 Net movements in other provisions 4.17 3,288 7,677 Interest expenses, net 5.9 26,965 42,574 Income tax expenses 5.10 24,185 26,211 Income from operating activities prior to movements in working capital 100,936 58,981

(Increase) Decrease in trade receivables 8,656 32,785 (Increase) Decrease in inventory, net (8,375) 56,603 Increase (Decrease) in trade payables 52,861 (51,783) (Increase) Decrease in other current receivables 5,462 (3,424) Increase (Decrease) in other current payables (94) (9,520) Interest expenses paid (29,058) (42,376) Income tax paid (32,796) (29,791) Total (B) 97,593 11,476

C - Cash flow from (for) investing activities

Purchase of property, plant and equipment (net of disposals) (26,734) (31,332) Disposal of retail subsidiaries (net of cash disposed of) 5.7 5,853 12,175 (Acquisition) Disposal of investments and bonds - 128 Purchase of intangible assets (2,430) (3,245) Total (C) (23,311) (22,274)

D - Cash flow from (for) financing activities Proceeds from borrowings 605 34,500 Repayment of borrowings (242,752) (15,948) Share capital increase net of paid fees 260,576 - Dividends paid (2,148) (3,143) Total (D) 16,281 15,409

E - Cash flow for the period (B+C+D) 90,563 4,611

Translation exchange difference 2,851 (5,088) Total (F) 2,851 (5,088)

G - Closing net cash and cash equivalents (net financial indebtedness - short term) (A+E+F) 72,495 (20,919)

86 ______Consolidated Financial Statements Safilo Group S.p.A.

Consolidated statement of changes in equity

______87 Consolidated Financial Statements Safilo Group S.p.A.

1. General information

1.1 General information

The holding company, Safilo Group S.p.A.., is a joint stock company established in Italy on 14 October 2002 registered with the Business and Trade registry of Vicenza. On 27 April 2006 the company moved its head office from Vicenza to Pieve di Cadore (Belluno) and on the same date opened a secondary office at the headquarters of the subsidiary Safilo S.p.A. in Padua.

The parent company is listed on Mercato Telematico Azionario (MTA) of the Italian Stock Exchange.

Following the Group’s financial restructuring, which was completed in the first quarter of 2010 with the share-capital increase approved by the Extraordinary Shareholders’ Meeting on 15 December 2009, Multibrands Italy B.V. (a subsidiary of HAL Holding N.V.) became the parent company’s leading shareholder, with a 37.23% equity interest.

These consolidated financial statements are reported in thousands of Euro, the official currency in the economies where the Group does most of its business. The consolidated financial information relates to the period from 1 January 2010 to 31 December 2010 and also presents comparative data related to the financial period from 1 January 2009 to 31 December 2009.

These financial statements were approved by the Board of Directors on 16 March 2011.

The companies included in the consolidation area are listed in paragraph 2.3 “Scope of consolidation and methodology”.

2. Summary of accounting principles adopted

2.1 Accounting policies

The accounting policies described here below have been applied during the preparation of these consolidated financial statements in a consistent manner for both financial years presented and on the going concern assumption.

The Group’s recapitalisation and financial restructuring plan executed through the share-capital increase completed in the first quarter of 2010 resulted in the injection of fresh cash for a total of approximaterly €270 million. These funds placed the Group on sounder footing, minimising the risks associated with low liquidity levels and funding.

The consolidated financial statements for the year ended 31 December 2010 and 31 December 2009 were prepared in accordance with IFRSs issued by the International Accounting Standard Board (“IASB”) and endorsed by the European Commission, as well as with the measures enacted to implement article 9 of Legislative Decree no. 38/2005. IFRSs include also all the interpretations of the International Financial Reporting Interpretations Commitee (“IFRIC”), previously called Standing Interpretations Commitee (“SIC”).

88 ______Consolidated Financial Statements Safilo Group S.p.A.

These consolidated financial statements were prepared in accordance with “cost” criteria with the exception of financial assets available-for-sale and some financial assets and liabilities, including derivative instruments, for which the “fair value” criterion was adopted.

Preparation of the annual report in accordance with IFRSs requires the management to make estimates and assumptions that may affect the amounts reported in the financial statements and explanatory notes. Actual results may differ from these estimates. The areas of the financial statements that are most affected by such estimates and assumptions are listed in section 2.21 “Use of estimates”.

Accounting standards, amendments and interpretations effective as of 1 January 2010 which are not significant for the Group

The following amendments, improvements and interpretations, effective as of 1 January 2010, govern cases and situations not applicable to the Group as of the reporting date but could have accounting effects on future transactions and agreements:

¾ Amendments to IFRS 2 – Group cash-settled share-based payment transactions.

¾ IFRS 3 (Revised in 2008) – Business Combinations.

¾ 2008 improvement to IFRS 5 – Non-Current Assets Held for Sale and Discontinued Operations.

¾ Amendments to IAS 28 – Investments in Associates, to IAS 31 – Investments in Joint Ventures, and to IAS 27 following the amendments of IFRS 3.

¾ Improvements to IAS/IFRSs (2009).

¾ IFRIC 16 – Hedges of a net investment in a foreign operation.

¾ IFRIC 17 – Distribution of Non-cash Assets to Owners.

¾ IFRIC 18 – Transfers of Assets from Customers.

¾ Amendment to IAS 39 – Financial Instruments: Recognition and Measurement - Eligible Hedged Items

Accounting standards, amendments and interpretations not yet applicable and not adopted early by the Group

On 8 October 2009 the IASB issued an amendment to IAS 32 – Financial Instruments: Presentation: Classification of Rights Issues to provide for the recognition of rights (rights, options or warrants) issued in a currency other than the issuer’s functional currency. These rights had been previously accounted for as liabilities resulting from derivative financial instruments. Instead, the amendment requires that these rights be classified in equity at specific conditions regardless of the currency in which the exercise price is denominated. This amendment is retrospectively applicable from 1 January 2011. The adoption of the amendment will have no effect on the Group’s accounts.

On 4 November 2009 the IASB issued a revised version of IAS 24 – Related Party Disclosures that simplifies the type of information required in the case of transactions with related parties controlled by the State and clarifies the

______89 Consolidated Financial Statements Safilo Group S.p.A.

definition of related parties. This standard must be applied as of 1 January 2011. The adoption of this amendment will have no effect on the Group’s accounts.

On 12 November 2009 the IASB published IFRS 9 – Financial Instruments. The same standard was subsequently amended on 28 October 2010 and will be applicable as of 1 January 2013. This publication is the first part of a multi-phase process designed to replace entirely IAS 39, introducing new criteria to recognise and measure financial assets and liabilities and to derecognise financial assets. The new standard uses a single approach based on the treatment of financial instruments and on the characteristics of the contractual cash flows of financial assets to determine how they are measured, replacing the different approaches provided for by IAS 39. On the other hand, the main change concerns the accounting treatment of changes in fair value of financial liabilities designated as financial liabilities recognised at their fair value through profit or loss, in the event that any such change is due to a variation of the credit rating assigned to the financial liability. According to the new standard, these changes are recognised in Other comprehensive income/(loss) and will no longer be reported in the income statement. At the date of these consolidated financial statements, the competent bodies of the European Union had not yet completed the approval process necessary for the application of this new standard.

On 26 November 2009 the IASB issued a minor amendment to IFRIC 14 – Prepayments of a Minimum Funding Requirement, allowing the companies that prepay a minimum funding requirement to recognise it as an asset. This amendment is applicable as of 1 January 2011. The adoption of this amendment is not expected to have significant effects on the Group’s accounts.

On 26 November 2009 IFRIC issued IFRIC Interpretation 19 – Extinguishing Financial Liabilities with Equity Instruments, which provides guidelines as to how to recognise extinguishment of a financial liability through the issuance of equity instruments. The interpretation stipulates that if an enterprise renegotiate the terms of a financial liability and its creditor accepts the debtor’s equity in full settlement, the equity instruments issued by the enterprise are part of consideration paid to extinguish the financial liability and must be recognised at their fair value. The difference between the book value of the extinguished financial liability and the initial value of the equity instruments issued is recognised through profit or loss for the period. The interpretation applies as of 1 January 2011. The adoption of this amendment is not expected to have significant effects on the Group’s accounts.

On 6 May 2010 the IASB issued a set of amendments to the IFRS “Improvements” that will be applicable as of 1 January 2011. However, these are not mentioned in these financial statements because they do not apply to the Safilo Group.

On 7 October 2010 the IASB published certain amendments to IFRS 7 – Financial Instruments – Additional Disclosures – applicable for the accounting periods starting as of 1 July 2011. The amendments will allow users of financial statements to improve their understanding of transfer transactions of financial assets, including understanding the possible effects of any risks that may remain with the entity that transferred the assets. The amendments also require additional disclosures if a disproportionate amount of transfer transactions are undertaken around the end of a reporting period. As of the reporting date, the competent bodies of the European Union had not yet completed the endorsement process necessary to apply such amendments.

On 20 December 2010 the IASB issued a narrow amendment to IFRS 1 First-time Adoption of International Financial Reporting Standards (IFRSs) to eliminate references to 1 January 2004 contained therein and described as the date of transition to IFRSs and to provide guidance on the presentation of financial statements in accordance with IFRSs after a period of hyperinflation. These amendments will be applicable as of 1 July 2011. As of the reporting date, the 90 ______Consolidated Financial Statements Safilo Group S.p.A.

competent bodies of the European Union had not yet completed the endorsement process necessary to apply such amendment.

On 20 December 2010 the IASB issued an amendment to IAS 12 – Income Taxes requiring an entity to measure the deferred tax relating to an asset depending on whether the entity expects to recover the carrying amount of the asset through use or sale. Following the introduction of this amendment, SIC–21 – Income Taxes – Recovery of Non- depreciable Assets – will no longer be applicable. The amendment is applicable as of 1 January 2012. As of the reporting date, the competent bodies of the European Union had not yet completed the endorsement process necessary to apply such amendment.

2.2 Format of financial statements

Safilo Group presents the income statement by function (so-called “cost of sales”). This is considered to be more representative with respect to presentation by type of expenses, as it conforms more closely to the internal reporting and business management methods and is in line with international practice in the eyewear sector.

For the balance sheet, a distinction is made in the assets and liabilities between current and non-current as described in paragraphs 51 and following of IAS 1. The indirect method for the cash flow statement was used. Therefore the net profit of the period is adjusted by the effects of non-monetary transactions, changes in the working capital and cash flows from investing and financing activities.

2.3 Scope of consolidation and methodology

The Group’s consolidated financial statements as of 31 December 2010 include the parent company, Safilo Group S.p.A, and 50 subsidiaries accounted for on a line-by-line basis, with the parent company holding, directly or indirectly, the majority of voting rights.

The number of subsidiaries included in the scope of consolidation decreased by one unit, compared with the previous year, following the sale in December 2010 of Tide Ti SA de CV, in connection with the disposal of the Group’s non-core retail chains begun at the end of 2009.

At 31 December 2010 the direct and indirect holdings included in the scope of consolidation under the line-by-line method, in addition to the parent company Safilo Group S.p.A., were the following:

______91 Consolidated Financial Statements Safilo Group S.p.A.

Value Share capital % interest held

ITALIAN COMPANIES Safilo S.p.A. – Pieve di Cadore (BL) EUR 66,176,000 100.0 Oxsol S.p.A. - Pieve di Cadore (BL) EUR 121,000 100.0 Lenti S.r.l. – Bergamo EUR 500,000 75.6 Smith Sport Optics S.r.l. (in liquidazione) – Padova EUR 102,775 100.0 FOREIGN COMPANIES Safilo International B.V. - Rotterdam (NL) EUR 24,165,700 100.0 Safint B.V. - Rotterdam (NL) EUR 18,200 100.0 Safilo Capital Int. S.A. - Lussemburgo (L) EUR 31,000 100.0 Luxury Trade S.A - Lussemburgo (L) EUR 1,650,000 100.0 Safilo Benelux S.A. - Zaventem (B) EUR 560,000 100.0 Safilo Espana S.L. - Madrid (E) EUR 1,000,000 100.0 Safilo France S.a.r.l. - Parigi (F) EUR 960,000 100.0 Safilo Gmbh - Colonia (D) EUR 511,300 100.0 Safilo Nordic AB - Taby (S) SEK 500,000 100.0 Safilo CIS - LLC - Mosca (Russia) RUB 10,000,000 100.0 Safilo Far East Ltd. - Hong Kong (RC) HKD 49,700,000 100.0 Safint Optical Investment Ltd - Hong Kong (RC) HKD 10,000 51.0 Safilo Hong-Kong Ltd – Hong Kong (RC) HKD 100,000 51.0 Safilo Singapore Pte Ltd - Singapore (SGP) SGD 400,000 100.0 Safilo Optical Sdn Bhd – Kuala Lumpur (MAL) MYR 100,000 100.0 Safilo Trading Shenzen Limited- Shenzen (RC) CNY 2,481,000 51.0 Safilo Eyewear (Shenzen) Company Limited - (RC) USD 6,700,000 51.0 Safilo Eyewear (Suzhou) Industries Limited - (RC) USD 18,300,000 100.0 Safilo Retail (Shangai) Co. Ltd - (RC) USD 5,100,000 100.0 Safilo Korea Ltd – Seoul (K) KRW 300,000,000 100.0 Safilo Hellas Ottica S.a. – Atene (GR) EUR 489,990 70.0 Safilo Nederland B.V. - Bilthoven (NL) EUR 18,200 100.0 Safilo South Africa (Pty) Ltd. – Bryanston (ZA) ZAR 3,583 100.0 Safilo Austria Gmbh -Traun (A) EUR 217,582 100.0 Carrera Optyl D.o.o. - Ormoz (SLO) EUR 563,767 100.0 Safilo Japan Co Ltd - Tokyo (J) JPY 100,000,000 100.0 Safilo Do Brasil Ltda – San Paolo (BR) BRL 8,077,500 100.0 Safilo Portugal Lda – Lisbona (P) EUR 500,000 100.0 Safilo Switzerland AG – Liestal (CH) CHF 1,000,000 100.0 Safilo India Pvt. Ltd - Bombay (IND) INR 42,000,000 88.5 Safint Australia Pty Ltd.- Sydney (AUS) AUD 3,000,000 100.0 Safilo Australia Partnership – Sydney (AUS) AUD 204,081 61.0 Optifashion Hong Kong Ltd - Hong Kong (RC) HKD 300,000 100.0 Safint Optical UK Ltd. - Londra (GB) GBP 21,139,001 100.0 Safilo UK Ltd. - North Yorkshire (GB) GBP 250 100.0 Safilo America Inc. - Delaware (USA) USD 8,430 100.0 Safilo USA Inc. - New Jersey (USA) USD 23,289 100.0 Safilo Realty Corp. - Delaware (USA) USD 10,000 100.0 Safilo Services LLC - New Jersey (USA) USD - 100.0 Smith Sport Optics Inc. - Idaho (USA) USD 12,087 100.0 Solstice Marketing Corp. – Delaware (USA) USD 1,000 100.0 Solstice Marketing Concepts LLC – Delaware (USA) USD - 100.0 Safint Eyewear de Mexico S.A. de C.V. - Cancun (MEX) MXP 10,035,575 100.0 2844-2580 Quebec Inc. – Montreal (CAN) CAD 100,000 100.0 Safilo Canada Inc. - Montreal (CAN) CAD 2,470,425 100.0 Canam Sport Eyewear Inc. - Montreal (CAN) CAD 300,011 100.0

92 ______Consolidated Financial Statements Safilo Group S.p.A.

Investments in subsidiaries

The companies in which the Group exercises control (“subsidiary companies”), as defined in IAS 27, either due to direct shareholdings or by indirectly holding the majority of the voting rights, having the power to determine even indirectly the financial and managerial choices of the companies and thus obtaining the relative benefits regardless of the relationships deriving from the share ownership, are consolidated using the line-by-line method. Potential exercisable voting rights existing at the balance sheet date are considered in order to determine control. The subsidiary companies are consolidated from the date on which control is assumed and are deconsolidated from the date when control ceases.

Non-controlling interests in the net assets of consolidated subsidiaries and non-controlling interests in the profit or loss of consolidated subsidiaries are presented separately from the interests of the owners of the parent in the consolidated statement of financial position and income statement respectively. Losses applicable to non-controlling interests which exceed the minority’s interests in the subsidiary’s equity are allocated against the non-controlling interests. Changes in the interests in a subsidiary which do not lead to the acquisition or loss of control are recognised directly in equity.

The revisions to IAS 27 principally affect the accounting for transactions and events that result in a change in the Group’s interest in its subsidiaries and the attribution of a subsidiary’s losses to non-controlling interests. IAS 27 (revised 2008) specifies that once control has been obtained, further transactions whereby the parent entity acquires additional equity interests from non-controlling interests, or disposes of equity interests without losing control are transactions with owners and therefore shall be accounted for as equity transactions. It follows that the carrying amounts of the controlling and non-controlling interests must be adjusted to reflect the changes in their relative interests in the subsidiary and any difference between the amount by which the non-controlling interest is adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to the owners of the parent. There is no consequential adjustment to the carrying amount of goodwill and no gain or loss is recognised in profit or loss. Costs associated with these transactions are recognised in equity in accordance with IAS 32 paragraph 35.

Upon consolidation, the amounts resulting from intra-group operations between consolidated companies are eliminated, in particular in relation to receivables and payables at the balance sheet date, costs and revenues as well as financial income and charges. In addition, gains and losses between the subsidiary companies that are fully consolidated are also eliminated.

The accounting principles adopted by the subsidiary companies have been modified where necessary, to comply with those adopted by the parent company.

Non-controlling interests and the amount of net profit attributable to them are shown separately under “Non- controlling interests” and “Profit for the period attributale to non-controlling interests” in the consolidated balance sheet and income statement, respectively.

Investments in associated companies

The holdings in companies/entities in which a significant influence is exercised (“associated companies”), that is presumed to exist when the percentage held is between 20% and 50%, are valued under the “equity” method. Due to the application of the equity method, the value of the investment is aligned to the shareholders’ equity that is

______93 Consolidated Financial Statements Safilo Group S.p.A.

adjusted, where necessary, to reflect the application of the IFRS approved by the European Commission, and includes the recording of any goodwill identified at the moment of acquisition. The share of gains/losses realised by the associated companies after the acquisition is recorded on the income statement, while the share of movements of reserves after the acquisition is recorded in the equity reserves. When the share of losses of the Group in an associated company is equal to or exceeds its holding in the associated company, taking into account all receivables not guaranteed, the value of the investment is fully written down and the Group does not record further losses above its share, except where the Group has the obligation to cover these losses. Gains and losses not realised that are generated on operations with associated companies are eliminated for the part pertaining to the Group.

Investments in other companies

Investments in other companies representing “available-for-sale financial assets” are valued at their fair value and gains and losses arising from changes in the fair value are assigned directly to shareholders’ equity until sale. Total gains and losses are charged to the statement of operations of the year in which the sale took place, unless an AFS financial asset has accumulated a significant or prolonged decrease of its fair value. In this case, the accumulated losses in the fair value reserve of shareholders’ equity is recognised in the statement of operations.

2.4 Segment information

Information according to business sector (retail/wholesale) and geographic area is given, pursuant to IFRS 8 – Operating Segments.

Management prepares information according to the Group’s operating segments, i.e. “wholesale and retail”. The criteria applied for the identification of the segments depend on the modalities by which the management organises the Group and attributes managerial responsibilities.

It must be noted that grouping by geographic area depends on the location of the registered head office of each Group company; therefore the sales identified in accordance with this segmentation are determined by origin of invoicing and not by target market.

2.5 Conversion of financial statements and transactions into currencies other than Euro

Foreign currency transactions are converted into the functional currency using the exchange rates prevailing on the date of the transaction. Exchange rate gains and losses resulting from such transactions and from the translation of assets and liabilities in foreign currencies at the exchange rates at end of the year are accounted for in the income statement.

The rules for the conversion of financial statements of companies expressed in currencies different from the Euro are the following:

¾ assets and liabilities are converted using the exchange rates prevailing on the balance sheet date;

¾ costs, revenues, income and charges are converted at the average exchange rate of the period;

¾ the “conversion reserve” includes foreign exchange differences generated from the conversion of the opening shareholders’ equity and the movements during the year at a rate different from that at the end of the year; 94 ______Consolidated Financial Statements Safilo Group S.p.A.

¾ the goodwill and fair value adjustments related to the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the exchange rate at the end of the period.

The exchange rates applied in the conversion of financial statements prepared in currencies other than Euro at 31 December 2010 and 31 December 2009 are given in the following table; appreciation (figures with a minus sign in the table below) indicates an increase in the value of the currency against the Euro.

(Appreciation)/ Avg. for the financial (Appreciation)/ As of As of Depreciation year Depreciation December December 2010 2009 Currency Code 31, 2010 31, 2009 % %

US Dollar USD 1.3362 1.4406 -7.2% 1.3257 1.3947 -4.9% Hong-Kong Dollar HKD 10.3856 11.1709 -7.0% 10.2994 10.8114 -4.7% Swiss Franc CHF 1.2504 1.4836 -15.7% 1.3803 1.5100 -8.6% Canadian Dollar CAD 1.3322 1.5128 -11.9% 1.3651 1.5846 -13.9% Japanese Yen YEN 108.6500 133.1600 -18.4% 116.2386 130.3249 -10.8% British Pound GBP 0.8608 0.8881 -3.1% 0.8578 0.8909 -3.7% Swedish Krown SEK 8.9655 10.2520 -12.5% 9.5373 10.6230 -10.2% Australian Dollar AUD 1.3136 1.6008 -17.9% 1.4423 1.7729 -18.6% South-African Rand ZAR 8.8625 10.6660 -16.9% 9.6984 11.6741 -16.9% Russian Ruble RUB 40.8200 43.1540 -5.4% 40.2629 44.1350 -8.8% Brasilian Real BRL 2.2177 2.5113 -11.7% 2.3314 2.7674 -15.8% Indian Rupee INR 59.7580 67.0400 -10.9% 60.5878 67.3571 -10.0% Singapore Dollar SGD 1.7136 2.0194 -15.1% 1.8055 2.0241 -10.8% Malaysian Ringgit MYR 4.0950 4.9326 -17.0% 4.2668 4.9079 -13.1% Chinese Reminbi CNY 8.8220 9.8350 -10.3% 8.9712 9.5277 -5.8% Korean Won KRW 1,499.0600 1,666.9700 -10.1% 1,531.8212 1772.9039 -13.6% Mexican Peso MXN 16.5475 18.9223 -12.6% 16.7373 18.7989 -11.0%

2.6 Tangible assets

Tangible fixed assets are assessed at purchase or production cost, net of accumulated depreciation and of any possible loss in value. The cost includes all charges directly incurred in bringing assets to their current location and condition. Costs incurred after purchase of assets are recorded only if they increase the future economic benefits of the asset they refer to.

Charges incurred for the maintenance and repairs of an ordinary and/or cyclical nature are directly charged to the statement of operations of the period in which the costs are incurred. The capitalisation of costs relating to the expansion, modernisation or improvement of proprietary structural assets or of those used by third parties, is made only when they satisfy the requirements to be separately classified as an asset or part of an asset. The book value is adjusted for depreciation on a systematic basis, over its useful life.

Capitalised costs for leasehold improvements are attributed to the category of the assets they refer to and are depreciated over the shorter of either the remaining duration of the rental contract or the remaining useful lifetime of the assets improved.

When circumstances indicate that there may be a permanent impairment in value, an estimate is made of the recoverable amount of the asset, and any loss is recorded in the income statement. When the reasons for the previously recognised impairment no longer exist, the book value of the asset is restated through profit or loss, up to the value at which the asset would have been recognised in the absence of impairment and net of amortisation.

______95 Consolidated Financial Statements Safilo Group S.p.A.

Assets held through finance lease contracts, where the majority of the risks and benefits related to the ownership of an asset have been transferred to the Group, are recognised as assets of the Group at their fair value or, if lower, at the current value of the minimum lease payments. The corresponding liability due to the lessor is recorded on the financial statements under financial debts. The assets are depreciated by applying the criteria and rates indicated below.

The leased assets where the lessor bears the majority of the risks and benefits related to an asset are recorded as operating leases. The costs relating to operating leases are recorded on a straight-line basis in the income statement over the duration of the lease contract.

Depreciation is calculated on a straight-line basis over the estimated useful lifetime of the asset, in accordance with the following depreciation rates:

Category Useful lifetime in years

Buildings 20-33 Plant, machinery and equipment 5-15 Furniture, office equipment and vehicles 4-8

Land is not depreciated.

When the asset to be depreciated is composed of separately identifiable elements whose useful lifetime differs significantly from that of the other parts of the asset, the depreciation is made separately for each part of the asset, with the application of the “component approach” principle.

The remaining value of the assets and their useful lifetime are reviewed at the end of each financial year. The capital gains or losses from the sale of the fixed assets are posted to the income statement and valued as the difference between the sale proceeds and the net book value.

2.7 Intangible assets

Intangible assets consist of clearly identifiable non-monetary assets, without any physical substance and capable of generating future economic benefits. These assets are recognised at purchase and/or production cost, including the costs of bringing the asset to its current use, net of accumulated amortisation and any impairment. Amortisation begins when the asset is available for use and is allocated in equal instalments over the course of its useful life.

When circumstances indicate that there may be an impairment loss, an estimate is made of the recoverable amount of the asset, and any impairment is recognised through profit or loss. When the reasons for the previously recognised impairment no longer exist, the book value of the asset is restated through profit or loss, up to the value at which the asset would have been recognised in the absence of impairment and net of amortisation.

Goodwill

Goodwill is measured as the excess of the aggregate of the consideration transferred in the business combination, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer's previously held equity 96 ______Consolidated Financial Statements Safilo Group S.p.A.

interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the aggregate of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer's previously held interest in the acquiree (if any), the excess is recognised immediately in profit or loss as a bargain purchase gain. Non-controlling interest is initially measured either at fair value or at the non-controlling interest’s proportionate share of the acquiree's identifiable net assets. The selection of the measurement method is made on a transaction-by transaction basis. Goodwill is not amortised but is tested for impairment at least once a year or whenever there are any impairment signs. After initial recognition, goodwill is valued at cost, net of any accumulated impairment.

When a company or a business unit previously purchased is sold and that acquisition led to goodwill, in measuring the gain or loss on the sale, consideration is given to the corresponding residual value of goodwill.

Goodwill and fair value adjustments generated from the acquisition of a foreign company are recorded in the relative foreign currencies and are converted at the exchange rate at the end of the period.

Brands

Trademarks are recorded at cost. They have a definite useful lifetime and are recorded at cost net of any accumulated amortisation. Amortisation is calculated on a straight-line basis allocating the cost of trademarks over the relative useful lifetime.

Software

All software licenses purchased are capitalised on the basis of the costs incurred for their acquisition and in bringing them to their current condition. Amortisation is calculated on a straight-line basis over their estimated useful lifetime (from 3 to 5 years).

The costs associated with the development and maintenance of software programs are posted to the income statement of the period in which they were incurred. The costs directly associated with the production of unique and identifiable software products controlled by the Group are recorded as intangible fixed assets on the balance sheet only if the following conditions are respected: the costs can be reliably calculated, the Group has the technical and financial resources to complete the products and intends to conclude such activities, the technical feasibility of the products is guaranteed and the use of the products will generate probable future economic benefits for more than one year. Direct costs include costs relating to employees developing the software as well as any appropriate share of general costs.

2.8 Impairment of non-financial assets

Assets with an indefinite useful life are not subject to amortisation but undergo an impairment test at least on an annual basis to control whether their book value has been reduced.

Assets subject to amortisation undergo impairment tests when events or circumstances arise that indicate that the book value cannot be recovered. In both cases any loss in value is posted for the share of book value exceeding the recoverable value. This value is the higher of either the fair value of the asset net of the costs for sale or its value for use. If the value for use of an asset cannot be established individually, the recoverable value of the unit that generates cash flows (so-called "cash generating units” or CGU) to which the asset belongs must be established. ______97 Consolidated Financial Statements Safilo Group S.p.A.

Assets are grouped at the lowest level at which they generate independent cash flows and the Group then discounts to present value the future estimated cash flows generated by these CGUs by applying a discount rate that reflects the current time value of money and the specific risks associated with the business.

When a loss on an asset, other than goodwill, no longer exists or is reduced, the book value of the asset or cash- generating unit is increased to the new estimated recoverable value, which cannot exceed the value that would have been established if there had been no loss due to reduction in value.

A reversal of loss in value is calculated according to the revaluation model and recorded in the income statement in accordance with the provisions of IAS 16.

2.9 Financial instruments

The classification of financial instruments depends on the purpose for which the financial instrument was acquired. The management determines the classification of its financial instruments on the initial recognition in the financial statements. The purchase and sale of financial instruments are recognised at the transaction date or at the date when the Group undertakes the commitment to purchase or sell the asset. All financial instruments are initially recognised at fair value.

Financial assets

Financial assets are classified according to the following categories:

¾ Financial assets at fair value through profit or loss: this category includes financial assets acquired primarily for sale in the short-term or those designated as such by the management, in addition to derivative instruments that are not designated as hedges (in relation to the treatment of derivatives, reference should be made to the following paragraph). The fair value of these instruments is determined with reference to the market value (offer price) at the balance sheet date; in the case of non-quoted instruments they are determined through commonly used technical financial valuation methods. Fair value variations of the instruments belonging to this category are recognised in the income statement. Financial instruments of this category are classified in the short-term if they are “held for trading” or if it is expected that they will be sold within twelve months from the balance sheet date. The only financial assets of this category held by the Group and recorded on the financial statements are derivative financial instruments.

¾ Loans and receivables: these are non-derivative financial instruments, with fixed or determinable payments, not quoted on an active market. They are recorded as current assets with the exception of those amounts due beyond twelve months from the balance sheet date. The latter are classified as non- current assets. These assets are measured at amortised cost on the basis of the “effective interest rate” method. Any loss in value determined through an impairment test is recognised in the income statement. In particular, trade receivables are initially recognised in the financial statements at their current value and subsequently recorded under the amortised cost method less any write-downs for loss in value. An allowance for doubtful accounts is set-up when there is evidence that the Group will not be capable of receiving the original amount due. The provisions allocated for doubtful accounts are recorded in the income statement.

98 ______Consolidated Financial Statements Safilo Group S.p.A.

¾ Investments held to maturity: these are non-derivative financial instruments with fixed or determinable payments, with a fixed maturity date, that the Group has the intention and the means to maintain until maturity. Receivables and investments held until maturity are assessed according to the “amortised cost” method using the effective interest rate, net of any write-downs for loss in value. The Group did not hold any investments of this kind during the financial period covered by these financial statements.

¾ Available-for-sale financial assets: these are non-derivative financial instruments that are expressly designated to this category or are not classified in any of the previous categories. They are measured at fair value, determined with reference to market prices at the balance sheet date or through financial measurement techniques or models, recording changes in value in an equity reserve. This reserve is recognised in the income statement only when the financial asset is sold, or in the case of negative cumulative variations, when it is considered that the reduction in value already recorded under equity cannot be recovered. Classification as a current or non-current asset depends on the intentions of the management and on the real liquidity of the security; they are recorded under current assets when they are expected to be realized within twelve months.

Financial assets are removed from the balance sheet when the right to receive cash flows from the instrument ceases and the Group has transferred all risks and benefits relating to the instrument.

Loans

Loans are initially recognised at fair value less any transaction costs. After initial recognition, they are recognised at amortised cost; all differences between the amount financed (net of initial transaction costs) and the face value are recognised in profit or loss over the duration of the loan using the effective interest method. If there is a significant variation in the expected cash flow that can be reliably estimated by management, the value of the loans is recalculated to reflect the expected change in the cash flow. The value of the loans is recalculated on the basis of the discounted value of the new expected cash flow and the internal rate of return.

Loans are classified under current liabilities unless the company has an unconditional right to defer the payment for at least twelve months after the balance sheet date, and are removed from the balance sheet when they expire and the Group has transferred all risks and obligations relating to the instrument.

Derivative instruments

In accordance with the provisions of IAS 39 as approved by the European Commission, the derivative financial instruments used by the Group with the intention of hedging in order to reduce the foreign currency and interest rate risks, can be recorded according to the "hedge accounting" methodology only when:

¾ a formal designation and documentation relating to the hedge exists at the beginning of the hedge,

¾ it is presumed that the hedge is highly effective,

¾ the effectiveness can be reliably measured and the hedge is highly effective over the different financial periods for which it was designated.

______99 Consolidated Financial Statements Safilo Group S.p.A.

All derivative financial instruments are measured at fair value, in accordance with IAS 39. When the financial instruments possess the characteristics required to be recorded according to the hedge accounting, the following accounting procedures are applied:

¾ Fair value hedge – if a derivative financial instrument is designated as a hedge for the exposure of changes in the current value of an asset or liability on the financial statements attributable to a specific risk that can determine effects on the income statement, the profit or loss after the initial valuation of the fair value of the hedge instruments is recognised in the income statement. The profit or loss on the hedged item, related to the hedged risk, changes the book value of that item and is recognised on the income statement. In the financial periods described herein there were no fair value hedges.

¾ Cash flow hedge – if a derivative financial instrument is designated as a hedge for the exposure of changes in the cash flows of an asset or liability recorded on the financial statements or of an operation considered highly probable and which may have effects on the income statement, the effective portion of the profits or losses of the financial instrument is recognised in an equity reserve. The cumulative profits or losses are reversed from equity and recorded in the income statement in the same period as the operation that is hedged. The profits or losses associated with a hedge or with that part of the hedge that has become ineffective, are immediately recorded in the income statement. If a hedge instrument or a relation of a hedge is closed, but the hedged operation has not yet been realized, the cumulative profits and losses, up to that moment recorded in equity, are recognised in the income statement when the relative operation is realized. If the operation hedged is no longer considered probable, the profits or losses not yet realised in equity are recognised immediately in the income statement.

If hedge accounting cannot be applied, the profits or losses deriving from the fair value of the derivative financial instruments are immediately recognised in the income statement.

2.10 Inventory

Inventories are measured at the lower of either the purchase or production cost or the net realisable value. The cost of raw materials and purchased finished products is calculated using the “weighted average cost” method. The cost of semi-finished products and internally produced finished products includes raw material, direct labour costs and the indirect costs allocated based on normal production capacity.

The net realizable value is determined on the basis of the estimated selling price under normal market conditions, net of direct sales costs.

Against the value of stock as determined above, provisions are made in order to take account of obsolete or slow moving stock.

2.11 Trade receivables

Trade receivables are initially classified on the financial statements at their current value and subsequently recalculated with the “amortised cost” method, net of any write-downs for loss in value. A provision for doubtful accounts is allocated when there is evidence that the Group will not succeed in collecting the original amount due. The provisions allocated for doubtful accounts are recorded in the income statement.

100 ______Consolidated Financial Statements Safilo Group S.p.A.

The Group also transfers trade receivables to factoring companies. Since such receivables represent legally sold credit, they do not comply with all the conditions of paragraphs 17 and following of IAS 39. They are not removed from the balance sheet, but are maintained on the financial statement with a contra entry as a financial debt towards the factoring company.

2.12 Cash in hand and at bank

Cash and cash equivalents include cash, bank deposits on demand and other highly liquid short-term investments available within three months from purchase. The items included in the net cash and cash equivalents are measured at fair value and the relative changes are recognised in income. Bank overdrafts are posted under current liabilities.

2.13 Employee benefits

Pension plans

The Group recognises different forms of defined benefit plans and defined contribution plans, in line with the local conditions and practices in the countries in which it carries out its activities. The premiums paid for defined contribution plans are recorded in the income statement for the part matured in the year. The defined benefit plans are based on the working life of the employees and on the remuneration received by the employee during a predetermined period of employment.

The obligation of the company to finance the defined benefit plans and the annual cost recognised in the income statement are determined by independent consultants using the “projected unit credit” method. The related costs are recorded in the income statement on the basis of the estimated employment period of employees. The Group does not defer actuarial gains and losses in accordance with the corridor method but recognises all the actuarial gains and losses in equity, via the consolidated statement of comprehensive income, in the year in which these arise.

The employee severance fund of Italian companies (“TFR”) has always been considered to be a defined benefit plan however, following the changes to the discipline that governs the employment severance fund introduced by Italian law no. 296 of 27 December 2006 (“Financial Law 2007”) and subsequent Decrees and Regulations issued in the first months of 2007, Safilo Group, on the basis of the generally agreed interpretations, has decided that:

¾ the portion of the employee benefit liability accruing from 1 January 2007, whether transferred to selected pension funds or transferred to the treasury account established with INPS, must be classified as a “defined contribution plan”;

¾ the portion of the employee benefit liability accruing as of 31 December 2006, must be classified as a “defined benefit plan” requiring actuarial valuations that exclude future increases in salaries.

For an analysis of the accounting effects deriving from this decision, see paragraph 4.18 “Employee benefits”.

Remuneration plans under the form of share capital participation

The Group recognises additional benefits to some employees and consultants through "equity settled" type stock options. In accordance with IFRS 2 - Share-based payments, the current value of the stock options determined at ______101 Consolidated Financial Statements Safilo Group S.p.A.

the vesting date through the application of the "Black & Scholes" method is recognised in the income statement under personnel costs in constant quotas over the period between the vesting date of the stock options and the maturity date, counterbalanced by an equity reserve.

The effects of the vesting conditions not related to the market are not taken into consideration in the fair value of the vested options, but are material to measurement of the number of options which are expected to be exercised.

At the balance sheet date the Group revises its estimates on the number of options which are expected to be exercised. The impact of the revision of the original estimates is recognised in profit or loss over the maturity period, with a balance entry in equity reserves.

When the stock option is exercised, the amounts received by the employee, net of the costs directly attributable to the transaction, are credited to share capital for an amount equal to the par value of the issued shares and to the share premium reserve for the remaining part.

2.14 Provisions for risks and charges

The Group records provisions for risks and charges when:

¾ has a legal or constructive obligation to third parties;

¾ it is probable that it will be necessary to use resources of the Group to settle the obligation;

¾ a reliable estimate of the amount can be made.

Changes in estimates are recorded in the income statement of the period in which the changes occur.

2.15 Revenue recognition

Revenues include the fair value of the sale of goods and services, less VAT, returns and discounts. In particular, the Group recognises the revenues from the sale of goods sold at the shipment date, when all the risks and rewards relating to the ownership of the goods have been transferred to the client, or on delivery to the client, in accordance with the sales terms agreed. If the sale includes the right for the client to return unsold goods, the revenue is recognised on the date of shipment to the client, net of a provision which represents the best estimate of the products to be returned by the client and which the Group will no longer be able to place on the market. This provision is based on specific historical data and on the specific knowledge of the clients; historically there have not been significant differences between the estimates made and the products actually returned.

2.16 Public contributions

The Group recognises public contributions when there is reasonable certainty that they will be received and that the conditions required for the contribution have been or will be respected.

The contributions received are recorded in the income statement for the time required to relate them to the relative costs and they are considered as deferred income.

102 ______Consolidated Financial Statements Safilo Group S.p.A.

2.17 Royalties

The Group recognises royalty income and expenses in accordance with the accruals principle and in compliance with the substance of the contracts agreed.

2.18 Dividends

Dividends are recorded when the right of the Shareholders to receive the payment arises, which normally occurs when the Shareholders' meeting resolves the distribution of dividends. The distribution of dividends is therefore recorded as a liability on the financial statements in the period in which the distribution is approved by the Shareholders' meeting.

2.19 Income taxes

Income taxes include all taxes calculated on the taxable profits of the companies of the Group. Income taxes are recognised on the income statement, with the exception of those relating to accounts that are directly credited or debited to equity, in which case the tax effect is recognised directly in equity. Taxes not related to income (e.g. property taxes) are stated with operating costs.

Deferred taxes are calculated on fiscal losses that can be carried forward and all the timing differences between the assessable income of an asset or liability and the relative book value. Deferred tax assets are recognised only for those amounts where it is likely there will be future taxable income allowing for recovery of the amounts.

Current and deferred tax assets and liabilities are offset when the income tax is applied by the same tax authority and when there is a legal right to offsetting. The deferred tax assets and liabilities are determined with the fiscal rates that are expected to be applied, in accordance with the regulations of the countries in which the Group operates, in the years in which the temporary differences will be realised or extinguished.

2.20 Earnings per share

Basic

Basic earnings per share are calculated by dividing the profit or loss of the Group by the weighted average number of ordinary shares outstanding during the year.

Diluted

Diluted earnings per share are calculated by dividing the profit or loss of the Group by the weighted average number of ordinary shares outstanding during the year. In order to calculate the diluted earnings per share, the weighted average number of shares outstanding is adjusted in respect of the dilutive potential ordinary share (stock options and convertible bonds), while the profit or loss of the Group is adjusted to take into account the effects, net of income taxes, of the conversion.

2.21 Use of estimates

The preparation of the consolidated financial statements requires the Directors to apply accounting standards and methods that, in some circumstances, are based on difficult and subjective valuations and estimates based on past

______103 Consolidated Financial Statements Safilo Group S.p.A.

experience and assumptions which are from time to time considered reasonable and realistic according to the relative circumstances. The application of these estimates and assumptions affects the amounts posted in the financial statements, such as the balance sheet, the income statement, the cash flow statement and the notes thereto. Actual results of the balances on the financial statements, resulting from the above-mentioned estimates and assumptions, may differ from those reported on the financial statements due to the uncertainty which characterizes the assumptions and the conditions on which the estimates are based. The accounting standards that are more subject to the directors’ estimates and for which a change in the underlying conditions or the assumptions may have a significant impact on the consolidated financial statements of the Group are described briefly below.

¾ Goodwill: in accordance with the accounting standards adopted for the preparation of the financial statements, the company tests goodwill at least once a year in order to ascertain the existence of any loss in value to be recorded in the income statement. In particular, the test results in the determination of the fair value allocated to the cash-generating units. This value is determined according to their current value in use. The allocation of the goodwill to the cash-generating units and the determination of their value require estimates which depend on factors that may change over time with consequent effects, which may be significant, compared to the Directors’ assessments.

¾ Write-down of fixed assets: in accordance with the accounting standards applied by the Group, the fixed assets are verified to ascertain if there has been a loss in value which is recorded by means of a write- down, when it is considered there will be difficulty in recovering the relative net book value through use. The verification of the existence of such difficulty requires the Directors to make valuations based on the information available within the Group and from the market, as well as historical experience. In addition, when it is deemed that there may be a potential loss in value, the Group determines this using the most appropriate technical valuation methods available. Proper identification of the indicators of contingent impairment as well as the estimates used to determine them depend on factors which may vary over time, influencing the Directors’ measurements and estimates.

¾ Allowance for bad or doubtful debts: the allowance for bad or doubtful debts reflects the management’s best estimate regarding losses concerning the credit portfolio towards the final client. This estimate is based on the losses expected by the Group, determined on the basis of past experience for similar credits, current and historic overdue, careful monitoring of credit quality and projections regarding the economic and market conditions.

¾ Allowance for inventory obsolescence: the inventory of finished products which are obsolescent or slow moving are regularly subjected to specific assessment tests, which take into consideration past experience, historic results and the probability of sale under normal market conditions. If the need to reduce the value of the stock should arise following these analyses, the management proceeds with the appropriate write- downs.

¾ Product warranty provision: when a product is sold, the Group estimates the relative costs of performing work under guarantee and allocates a provision on the basis of historic information and a series of statistical data regarding the nature, frequency and the average cost of such work. The Group operates constantly to minimize the costs of work performed under guarantee and to improve the quality of its products.

104 ______Consolidated Financial Statements Safilo Group S.p.A.

¾ Contingent liabilities: the Group is subject to legal and tax actions regarding different types of problems; due to uncertainties relating to proceedings and the complexity of such proceedings, the management consults its lawyers, and other legal and fiscal experts, and when expenditure is considered probable and the amount can be reasonably estimated, adequate funds are allocated.

¾ Pension plans: the companies of the Group participate in pension plans, the costs of which are calculated by the management, with the assistance of the Group’s actuarial consultants, on the basis of statistical assumptions and assessment factors regarding in particular the discount rate to be used, relative mortality and resignation rates.

¾ Deferred taxes: deferred tax assets are accounted for on the basis of the expectations of future taxable income. The measurement of expected income for recognition of deferred taxes depends on factors that may change over time and may have a material impact influence on the estimate of the deferred tax assets.

2.22 Fair value estimates

The fair value of the financial instruments traded on an active market is based on the listed price at the balance sheet date.

The fair value of the financial instruments not traded on an active market is calculated in accordance with valuation techniques, by applying models and techniques that are widely used in financial sectors and in particular:

¾ the fair value of the interest rate swaps is calculated on the basis of the current value of future cash flows;

¾ the fair value of the forward currency hedging contracts is determined on the basis of the current value of the differences between the contracted forward exchange rate and the spot market rate at the balance sheet date;

¾ the fair value of stock options is calculated using the Black & Scholes model.

______105 Consolidated Financial Statements Safilo Group S.p.A.

3. Risk management

The operations of the Safilo Group are subject to various financial risks, in particular:

¾ credit risks, relative to normal business relations with clients and to financial assets in the financial statements;

¾ market risks (mainly interest and exchange rate risks), since the Group operates internationally and uses financial instruments that generate interests;

¾ cash flow risks, with particular regard to the ability to promptly find resources on financial markets under normal market conditions when needed.

The Group constantly monitors the financial risks to which it is exposed, in order to assess potentially negative effects in advance and to take appropriate corrective measures with the aim of eliminating or, at the least, limiting the negative effects deriving from the risks in question.

The risks to which the Group is exposed are managed centrally on the basis of hedging policies that may also include the use of derivative instruments with the aim of minimizing the effects deriving from exchange rate (especially in relation to the US dollar) and interest rate fluctuations.

Credit risks

The Group strives to reduce risk deriving from the insolvency of its customers through rules ensuring that sales are made to reliable and soluble customers. The relative assessment is based on information regarding the solvency of customers and statistical historical data. However, the credit risk is mitigated by the fact that credit exposure is spread over a very large number of clients.

Positions of a significant amount for which the Group recognises that total or partial recovery will be effectively impossible, also taking into account any guarantees obtained, as well as the charges and expenses that will have to be sustained for the attempted credit recovery, are subject to individual write-down.

The Group’s theoretical maximum exposure to the credit risk at the date of the balance sheet is represented by the book value of the financial assets.

As required by IFRS 7, paragraph 36, the table below analyses the age of past due receivables as of 31 December 2010 and 31 December 2009 as well as any allowance made for totally or partially uncollectible receivables:

106 ______Consolidated Financial Statements Safilo Group S.p.A.

December 31, 2010 December 31, 2009 (Euro/000)

Ageing of trade receivables Nominal value Allowance for bad Nominal value Allowance for bad Overdue and impaired trade receivables and doubtful debts trade receivables and doubtful debts

up to 6 months 6,497 (2,782) 5,479 (2,461) 6 to 12 months 5,955 (1,041) 2,779 (1,907) 12 to 24 months 5,881 (5,255) 7,340 (5,037) over 24 months 11,620 (10,591) 11,957 (9,865)

Grand total 29,953 (19,669) 27,555 (19,270)

At 31 December 2010 past due receivables for which no allowance for bad debts was made, as the Group considered them fully collectible, amounted to 52,909 thousand Euro (compared with 47,155 thousand Euro at 31 December 2009). Of these, receivables that were more than 12 months past due amounted to 1,757 thousand Euro (compared with 3,701 thousand at 31 December 2009) but accounted for 0.6% of the Group’s total trade receivable vis-à-vis 1.2% in the previous year.

Market risks can be divided into the following categories:

Exchange rate risk

The Group operates internationally and is therefore exposed to risks deriving from variations in exchange rates that may influence the value of its shareholders’ equity and financial results.

In particular, the Group is exposed to risks regarding the exchange rate between the Euro and the US Dollar, since some of the companies of the Group usually sell goods on the North American market and on other markets where the US dollar is the main currency used for business (Far-East).

The Group constantly tries to reduce the effects deriving from fluctuations in the US currency by getting its supplies from local suppliers in areas where purchases are made in American dollars and thus implementing a sort of “natural hedging”. The remaining exposure can be hedged with currency forward contracts expiring in less than 12 months.

Furthermore, the Group owns shareholdings in subsidiaries located in areas outside the European Monetary Union, the variations in the net assets, deriving from fluctuations in the exchange rates of the local currency against the Euro, are recorded in a reserve of the consolidated shareholders’ equity named “conversion reserve”.

As far as the sensitivity analysis is concerned, note that an increase or decrease of 1% of the US dollar against the Euro would result respectively in an increase or a decrease of the 2010 operating profit of the Group of around 0.9 million Euro (1.3 million in 2009).

The tables below summarize the financial assets and liabilities of the Group per currency at 31 December 2010 and 31 December 2009:

______107 Consolidated Financial Statements Safilo Group S.p.A.

(Euro/000) December 31, 2010 Euro US Dollar Other currencies Total

Cash in hand and at bank 31,949 31,424 24,894 88,267 Trade receivables, net 136,797 69,294 65,226 271,317 Derivate financial instruments - - - - Other current assets 47,500 7,573 5,398 60,471 Total 216,246 108,291 95,518 420,055

Derivate financial instruments 177 - - 177 Other non-current assets 12,429 795 1,079 14,303 Total 12,606 795 1,079 14,480

Trade payables 117,051 69,998 17,140 204,189 Short-term borrowings 39,920 - 16,723 56,643 Derivate financial instruments 1,563 264 - 1,827 Tax payables and other current liabilities 59,354 10,914 19,825 90,093 Total 217,888 81,176 53,688 352,752

Short-term borrowings 212,463 72,810 2,521 287,794 Derivate financial instruments - 265 - 265 Other non-current liabilities 270 6,825 170 7,265 Total 212,733 79,900 2,691 295,324

(Euro/000) December 31, 2009 Euro US Dollar Other currencies Total

Cash in hand and at bank 6,664 17,259 13,463 37,386 Trade receivables, net 152,370 59,595 56,785 268,750 Derivate financial instruments - - - - Other current assets 50,062 7,692 6,557 64,311 Total 209,096 84,546 76,805 370,447

Derivate financial instruments 228 - - 228 Other non-current assets 10,265 721 1,736 12,722 Total 10,493 721 1,736 12,950

Trade payables 85,776 50,852 13,440 150,068 Short-term borrowings 115,309 41,906 20,909 178,124 Derivate financial instruments 5,549 - - 5,549 Tax payables and other current liabilities 57,560 7,776 16,752 82,088 Total 264,194 100,534 51,101 415,829

Short-term borrowings 416,862 26,191 4,229 447,282 Derivate financial instruments - - - - Other non-current liabilities 6,672 3,971 474 11,117 Total 423,534 30,162 4,703 458,399

108 ______Consolidated Financial Statements Safilo Group S.p.A.

Changes in fair value risk.

The Group holds some assets that are subject to variations in value over time according to the variations of the market on which they are traded. This risk is predominantly concentrated within the "available for sale” portfolio and is constantly monitored by the Group through real time information regarding the assets in question.

With regard to trade payables and receivables and other current and non-current assets, it is assumed that their book value is approximately equal to their fair value.

Interest rate risk.

Borrowing from banks exposes the Group to the risk of variations in the interest rates. In particular, floating-rate borrowings are subject to a cash flow risk.

At 31 December 2010, the floating-rate portion of the Group’s total borrowings (floating base Euribor/Libor) not subject to hedging amounted to 64,512 thousand Euro (accounting for 18.73% of total debt)

The Group monitors constantly its exposure to changes in interest rates, managing this risk through interest rate swaps (IRSs). The interest rate swap contracts are stipulated with primary financial institutions and, at the beginning of the hedge, the formal designation is made and the documentation relating to the hedge is prepared.

As far as the sensitivity analysis is concerned, a positive (negative) variation of 50 bps in the level of the short-term interest rates applied to the variable rate financial liabilities not subject to hedging would have represented a greater (lower) annual financial charge, on a pre-tax basis, of around 910 thousand Euro (1,391 thousand Euro at 31 December 2009).

Still in terms of sensitivity analysys, a reduction of 50 bps applied to the yield curve would have entailed a negative change in the fair value of the IRSs, on a pre-tax basis, of 1,296 thousand Euro (921 thousand Euro at 31 December 2009). On the other hand, an increase of 50 bps would have entailed a positive variation in the fair value of the IRSs, on a pre-tax basis, of 1,277 thousand Euro (910 thousand Euro at 31 December 2009).

The following table summarises the main characteristics of the most significant variable and fixed rate medium and long term borrowings outstanding at 31 December 2010 and 31 December 2009:

______109 Consolidated Financial Statements Safilo Group S.p.A.

December 31, 2010 Internal Nominal interest (Euro/000) Currency interest rate rate Book value Expiry

Facility A1 - T1 EURO Euribor 3.1586% 2,159 30/06/2012 Facility A1 - T2 EURO Euribor 2.9035% 24,756 30/06/2014 Facility A2 USD Libor 2.3946% 33,980 30/06/2012 Facility A3 USD Libor 2.3946% 38,830 30/06/2012

Revolving facility EURO Euribor n.a. - 30/06/2015

High Yield EURO 9.625% 10.6887% 181,755 15/05/2013

December 31, 2009 Internal Nominal interest (Euro/000) Currency interest rate rate Book value Expiry

Facility A1 EURO Euribor 2.5662% 56,000 31/12/2011 Facility A2 USD Libor 2.0954% 31,779 31/12/2011 Facility A3 USD Libor 2.0954% 36,318 31/12/2011

Revolving facility EURO Euribor 2.7087% 195,000 31/12/2012

High Yield EURO 9.625% 10.6887% 190,704 15/05/2013

Liquidity risk

This risk could generate the inability to find the necessary financial resources to back up the operating activities at good market terms within the timeframe available. The Group companies’ cash flows, borrowing requirements and liquidity are monitored constantly at central level by the Group’s treasury to ensure an effective and efficient use of the cash available.

In the first quarter of 2010 the Group’s recapitalisation and financial restructuring plan was fully implemented. Thanks to the equity injection and the change in the terms, conditions and maturity of the senior borrowing, the Group is now on sound footing again and has accordingly reduced the risk related to insufficient liquidity and the inability to obtain credit as needed.

The following table details the lines of credits granted to the Group, the uses and the lines of credit available at 31 December 2010 and 31 December 2009, net of factoring and leasing transactions:

110 ______Consolidated Financial Statements Safilo Group S.p.A.

December 31, 2010 Credit lines (Euro/000) granted Uses Credit lines available

Credit lines on bank accounts and short-term bank loans 76,972 15,753 61,219 Credit lines on long-term bank loans 304,785 104,785 200,000

Total 381,757 120,538 261,219

December 31, 2009 Credit lines (Euro/000) granted Uses Credit lines available

Credit lines on bank accounts and short-term bank loans 111,495 58,218 53,277 Credit lines on long-term bank loans 331,438 326,438 5,000

Total 442,933 384,656 58,277

______111 Consolidated Financial Statements Safilo Group S.p.A.

The table below summarises the financial assets and liabilities of the Group at 31 December 2010 and 31 December 2009 by maturity:

(Euro/000) December 31, 2010 within 1 year between 2 and 5 years beyond 5 years Total

Cash in hand and at bank 88,267 - - 88,267 Trade receivables, net 271,317 - - 271,317 Derivate financial instruments - - - - Other current assets 60,471 - - 60,471 Total 420,055 - - 420,055

Derivate financial instruments - 177 - 177 Other non-current assets - 14,060 243 14,303 Total - 14,237 243 14,480

Trade payables 204,189 - - 204,189 Tax payables 17,795 - - 17,795 Short-term borrowings 56,643 - - 56,643 Derivate financial instruments 1,827 - - 1,827 Other current liabilities 72,298 - - 72,298 Total 352,752 - - 352,752

Short-term borrowings - 287,794 - 287,794 Derivate financial instruments - 265 - 265 Other non-current liabilities - 5,375 1,890 7,265 Total - 293,434 1,890 295,324

(Euro/000) December 31, 2009 within 1 year between 2 and 5 years beyond 5 years Total

Cash in hand and at bank 37,386 - - 37,386 Trade receivables, net 268,750 - - 268,750 Derivate financial instruments - - - - Other current assets 64,311 - - 64,311 Total 370,447 - - 370,447

Derivate financial instruments - 228 - 228 Other non-current assets - 12,277 445 12,722 Total - 12,505 445 12,950

Trade payables 150,068 - - 150,068 Tax payables 18,651 - - 18,651 Short-term borrowings 178,124 - - 178,124 Derivate financial instruments 5,549 - - 5,549 Other current liabilities 63,437 - - 63,437 Total 415,828 - - 415,828

Short-term borrowings - 445,411 1,871 447,282 Derivate financial instruments - - - - Other non-current liabilities - 9,215 1,903 11,117 Total - 454,626 3,774 458,399

112 ______Consolidated Financial Statements Safilo Group S.p.A.

Classification of financial instruments

The table below shows the financial instruments reported on the balance sheet, according to the analyses requested by IFRS 7, with indication of the valuation criteria applied and, in the case of “financial instruments measured at fair value”, the impact on the income statement or the shareholders' equity. If applicable, the last column of the table shows the fair value of the financial instrument.

Financial instruments Financial instruments Investments at fair value through Financial and non- Current instruments listed value at Fair value Income at amortised financial Dec. 31, at Dec. 31, (Euro/000) Statement Equity cost assets at cost 2010 2010 ASSETS Cash in hand and at bank - - 88,267 - 88,267 88,267 Trade receivables, net - - 271,317 - 271,317 271,317 Derivate financial instruments - 177 - - 177 177 Options ------Financial assets available for sale 440 54 - 46 540 540 Other current assets - - 60,471 - 60,471 60,471 Other non-current assets - - 13,763 - 13,763 13,763 Total assets 440 231 433,818 46 434,535 434,535

LIABILITIES Short-term and long-term borrowings - - 162,682 - 162,682 162,682 High Yield - - 181,755 - 181,755 188,637 Derivate financial instruments 1,827 265 - - 2,092 2,092 Other current liabilities - - 72,298 - 72,298 72,298 Other non-current liabilities - - 7,265 - 7,265 7,265 Total liabilities 1,827 265 424,000 - 426,092 432,974

Financial instruments Financial instruments Investments at fair value through Financial and non- Current instruments listed value at Fair value Income at amortised financial Dec. 31, at Dec. 31, (Euro/000) Statement Equity cost assets at cost 2009 2009 ASSETS Cash in hand and at bank - - 37,386 - 37,386 37,386 Trade receivables, net - - 268,750 - 268,750 268,750 Options 228 - - - 228 228 Financial assets available for sale - 761 - 45 806 806 Other current assets - - 64,311 - 64,311 64,311 Other non-current assets - - 11,916 - 11,916 11,916 Total assets 228 761 382,363 45 383,397 383,397

LIABILITIES Short-term and long-term borrowings - - 434,702 - 434,702 434,702 High Yield - - 190,704 - 190,704 181,438 Derivate financial instruments 5,549 - - - 5,549 5,549 Other current liabilities - - 63,437 - 63,437 63,437 Other non-current liabilities - - 11,117 - 11,117 11,117 Total liabilities 5,549 - 699,960 - 705,509 696,243

______113 Consolidated Financial Statements Safilo Group S.p.A.

Hierarchical levels of the fair value measurement

As regards financial instruments reported in the balance sheet valued at the fair value, the IFRS 7 amendment requires that these values are classified based on a three-level hierarchy that reflects the significance of the input used in determining the fair value. In particular, the amendment defines three levels of fair value:

¾ Level 1 – if the instrument is quoted in an active market;

¾ Level 2 - if the fair value is measured based on valuation techniques for which all significant inputs are based on observable market data, other than quotations of the financial instrument;

¾ Level 3 – if the fair value is calculated based on valuation techniques for which any significant input is not based on observable market data.

The following table shows the liabilities and assets valued at their fair value at 31 December 2010, split by hierarchical level of the fair value.

(Euro/000) Level 1 Level 2 Level 3 Total

Investments at fair value - available for sale 494 - - 494 Derivate financial instruments - 177 - 177 Total assets 494 177 - 671

Financial derivate instruments - (2,092) - (2,092) Total liabilities - (2,092) - (2,092)

In 2010, there have been no transfers from the level 1 to the level 2 and vice versa.

The following table shows the changes taking place in level 3 in 2010:

(Euro/000) Options

Balances at December 31, 2009 228

Gain and (losses) recognised in profit or loss (228)

Balances at December 31, 2010 -

In 2010, there have been no transfers from the level 3 to other levels and vice versa.

114 ______Consolidated Financial Statements Safilo Group S.p.A.

4. Notes to the consolidated balance sheet

4.1 Cash in hand and at bank

This item represents the temporary availability of liquidity held at market rates conditions. The book value of the available liquidity is aligned with its fair value at the reporting date and the related credit risk is very limited as the counterparts are primary banks.

The following table shows the reconciliation of the entry “Cash in hand and at bank” with the cash balance presented on the cash flow statement:

(Euro/000) December 31, 2010 December 31, 2009

Cash in hand and at bank 88,267 37,386 Bank overdrafts (1,222) (6,093) Bank borrowings current (14,550) (52,212)

Total 72,495 (20,919)

4.2. Trade receivables, net

This item breaks down as follows:

(Euro/000) December 31, 2010 December 31, 2009

Gross value 302,097 297,327 Allowance for doubtful accounts and sales returns (30,780) (28,577)

Net value 271,317 268,750

At constant exchange rates, trade receivables, net of changes in the allowance for doubtful accounts, fell by 8,656 thousand Euro. It should be highlighted that the Group has no particular concentration of credit risk, as its credit exposure is spread over a large number of clients. Furthermore the book value of trade receivables is considered to be approximately equal to their fair value.

At 31 Decembre 2010, trade receivables included receivables sold to prime factoring companies that do not qualify for derecognition under IAS 39 for a total of 59,924 thousand Euro (61,816 thousand Euro at 31 December 2009).

The allowance for doubtful accounts and returns includes:

- Provisions for doubtful accounts charged to the income statement under “General and administrative expenses” (note 5.4).

______115 Consolidated Financial Statements Safilo Group S.p.A.

- Provisions against the risk of returns of products sold and delivered to customers that, based on the relevant sales contracts, might be returned. This sum is charged to the income statement and is deducted directly from revenues.

The following table shows changes in allowance occurring during FYs 2009 and 2010:

Balance at Posted to Changes in Balance at January 1, income the scope of Transl. December (Euro/000) 2009 statement Use(-) consolidation Diff. 31, 2009

Allowance for bad debts 13,506 8,934 (3,062) (287) 178 19,269 Allowance for sales returns 9,741 2,175 (2,383) - (225) 9,308

Total 23,247 11,109 (5,445) (287) (47) 28,577

Balance at Posted to Changes in Balance at January 1, income the scope of Transl. December (Euro/000) 2010 statement Use(-) consolidation Diff. 31, 2010

Allowance for bad debts 19,269 7,789 (7,793) - 404 19,669 Allowance for sales returns 9,308 3,044 (1,944) - 703 11,111 - Total 28,577 10,833 (9,737) - 1,107 30,780

4.3 Inventories

This item breaks down as follows:

December 31, 2010 December 31, 2009

Raw materials 59,378 49,809 Work-in-progress 6,028 5,377 Finished products 216,301 202,836 Gross 281,707 258,022 Obsolescence provision (-) (61,264) (49,649)

Total 220,443 208,373

Given obsolete and slow-moving items, provisions are made on the basis of factors that reflect the possibility that finished products are sold and that raw materials and semi-finished products are used in production in future. This item is charged to income under “cost of sales”.

116 ______Consolidated Financial Statements Safilo Group S.p.A.

The movements in the aforementioned provision are shown below:

Balance at Changes in the Balance at January 1, Changes of the scope of December 31, (Euro/000) 2009 period consolidation Transl. Diff. 2009

Obsolescence provision 36,588 14,131 (1,250) 180 49,649

Total 36,588 14,131 (1,250) 180 49,649

Balance at Changes in the Balance at January 1, Changes of the scope of December 31, (Euro/000) 2010 period consolidation Transl. Diff. 2010

Obsolescence provision 49,649 10,218 (765) 2,162 61,264

Total 49,649 10,218 (765) 2,162 61,264

4.4 Derivative financial instruments

The following table summarises the amount of financial instruments reported in the balance sheet as at 31 December 2010 and 2009:

(Euro/000) December 31, 2010 December 31, 2009

Non-current assets: - Interest rate swaps - cash flow hedge 177 - - Options - 228 Total 177 228

Current liabilities: - Foreign currency contracts - at fair value through P&L - 338 - Interest rate swaps - at fair value through P&L 1,827 5,211 Total 1,827 5,549

Non-Current liabilities: - Interest rate swaps - cash flow hedge 265 - Total 265 -

The net market value of IRSs used as hedge reported in the balance sheet at 31 December 2010 was negative for 88 thousand Euro, according to estimates by specialised financial institutions on the basis of regular market conditions. The Group’s policies for managing interest rate risk normally envisage hedging of future cash flows that will be reported in subsequent years. Given this, the related hedging effect must be suspended in the cash flow reserve and recognised in profit or loss in subsequent years when the expected flows actually emerge.

There is a portfolio of interest rate swaps that, following the debt restructuring, no longer qualified as hedge as early as 2009 and, as such, it is recognised at fair value through profit or loss. This portfolio, which will expire in 2011, has a negative value of 1,827 thousand Euro.

______117 Consolidated Financial Statements Safilo Group S.p.A.

The following table summarises the characteristics and fair value of IRS contracts in place as at 31 December 2010 and 31 December 2009:

Interest rate swaps December 31, 2010 December 31, 2009

(Euro/000) Contractual value Fair value Contractual value Fair value (USD/000) (Euro/000) (Euro/000) (USD/000) (Euro/000) (Euro/000)

Expiry year 2010 - - - - 55,000 (1,386) Expiry year 2011 - 49,000 (1,397) - 65,000 (2,847) Expiry year 2011 26,938 - (430) 48,488 - (978) Expiry year 2012 - 2,170 2 - - - Expiry year 2012 98,100 - (265) - - - Expiry year 2014 - 25,000 175 - - -

Total 125,038 76,170 (1,915) 48,488 120,000 (5,211)

4.5 Other current assets

This item breaks down as follows:

(Euro/000) December 31, 2010 December 31, 2009

VAT receivable 11,086 7,197 Tax credits and payments on account 10,214 15,378 Prepayments and accrued income 21,323 22,212 Receivables from agents 602 1,083 Other current receivables 17,246 18,441

Total 60,471 64,311

The tax credits and payments on account principally relate to tax credits and prepayments made during the financial year which will be offset against the relative tax payable.

As at 31 December 2010 prepayments and accrued income amounted to 21,323 thousand Euro and mainly consisted of:

¾ prepaid royalty costs of 16,026 thousand Euro;

¾ prepaid advertising costs of 1,327 thousand Euro;

¾ prepaid rent and operating lease costs of 1,869 thousand Euro;

¾ prepaid insurance for 357 thousand Euro.

The receivables from agents mainly refer to receivables deriving from the sale of samples.

Other current receivables amounted to 17,246 thousand Euro, compared to 18,441 thousand Euro in 2009, and related mainly:

¾ To the prepayment of minimum guaranteed royalties for 2011 for 11,282 thousand Euro; 118 ______Consolidated Financial Statements Safilo Group S.p.A.

¾ receivables reported in the balance sheet of the subsidiary Safilo S.p.A. for EUR 2,417 thousand, referring to receivables due from bankrupt customers for the amount of credit relating to VAT which, pursuant to Italian tax legislation, can only be recovered when the distribution plan of the bankruptcy procedure is executed;

¾ deposit payments due within 12 months for 370 thousand Euro;

¾ amounts receivable for insurance refunds totalling 991 thousand Euro.

It is considered that the book value of the other current assets is approximately equal to their fair value.

______119 Consolidated Financial Statements Safilo Group S.p.A.

4.6 Tangible assets

The table below summarises the changes occurred in this item in the years ended 31 December 2009 and 2010:

Balance at Changes in Balance at Transl. January 1, Increase Decrease Reclass. the scope of December diff. 2009 consolidation 31, 2009 (Euro/000)

Gross value

Land and buildings 129,048 7,478 (1,207) 7,219 (9,310) (147) 133,081 Plant and machinery 177,913 8,595 (4,927) - - (437) 181,144 Equipment and other assets 192,555 15,447 (4,309) (3,053) (8,224) (830) 191,586 Assets under constructions 6,439 5,295 (151) (7,405) - (30) 4,148 Total 505,955 36,815 (10,594) (3,239) (17,534) (1,444) 509,959

Accumulated depreciation

Land and buildings 33,708 10,354 (2,680) 2,113 (8,233) 348 35,610 Plant and machinery 116,305 11,583 (3,392) - - (124) 124,372 Equipment and other assets 127,184 24,672 (3,692) (698) (5,570) (498) 141,398 Total 277,197 46,609 (9,764) 1,415 (13,803) (274) 301,380

Net book value 228,758 (9,794) (830) (4,654) (3,731) (1,170) 208,579

Balance at Changes in Balance at Transl. January 1, Increase Decrease Reclass. the scope of December diff. 2010 consolidation 31, 2010 (Euro/000)

Gross value

Land and buildings 133,081 2,702 (2,953) 251 (3,848) 2,786 132,019 Plant and machinery 181,144 13,401 (5,714) (5,010) - 1,359 185,180 Equipment and other assets 191,586 14,085 (6,897) 5,281 (4,058) 6,401 206,398 Assets under constructions 4,148 1,674 - (4,507) - 78 1,393 Total 509,959 31,862 (15,564) (3,985) (7,906) 10,624 524,990

Accumulated depreciation

Land and buildings 35,610 4,190 (2,558) 67 (1,608) 414 36,115 Plant and machinery 124,372 9,096 (5,512) (2,897) - 336 125,395 Equipment and other assets 141,398 20,254 (6,261) 2,739 (1,895) 3,565 159,800 Total 301,380 33,540 (14,331) (91) (3,503) 4,315 321,310

Net book value 208,579 (1,678) (1,233) (3,894) (4,403) 6,309 203,680

A total of 27,355 thousand Euro was invested in tangible fixed assets in the financial period (33,568 thousand Euro at 31 December 2009), mainly as follows:

¾ 10,994 thousand Euro for the Italian factories, mainly for the upgrading of plants and for the purchase and production of equipment for new models;

120 ______Consolidated Financial Statements Safilo Group S.p.A.

¾ 6.035 thousand Euro to increase the productive capacity of the new Chinese factory;

¾ 3,452 thousand Euro in the production facility of the Slovenian subsidiary Carrera d.o.o.;

¾ 4,740 thousand Euro for the U.S. companies, mainly for development of the U.S. retail store chain;

¾ the remaining part in other companies of the Group.

Several companies of the Group have purchased tangible fixed assets under finance lease contracts. The following table shows the gross value and the related accumulated depreciation, while the relating debt to the lessor is reported in paragraph 4.13 “Borrowings”.

(Euro/000) December 31, 2010 December 31, 2009

Land and buildings 14,261 15,437 Accumulated depreciation (-) (1,944) (2,032) Net book value 12,317 13,405

Plant and machinery 3,249 3,249 Accumulated depreciation (-) (3,100) (2,860) Net book value 149 389

Equipment and other assets 773 1,534 Accumulated depreciation (-) (424) (666) Net book value 349 868

Total 12,815 14,662

______121 Consolidated Financial Statements Safilo Group S.p.A.

4.7 Intangible assets

The following table shows changes in intangible fixed assets for the years ending on 31 December 2009 and 2010:

Balance at Changes in the Balance at Transl. January 1, Increase Decrease Reclass. scope of December diff. 2009 consolidation 31, 2009 (Euro/000)

Gross value

Software 17,754 3,063 (100) - (804) (157) 19,756 Trademarks and licenses 42,930 198 (3) - (27) 13 43,111 Other intangible assets 9,573 479 (215) (173) (644) 36 9,056 Intangible assets in progress 431 - (10) (421) - - - Total 70,688 3,740 (328) (594) (1,475) (108) 71,923

Accumulated depreciation

Software 12,140 2,508 (67) - (387) (55) 14,139 Trademarks and licenses 29,869 3,406 - - (13) 8 33,270 Other intangible assets 5,954 927 (186) (173) (87) (28) 6,407 Total 47,963 6,842 (253) (173) (487) (75) 53,817

Net book value 22,725 (3,102) (75) (421) (988) (33) 18,106

Balance at Changes in the Balance at Transl. January 1, Increase Decrease Reclass. scope of December diff. 2010 consolidation 31, 2010 (Euro/000)

Gross value

Software 19,756 1,561 (248) 224 (42) 962 22,213 Trademarks and licenses 43,111 235 - - - 62 43,408 Other intangible assets 9,056 184 (134) 19 (1,103) 103 8,125 Intangible assets in progress - 83 - - - - 83 Total 71,923 2,063 (382) 243 (1,145) 1,127 73,829

Accumulated depreciation

Software 14,139 2,449 (191) 128 (5) 557 17,077 Trademarks and licenses 33,270 3,402 - - - 40 36,712 Other intangible assets 6,407 648 (133) - (446) (168) 6,308 Total 53,817 6,499 (324) 128 (451) 429 60,098

Net value 18,106 (4,436) (58) 115 (694) 698 13,731

Amortisation and depreciation for 2010 and 2009 are allocated over the following income statement items:

122 ______Consolidated Financial Statements Safilo Group S.p.A.

(Euro/000) Note 2010 2009

Cost of sales 5.2 18,956 22,220 Selling and marketing expenses 5.3 8,470 13,766 General and administrative costs 5.4 12,613 13,544

Net value 40,039 49,530

4.8 Goodwill

Balance at Changes in Balance at Transl. January 1, Increase Decrease the scope of December 2009 diff. (Euro/000) consolidation 31, 2009

Goodwill 807,209 - (264,879) (22,907) (1,004) 518,419

Net book value 807,209 - (264,879) (22,907) (1,004) 518,419

Balance at Changes in Balance at Transl. January 1, Increase Decrease the scope of December diff. (Euro/000) 2010 consolidation 31, 2010

Goodwill 518,419 311 - (3,018) 34,301 550,013

Net book value 518,419 311 - (3,018) 34,301 550,013

The table below provides a breakdown of goodwill, allocated over the CGUs, by geographical area.

(Euro/000) Italy and Americas Asia Total Europe

December 31, 2010 161,494 200,316 188,203 550,013 December 31, 2009 157,611 187,178 173,630 518,419

Impairment test Below we describe the approach followed and the assumptions made to perform the impairment test:

For impairment test purposes, the Group has identified its cash-generating units (CGUs), which in essence correspond with the entities operating in each country.

The recoverable amount of the CGUs is based on their value in use determined on estimated future cash flow projections. This calculation is based on five-year projections made on the basis of the 2011 budget approved by the Board of Directors.

______123 Consolidated Financial Statements Safilo Group S.p.A.

Overall, the biggest differences compared with the impairment test performed when the 2009 financial statements were prepared stem from the following factors:

¾ the management used more recent information on future projections, the same used for the 2011 budget;

¾ the market risk premium used to calculate the weighted average cost of capital (WACC) decreased for all areas, except for Australia, where it remained unchanged;

¾ the growth rates for the years following the plan’s horizon (“g” rate) were unchanged for the CGUs in Europe, U.S., and Australia, whereas in the other areas the growth rates were adapted to the rate of inflation expected by analysts for 2011.

The cash flows considered for purposes of the impairment test conducted were built on the basis of the 2011 budget approved by the Board of Directors and developed for the following years on the basis of the best knowledge available within the company.

To calculate the present value, the future cash flows thus obtained were discounted to present value at a discount rate (WACC) as at the test’s date of reference that took the peculiarities and risks typical of each area where the Group operates into account.

The cash flows generated after the five-year horizon were determined on the basis of perpetual growth rates considered prudential with reference to the economic conditions of the country of reference.

The following table summarises the WACC (after tax) and “g” rates used by the Group for the analyses performed when preparing financial statements for the year ended on 31 December 2010:

Key assumptions "WACC" discount rate Growth rate "g"

December 31, December 31, December 31, December 31, 2010 2009 2010 2009

Euro area 6.5% 6.9% 1.0% 1.0% USA area 6.7% 7.2% 1.0% 1.0% Far East area 7.8% 8.6% 3.3% 2.3% Australia 9.0% 9.0% 1.0% 1.0% India 10.2% 11.4% 6.0% 5.7% Brasil 9.6% 10.0% 5.0% 4.2%

The impairment test performed by the Group did not show the need to reduce the value of goodwill in 2010. The Group’s management will continue to focus on circumstances and events that cause any goodwill impairment in future. In monitoring the goodwill value, the management developed sensitivities on the basis of various hypothetical future scenarios. The impairment test was performed in accordance with projections developed within the most conservative of the various sensitivities. The sensitivity analysis performed on the outcome of the test, in terms of changes in the basic assumptions that determine the extent of the impairment, yielded the following results:

124 ______Consolidated Financial Statements Safilo Group S.p.A.

- if the WACC used rose by approximately 1%, the goodwill of each CGU would be impaired by approximately 7 million Euro while there would be no impairment considering the entire Group.

- If g were reduced by 20%, goodwill would not be subject to any impairment.

- If the operating results of the CGUs with goodwill allocated were to fall by 10% as a result of reduced sales volumes, goodwill for each CGU would take impairment charges of approximately 2 million Euro. On the other hand, there would be no impairment considering the entire Group.

4.9 Investments in associates

At 31 December 2010, this item reflected the following:

Registered office or % of share Company headquarters capital Type of investment Main activity

TBR Inc. USA 33.3% Associate Real estate Elegance I. Holdings Ltd Hong Kong 23.05% Associate Commercial Optifashion As Turkey 50.0% Non-consolidated subsidiary Commercial

Movements in investments in associates during FY2010 were as follows:

January 1, 2010 Movements of the period

Share of results and Revaluation/ Transl. Gross value Value at write-down of divid. Value at (write-down) diff. January of associates December (Euro/000) 1, 2010 31, 2010

TBR Inc. 413 (91) 322 160 24 506 Elegance I. Holdings Ltd 5,124 6,345 11,469 123 863 12,455 Optifashion As 353 (112) 241 - - 241

Total 5,890 6,142 12,032 283 887 13,202

The change vs. 31 December 2009 was mainly due to the profits made in the year by the above companies, net of dividends distributed. The table below shows the principal data relating to the last approved financial statements of the above-mentioned companies:

Group Net profit shareholders' (Euro/000) Assets Liabilities Equity Revenues (loss) % Group equity

TBR Inc. 5,659 4,142 1,517 1,294 481 33.33% 506 Elegance I. Holdings Ltd 62,564 10,559 52,006 26,035 1,470 23.05% 11,987 Optifashion As 435 67 368 791 (46) 50.00% 184

Total 68,659 14,768 53,891 28,121 1,905 12,677

______125 Consolidated Financial Statements Safilo Group S.p.A.

The associated company Elegance Ltd closes its financial period on 31 March every year. For the purposes of valuation of the investment using the equity method, the last available set of approved accounts was used, i.e. the half year interim report as at 30 September 2010 prepared for disclosure to the Hong Kong Stock Exchange. The fair value of this investment, which reflects the closing market price at 31 December 2010, amounted to approximately 5.7 million Euro, compared with 5 million Euro at 31 December 2009. Such amount is deemed to be lower than the recoverable value of the investment.

TBR Inc. is a U.S. real estate company, of which the Group acquired 33.33% in 2002. On 14 February 2011 the Group acquired the remaining 66.67% of this company, thus increasing its equity interest to 100%, for USD 9.3 million. Our subsidiary Safilo USA leases its headquarters and distribution centre in the U.S. (New Jersey) based on a lease agreement with this real estate company.

The company Optifashion A.s. with registered office in Istanbul (Turkey), a 50% held subsidiary of the Group, is not included in the consolidation perimeter, since the amounts are considered insignificant for the purpose of representing a true and fair view of the Group’s financial position and result.

4.10 Available-for-sale financial assets

This item includes financial assets that may be sold. They are measured at fair value with changes in fair value recognised in equity, according to the modalities indicated in paragraph 2.9.

Value at December Value at December (Euro/000) Relationship 31, 2010 31, 2009

Gruppo Banco Popolare Other equity investment 440 680 Unicredit S.p.A. Other equity investment 54 80 Others Other equity investment 46 46

Total 540 806

The table below shows the changes occurred during the year:

December 31, 2009 Movements for the year

Gross Revaluation/ Revaluation/ value (write-down) Net Increase/ (write-down) Value at December (Euro/000) value (Decrease) 31, 2010

Gruppo Banco Popolare 4,096 (3,416) 680 - (240) 440 Unicredit S.p.A. 48 32 80 - (26) 54 Other 46 - 46 - - 46

Total 4,190 (3,384) 806 - (266) 540

The value of the investments in Gruppo Banco Popolare and Unicredit S.p.A. was determined with reference to the prices quoted on the official markets at the balance sheet date. The change in fair value of the investment in Gruppo Banco Popolare was recognised through profit and loss in light of the significant and protracted reduction in fair value according to IAS 39. 126 ______Consolidated Financial Statements Safilo Group S.p.A.

4.11 Deferred tax assets and deferred tax liabilities

Deferred tax assets (net of deferred tax liabilities) relating to some Group companies have been written down via provisioning of an allowance for tax credit impairment in order to take into account market trends and the prospects for future profitability. This provisioning, considered prudential, amounts to Euro 72.773 thousand. This write-down can be reversed in future years in the presence of taxable income able to absorb tax losses and temporary differences between the carrying value of assets and liabilities and their tax base.

The following table shows the amounts of deferred tax assets and liabilities, net of the write-down applied:

(Euro/000) December 31, 2010 December 31, 2009

Deferred tax assets 123,478 112,610 Depreciation Fund (-) (72,773) (70,892)

Total net deferred tax assets 50,705 41,718

Deferred tax liabilities (1,708) (3,531)

Net total 48,997 38,187

______127 Consolidated Financial Statements Safilo Group S.p.A.

The table below provides details of the items affected by temporary differences on which deferred tax assets and liabilities were calculated.

Deferred tax assets

Posted to Changes in Balance at Transl. Balance at the scope of January 1, Income diff. December (Euro/000) 2010 statement Equity consolidation 31, 2010

- Tax losses carryforward 35,518 (6,160) - - (317) 29,041 - ICO profit on inventories and obsolescence 22,705 4,788 - (229) 1,625 28,889 - Adjustments on receivables 7,075 (348) - (13) 346 7,060 - Contingent liabilities 5,066 1,648 - - 22 6,736 - Employees benefit liabilities 404 176 - - 102 682 - Intangible assets 4,559 (298) - - 6 4,267 - Tangible assets 14,644 1,625 - (53) 104 16,320 - Fair value of derivate instruments 149 (84) 62 - 0 127 - Other payables 20,875 6,636 - (68) 35 27,478 - Other temporary differences 1,615 (733) 1,659 - 337 2,878 - Tot. deferred tax assets 112,610 7,250 1,721 (363) 2,260 123,478

- Devaluation of def. tax assets on tax losses (34,925) 7,404 - - 375 (27,146) - Devaluation of deferred tax assets on other temporary differences (35,967) (7,611) (1,659) (1) (389) (45,627) - Total allowance on deferred tax assets (70,892) (207) (1,659) (1) (14) (72,773)

Total net 41,718 7,043 62 (364) 2,246 50,705

Deferred tax liabilities

Posted to Changes in the Balance at Transl. Balance at scope of January 1, Income diff. December (Euro/000) 2010 statement Equity consolidation 31, 2010

- Depreciation differences 976 (396) - - 55 635 - Goodwill 563 485 - - 33 1,081 - Investments 1,529 (1,662) - - 133 0 - Dividends 10 (12) - - 1 0 - Intercompany profit on inventories 98 36 - (50) 21 106 - Adjustments on receivables and payables 47 (1) - (41) 7 12 - Other 308 (476) - (13) 56 (126)

Totale 3,531 (2,025) - (104) 306 1,708

The table below shows the Group’s tax loss carryforwards for which deferred tax assets were recognised. It must be highlighted that, as stated in the previous paragraph, deferred tax assets calculated on the losses of some Group companies have been written down by a total of 27,146 Euro thousand because, at present, recovery via future taxable income is not considered likely.

128 ______Consolidated Financial Statements Safilo Group S.p.A.

Deferred tax Financial year Maturity Tax losses assets (Euro/000)

2006 2011 4,010 1,103 2007 2012 6,709 1,212 2008 2013 8,443 1,519 2009 2014 25,256 5,747 2009 2024 25,007 7,502 2009 unlimited 1,115 222 2010 2015 42,283 11,131 2010 2025 1,644 493 2010 unlimited 682 112

Total 115,148 29,041

Provision (27,146)

Total deferred tax assets on losses carried forward 1,895

The following table instead shows deferred tax assets and liabilities split between the portion recoverable within one year and the portion recoverable after more than one year.

(Euro/000) December 31, 2010 December 31, 2009

Deferred tax assets - recoverable within one year 16,040 11,616 - recoverable beyond one year 34,665 30,102 Total 50,705 41,718

Deferred tax liabilities - recoverable within one year 72 132 - recoverable beyond one year 1,637 3,400 Total 1,708 3,531

Total net 48,997 38,187

______129 Consolidated Financial Statements Safilo Group S.p.A.

4.12 Other non-current assets

The table below shows details of non-current assets

(Euro/000) December 31, 2010 December 31, 2009

Receivables from Social Security Institution 11,323 9,017 Long-term guarantee deposit 2,216 2,575 Other long-term receivables 224 324

Total 13,763 11,916

Amounts receivable from the Italian state pension & welfare agency (INPS) – refer to the central treasury fund set up by the INPS and, in turn, to credits for the portions of employee post-employment benefit provision transferred to that fund following the changes introduced by the Italian National Budget Law no. 296/2006.

It is considered that the book value of the other non-current assets is approximately equal to their fair value.

130 ______Consolidated Financial Statements Safilo Group S.p.A.

4.13 Borrowings

This item breaks down as follows:

(Euro/000) December 31, 2010 December 31, 2009

Short-term borrowings

Bank overdrafts 1,222 6,093 Short-term bank loans 14,550 52,212 Short-term portion of long-term bank loans 1,250 77,289 Short-term portion of financial leasing 1,299 1,609 Debt to the factoring company 38,213 40,815 Other short-term loans 109 106

Total 56,643 178,124

Long-term borrowings

Medium-long term loans 100,207 248,588 Ordinary bonds 181,755 190,704 Medium-long term financial leasing 5,486 7,536 Other medium-long term loans 346 454

Total 287,794 447,282

Total borrowings 344,437 625,406

On 5 February 2010, a contract was signed providing for the following changes to the Senior loan contract signed on 26 June 2006 by subsidiaries Safilo S.p.A. and Safilo USA Inc. with a pool of banks coordinated by UniCredit Banca Mobiliare S.p.A. (now UniCredit Bank AG):

- the redefinition of the tranches making up Facility A1 of the Senior Loan as follows: Tranche 1 Facility A1 (approximately EUR 2 million) and Tranche 2 Facility A1 (EUR 25 million);

- the redefinition of the purpose of the revolving line of the senior loan (Facility B) in order to also allow for the redemption of the high-yield (HY) bonds upon maturity in 2013;

- improvement for the Group of interest spreads applied to the different credit lines; for the revolving line (Facility B), a system in which the spread decreases in relation to changes in the net debt/consolidated EBITDA ratio (leverage ratio);

- a change in the methods of repayment and the final expiration for repayment of the lines of credit as follows: for Tranche 1 Facility A1, Facility A2 and Facility A3 repayment will change from half-yearly instalments and maturity on 31 December 2011 to a bullet repayment on 30 June 2012; for Tranche 2 Facility A1 repayment will change from half-yearly instalments and maturity on 31 December 2011 to a bullet repayment on 30 June 2014; for the revolving line (Facility B), repayment will be postponed from 31 December 2012 to 30 June 2015.

______131 Consolidated Financial Statements Safilo Group S.p.A.

- a covenant holiday until 30 June 2012, with the exception of those covenants related to the observance, beginning on the effective date of the restructuring agreement, of a general threshold of net debt. From 30 June 2012, with checks on 30 June and 31 December of every year, covenants relating to consolidated net debt/consolidated EBITDA (leverage ratio), EBITDA/net interest expenses (Interest Cover Ratio) will be subject to compliance with the new levels defined in the agreement.

At 31 December 2010, the aforementioned loan was booked under “Medium-/long-term bank loans”, and breaks down as follows:

¾ “Facility A1 –Tranche 1”, for 2.2 million Euro, maturing on 30 June 2012;

¾ “Facility A1 –Tranche 2”, for 24,7 million Euro, maturing 30 June 2014;

¾ “Facility A2” in USD for a total amount equivalent to 34.0 million Euro, maturing on 30 June 2012;

¾ “Facility A3” in USD for a total amount equivalent to 38.8 million Euro, maturing on 30 June 2012;

¾ The revolving line called “Facility B”, for an amount of up to 200 million Euro, maturing on 30 June 2015, consisting of two tranches disbursable also in USD, which was unused at 31 December 2010.

The Senior Loan contract includes a series of obligations and restrictions that concern operational and financial aspects relating to subsidiaries Safilo S.p.A. and Safilo USA, to protect the integrity of the guarantees provided to the financing banks, and which mainly translate into prohibiting, beyond certain limits set out in the contract, the provision of collateral in favour of third parties ( “negative pledge”), the incurring of financial debt beyond that resulting from the Senior Loan and HY bonds, the carrying out extraordinary company transactions, and the obligation to fulfil periodic disclosure requirements relating to financial data.

As regards financial commitments, from 30 June 2012, the company must comply with certain metrics “covenants” calculated on the basis of financial statement data at the end of each half-year. Failure to comply with such covenants would make it necessary to negotiate with the lenders the terms and conditions to continue the lending relationship, either through waivers or by changing the metrics associated with such convenants. If this were not the case an event of default could arise, which would involve acceleration of the loan repayment.

The main covenants are associated with the net debt/EBITDA the EBITDA/Net interest for the period ratios.

The collateral for the above loans, which are evaluated according to the amortised cost method, is composed mainly of pledges on Safilo S.p.A. shares and guarantees supplied by the companies directly financed.

The item Ordinary Bond refers to the High Yield bond loan, issued on 15 May 2003 by the Luxembourgian subsidiary Safilo Capital International S.A. at the fixed rate of 9.625%, for an original nominal amount of Euro 300 million, due to mature on 15 May 2013. On 13 January 2006 the Luxembourgian subsidiary repaid 35% of the nominal amount of Euro 105 million early.

In 2010, the subsidiary Safilo S.p.A. purchased, in different instances, a total nominal value of approximately 10.3 million Euro - representing around 5.3% of total bonds outstanding. The market price was 99.73 and the total price paid was approximately 10.2 million Euro. The purchase was completed to reduce the Group’s interest expense.

132 ______Consolidated Financial Statements Safilo Group S.p.A.

Following this purchase, the amount of bonds outstanding calculated with the amortised cost totalled 181,755 thousand Euro.

The payables for finance leases refer to tangible assets owned under lease contracts by some Group companies. The residual life of lease contracts varies from 2 to 5 years. All the lease contracts in force involve repayments at constant instalments and no restructuring of the original plans is envisaged.

The following table illustrates the short term and medium/long term portions relating to lease contracts at 31 December 2010:

(Euro/000) December 31, 2010 December 31, 2009

Short-term portion of financial leasing 1,299 1,609 Long-term portion of financial leasing 5,486 7,536

Total debt 6,785 9,145

Some Group companies have stipulated operating lease contracts. The rental costs for operating leases are posted in the income statement under “Cost of sales” (note 5.2), “Selling and marketing expenses” (note 5.3) and “General and administrative costs” (note 5.4).

The “other medium and long-term loans” mainly refer to a loan granted to the subsidiary Safilo S.p.A. valid under law 46/82 at a fixed rate of 0.705%.

The short-term payables towards factoring companies are for contracts stipulated with leading factoring companies by the subsidiary Safilo S.p.A. for 37,347 thousand Euro and by the subsidiary Safilo do Brasil for 866 thousand Euro.

The expiry dates of medium- and long-term loans are the following:

(Euro/000) December 31, 2010 December 31, 2009

Within 2 years 76,877 53,156 From 2 to 3 years 183,730 197,949 From 3 to 4 years 25,538 193,079 From 4 to 5 years 1,650 1,227 Beyond 5 years - 1,871

Total 287,794 447,282

______133 Consolidated Financial Statements Safilo Group S.p.A.

The following table shows the breakdown of net financial debt. This has been calculated consistently with Paragraph 127 of the CESR/05-054b recommendation implementing the European regulation CE 809/2004 and in line with the CONSOB (Italian securities & exchange commission) requirements of 26 July 2007.

Net financial position December 31, December 31, (Euro/000) 2010 2009 Change

A Cash and cash equivalents 88,267 37,386 50,881 B Cash and cash equivalents included as Assets held for sale - - - C Current securities (securities held for trading) - - - D Liquidity (A+B+C) 88,267 37,386 50,881

E Receivables from financing activities - - -

F Bank overdrafts and short-t. bank borrowings (15,772) (58,305) 42,533 G Current portion of long-term borrowings (1,250) (77,289) 76,039 H Other short-term borrowings (39,621) (42,530) 2,909 I Debts and other current financial liabilities (F+G+H) (56,643) (178,124) 121,481

J Current financial position, net (D)+(E)+(I) 31,624 (140,738) 172,362

K Long-term bank borrowings (100,207) (248,588) 148,381 L Ordinary bonds (181,755) (190,704) 8,949 M Other long-term borrowings (5,832) (7,990) 2,158 N Debts and other non current financial liabilities (K+L+M) (287,794) (447,282) 159,488

I Net financial position (J)+(N) (256,170) (588,020) 331,850

134 ______Consolidated Financial Statements Safilo Group S.p.A.

The following shows the breakdown of bank and other borrowings by currency:

(Euro/000) December 31, 2010 December 31, 2009

Short-term Euro 39,920 115,310 US Dollar - 41,906 Brazilian Real 895 1,282 Japanese Yen 2,802 2,253 Chinese Renminbi 12,923 16,878 Swedish krona 103 81 Mexican Peso - 414

Total 56,643 178,124

Medium long-term Euro 212,463 416,862 US Dollar 72,810 26,191 Brazilian Real 32 - Yen 61 - Mexican Peso - 1,057 Australian Dollar - 6 Chinese Renminbi 2,267 3,050 Swedish Krona 161 116

Total 287,794 447,282

Total borrowings 344,437 625,406

______135 Consolidated Financial Statements Safilo Group S.p.A.

4.14 Trade payables

This item breaks down as follows:

(Euro/000) December 31, 2010 December 31, 2009

Trade payables for:

- purchase of raw materials 42,357 24,683 - purchase of finished goods 62,762 46,675 - suppliers from subcontractors 4,944 2,413 - tangible and intangible assets 5,299 5,600 - commissions 5,744 4,778 - royalties 19,600 13,443 - advertising and marketing costs 27,941 22,387 - services 35,542 30,089

Total 204,189 150,068

The book value of the trade payables is maintained as being approximately the same as their fair value.

4.15 Tax payables

At 31 December 2010 tax payables amounted to 17,795 thousand Euro (compared with 18,651 thousand in 2009). Of this sum, 9,730 thousand Euro referred to income tax for the period, Euro 1,925 thousand to VAT payable and the balance related to taxes withheld, current and local taxes. Provision for the year’s current income tax is shown in Note 5.10 concerning income tax.

4.16 Other current liabilities

This item breaks down as follows:

(Euro/000) December 31, 2010 December 31, 2009

Payables to personnel and social security institutions 36,264 29,410 Premiums to clients 22,322 20,048 Agent fee payables 1,975 1,631 Payables to pension funds 1,320 1,144 Accrued advertising and sponsorship costs 875 332 Accrued interests on long-term loans 2,667 3,905 Other accruals and deferred income 3,194 1,839 Payables for dividends 2,294 2,995 Other current liabilities 1,387 2,133

Total 72,298 63,437

Payables to personnel and social security institutions principally refer to salaries and wages for December and for unused holidays.

136 ______Consolidated Financial Statements Safilo Group S.p.A.

Payables to minority shareholders refer to dividends that have already been approved by the shareholders’ meetings but had not yet been paid at the balance sheet date.

It is considered that the book value of the “other current liabilities” approximates fair value.

4.17 Provision for risks and charges

This item breaks down as follows:

Transl. Increase Decrease Balance at diff. Balance at (Euro/000) January 1, 2009 December 31, 2009

Product warranty provision 4,602 681 (1,221) (4) 4,058 Agents' severance indemnity 4,888 563 (502) - 4,949 Provision for corporate restructuring - 7,000 (586) - 6,414 Other provisions for risks and charges 3,773 2,741 (967) - 5,547

Provisions for risks - long term 13,263 10,985 (3,276) (4) 20,968

Provisions for risks - short term 1,053 3,748 (714) - 4,087

Total 14,316 14,733 (3,990) (4) 25,055

Transl. Increase Decrease Balance at diff. Balance at (Euro/000) January 1, 2010 December 31, 2010

Product warranty provision 4,058 3,209 (1,803) 10 5,474 Agents' severance indemnity 4,949 551 (205) 1 5,296 Provision for corporate restructuring 6,414 - (1,349) - 5,065 Other provisions for risks and charges 5,547 605 (2,595) - 3,557

Provisions for risks - long term 20,968 4,365 (5,952) 11 19,392

Provisions for risks - short term 4,087 6,172 (3,562) (18) 6,679

Total 25,055 10,537 (9,514) (7) 26,071

The product warranty provision was recorded against the costs to be incurred for the replacement of products sold before the balance sheet date.

The agents’ severance indemnity was created against the risk deriving from the payment of indemnities in the case of termination of the agency agreement. This provision has been calculated based on existing laws at the balance sheet date considering all the future expected financial cash outflows.

The provision for corporate restructuring reflects the sums set aside in the first half of 2009 to meet the restructuring costs related to the downsizing of the Italian manufacturing facilities. The decrease of this provision was due to the costs already incurred for employees who left during the year.

______137 Consolidated Financial Statements Safilo Group S.p.A.

The other provisions for risks and charges reflect provisions made for disputes pending as of the reporting date. It is maintained that the said allocations are sufficient to cover the risks existing at the balance sheet date.

4.18 Employee benefits

During the financial years under analysis, the item showed the following movements:

Changes in Balance at Posted to Transl. Balance at the scope of January 1, income Actuarial Uses/ diff. December (Euro/000) 2009 statement gains/(losses) Payments consolidation 31, 2009

Defined contribution plan 6,099 3,420 - (344) 20 (209) 8,986 Defined benefit plan 35,976 1,378 (2,486) (1,987) (49) - 32,832

Total 42,075 4,798 (2,486) (2,331) (29) (209) 41,818

Changes in Balance at Posted to Transl. Balance at the scope of January 1, income Actuarial Uses/ diff. December (Euro/000) 2010 statement gains/(losses) Payments consolidation 31, 2010

Defined contribution plan 8,986 5,616 - (3,261) 246 - 11,587 Defined benefit plan 32,832 2,286 (446) (2,870) 30 - 31,832

Total 41,818 7,902 (446) (6,131) 276 - 43,419

This item refers to different forms of defined benefit and defined contribution pension plans, in line with the local conditions and practices in the countries in which the Group carries out its business.

The employee severance fund of Italian companies (“TFR”), which constitutes the main part of such benefits, has always been considered to be a defined benefit plan. However, following the changes in legislation governing the employment severance fund introduced by Italian law no. 296 of 27 December 2006 (“Financial Law 2007”) and subsequent Decrees and Regulations issued in the first months of 2007, Safilo Group, on the basis of the generally agreed interpretations, has decided that:

¾ the portion of the employee benefit liability accrued from 1 January 2007, whether transferred to selected pension funds or transferred to the treasury account established with INPS, must be classified as a “defined contribution plan”;

¾ the portion of the employee benefit liability accrued as of 31 December 2006 must be classified as a “defined benefit plan” requiring actuarial valuations that exclude future increases in salaries.

Actuarial estimates used for calculating the employee severance liability accrued up to 31 December 2006 are based on a system of assumptions based on:

a) demographic parameters;

b) economic parameters;

c) financial parameters.

138 ______Consolidated Financial Statements Safilo Group S.p.A.

The demographic parameters are normally summarised in tables based on samples deriving from different institutes (ISTAT, INAIL, INPS, Italian General Accounts Office, etc.).

The economic parameters principally refer to long-term inflation rates and the financial yield rate, crucial for the revaluation of amounts accrued in the reserve for termination benefits.

The main financial parameter is given by the discount rate. For discounting to present value, the system of zero- coupon rates derived from swap rates as of 31 December 2010 was applied.

The amounts recorded in the financial statements relating to the financial years 2010 and 2009 can be divided as follows:

(Euro/000) 2010 2009

Service cost 6,688 3,621 Interest cost 1,214 1,177 Actuarial gain/(loss) (446) (2,486)

Total 7,455 2,312

4.19 Other non-current liabilities

At 31 December 2010 other non-current liabilities amounted to 7,265 thousand Euro (11,117 thousand Euro at 31 December 2009), reflecting:

¾ 2,444 thousand Euro in put option held by the minority shareholders of a subsidiary;

¾ 3,944 thousand Euro for long-term liability concerning mainly the store rental contracts of US retail subsidiary Solstice;

¾ 368 thousand Euro for the liability arising from the settlement agreement reached by a US subsidiary to settle a controversy that had arisen concerning use of a patent;

¾ the remaining portion, relating to non-current liabilities recorded on Group companies’ balance sheets.

______139 Consolidated Financial Statements Safilo Group S.p.A.

SHAREHOLDERS’ EQUITY

Shareholders’ equity is the value contributed by the shareholders of Safilo Group S.p.A. (the share capital and the share premium reserve), plus the value generated by the Group in terms of profit gained from its operations (profit carried forward and other reserves). As at 31 December 2010, shareholders’ equity totalled 767,035 thousand Euro (of which 11,035 thousand Euro belonging to non-controlling interests) versus Euro 445,992 thousand Euro as at 31 December 2009 (of which Euro 7,559 thousand belonging to non-controlling interests).

In managing its capital, the Group’s aim is to create value for its shareholders, developing its business and thus guaranteeing the company’s continuity.

The Group constantly monitors its debt-to-equity ratio, for the purpose of maintaining a sound financial structure, given the long-term loans currently outstanding.

4.20 Share capital

The capital increase approved by the extraordinary shareholders’ meeting of Safilo Group S.p.A. on 15 December 2009 was implemented in the first quarter of 2010 according to the following procedures and schedule:

¾ On 5 February 2010 Multibrands Italy B.V. (a company owned by HAL Holding B.V.) subscribed and paid for the reserved capital increase 12,842,735.40 Euro (including share premium), within the limit of 10% of previously existing share capital with exclusion of pre-emption rights pursuant to Article 2441, paragraph 4, second sentence, of the Italian Civil Code. This capital increase was subscribed via the issue of 28,539,412 Safilo Group S.p.A. shares at a per-share subscription price of 0.45 Euro, of which 0.25 Euro par value and 0.20 Euro premium;

¾ 8 February 2010 marked the start of the period for offer of rights to shareholders of a maximum of 822,505,770 Safilo Group S.p.A. shares, pursuant to Article 2441, paragraph 1, of the Italian Civil Code. The rights offering was intended to raise up to 250,041,754.08 Euro (including share premium) via issue of 822,505,770 Safilo Group S.p.A. ordinary shares, at a per-share subscription price of Euro 0.304, of which Euro 0.25 par value and Euro 0.054 premium, to be offered to the existing shareholders at a ratio of 131 new ordinary shares for every 50 ordinary shares already owned.

The rights offering was completed on 26 February 2010. Shareholders exercised 257,021,000 rights and subscribed to 673,395,020 newly-isued shares, accounting fror 81.87% of all shares offered, for a total of 204,712,086.08 Euro (including share premium).

At the end of the rights offering period, there were therefore 56,912,500 unopted rights, i.e. 18.13% of the rights offered, valid for subscription of a total of 149,110,750 newly issued ordinary shares, for a total amount of 45,329,668.00 Euro (including share premium).

In compliance with the rules of Article 2441, third paragraph, of the Italian Civil Code, the unopted rights were offered on the Italian Stock Exchange on 8 March 2010. This offer featured strong market interest with full placement of rights and total cash-in for the Company of 7,079,915 Euro.

Exercise of the unopted rights sold in the market resulted in the issue of 149,109,964 ordinary shares, accounting for 99.99% of the shares offered, for a total amount of 45,329,429.06 Euro (including share premium). 140 ______Consolidated Financial Statements Safilo Group S.p.A.

The intervention of the shareholder HAL Holding N.V., which had undertaken to subscribe any portion of the capital increase remaining unopted at the end of the Stock Exchange auction, up to a maximum of 64.88% of total rights, was thus limited to subscription of the 786 remaining shares that had not been subscribed.

The capital increase via option rights therefore concluded with the full subscription of 822,505,770 newly-issued ordinary shares in Safilo Group S.p.A., for a total amount of 250,041,754.08 Euro, comprising share capital of 205,626,442.50 Euro and a share premium of 44,415,311.58 Euro.

On 30 April 2010, in an extraordinary meeting, the shareholders approved the share consolidation proposed by the Board of Directors in the meeting held on 29 March 2010 for the Company’s 1,136,439,310 shares outstanding, with a nominal value of 0.25 Euro each. Such a consolidation would take place through a reverse stock split at a ratio of 1 new Safilo share, with a nominal value of 5.00 Euro, for every 20 ordinary shares, with a nominal value of 0.25 Euro, held.

Following the share capital increase and the reverse stock split, the Company’s share capital amounts to 284,109,825, allocated over 56,821,965 ordinary shares with a nominal value of 5.00 Euro each, as shown in the following table:

No. of ordinary Nominal Capital value shares value (Euro)

Share capital at January 1, 2010 285,394,128 0.25 71,348,532.00

Share capital - subscription - February 5, 2010 28,539,412 0.25 7,134,853.00 - February 26, 2010 673,395,020 0.25 168,348,755.00 - March 15, 2010 149,110,750 0.25 37,277,687.50 Total Share capital increase 851,045,182 0.25 212,761,295.50

Total Share capital pre reverse stock split 1,136,439,310 0.25 284,109,827.50

Reverse stock split rate: 1 new ordinary share for every 20 (2.50)

Total Share capital post Reverse stock split 56,821,965 5.00 284,109,825.00

______141 Consolidated Financial Statements Safilo Group S.p.A.

4.21 Share premium reserve

The share premium reserve represents:

• the higher value attributed on the transfer of shares of the subsidiary Safilo S.p.A. compared to the par value of the corresponding increase in share capital;

• the higher price paid compared to the par value of the shares, at the time the shares were placed on the Electronic Stock Market (MTA), net of listing costs;

• the premium resulting from conversion of convertible bonds;

• the premium received from the exercise of stock options by their holders.

• the premium received following the capital increase, as explained in more detail in section 4.20 on share capital.

Following the above share capital increase, as of 31 December 2010, the share premium reserve amounted to 461,491 thousand, as shown by the following table:

No. of ordinary Share premium Share premium (Euro) shares value reserve

Share premium reserve at January 1, 2010 285,394,128 745,104,717.92

Share capital - subscription - February 5, 2010 28,539,412 0.200 5,707,882.40 - February 26, 2010 673,395,020 0.054 36,363,331.08 - March 15, 2010 149,110,750 0.054 8,051,980.50 Total Share capital increase 851,045,182 50,123,193.98

Income from the subscription of Option Rights 7,079,915.00

Coverage previous year losses (331,428,329.40)

Costs for capital increase (9,388,183.81)

Share premium reserve at December 31, 2010 461,491,313.69

4.22 Retained earnings and other reserves

Retained earnings and other reserves include both the reserves of the subsidiary companies generated after their inclusion in the scope of consolidation and the translation differences deriving from the translation into Euro of the financial statements of consolidated companies denominated in other currencies.

142 ______Consolidated Financial Statements Safilo Group S.p.A.

Balance at Previous Gains Change in Balance at January 1, year's profit (losses) of Divid. consolidation December (Euro/000) 2009 allocation the period distribution scope 31, 2009 Translation differences - Group (55,889) - (6,640) - - (62,529) Translation differences - Minority 529 - (281) - - 248 Total (55,360) - (6,921) - - (62,281) Other reserves and retained earn. - Group 63,869 (23,315) 2,265 - (6,896) 35,923 Other reserves and retained earn. - Minority 5,108 2,775 16 (1,247) - 6,652 Total 68,977 (20,540) 2,281 (1,247) (6,896) 42,575

Total 13,617 (20,540) (4,640) (1,247) (6,896) (19,706)

Balance at Previous Gains Change in Balance at January 1, year's profit (losses) of Divid. consolidation December (Euro/000) 2010 allocation the period distribution scope 31, 2010 Translation differences - Group (62,529) - 54,651 - - (7,878) Translation differences - Minority 248 - 657 - - 905 Total (62,281) - 55,308 - - (6,973) Other reserves and retained earn. - Group 35,923 (20,019) 1,663 - - 17,567 Other reserves and retained earn. - Minority 6,652 659 41 (1,055) - 6,297 Total 42,575 (19,360) 1,704 (1,055) - 23,864

Total (19,706) (19,360) 57,012 (1,055) - 16,891

4.23 Fair value and cash flow reserves

This item breaks down as follows:

Consolidated statement of comprehensive income

Balance at Profit (loss) Balance at January 1, Profit (loss) of the reclass to Inc. Total Profit (loss) December (Euro/000) 2009 period Stat. of the period 31, 2009

Cash flow reserve (5,518) 432 5,086 5,518 - Fair value reserve (2,102) 71 2,063 2,134 32

Total (7,620) 503 7,149 7,652 32

Consolidated statement of comprehensive income

Balance at Profit (loss) Balance at January 1, Profit (loss) of the reclass to Inc. Total Profit (loss) December (Euro/000) 2010 period Stat. of the period 31, 2010

Cash flow reserve - (26) - (26) (26) Fair value reserve 32 (27) - (27) 5

Total 32 (53) - (53) (21)

______143 Consolidated Financial Statements Safilo Group S.p.A.

The cash flow reserve refers to the current value of interest rate swaps while the fair value reserve relates to the current value of investments recognised as available-for-sale financial assets.

4.24 Stock option plans

In the Extraordinary Meeting held on 5 November 2010, the Shareholders approved the issue of up to 1,700,000 (one million seven hundred thousand) new ordinary shares with a nominal value of 5.00 (five/00) Euro each, for a total of 8,500,000.00 (eight million five hundred thousand/00), to be offered to directors and/or employees of the Company and its subsidiaries in connection with the “2010-2013 Stock Option Plan”.

This Plan – designed to incentivise and retain directors and/or employees/managers of the Company and/or its subsidiaries – is carried out through the grant, in different tranches, of up to 1,700,000 options, each such option entitling the beneficiary to subscribe to 1 of the foregoing ordinary Company share with a nominal value of 5.00 Euro each, issued for cash and without any all-or-none clause, excluding all pre-emptive rights pursuant to article 2441, paragraph four, second sentence of the Italian Civil Code.

The Plan will last for 9 years (from 2010 to 2019). The options granted to the beneficiaries may be exercised after three years from the grant date (except the first tranche, which will benefit from a shorter vesting period).

Specifically, four different option grant dates have been set. The first tranche (“First Tranche”) was granted on the date of the meeting of the Board of Directors that was held after the Shareholders’ Meeting convened to decide on the adoption of the Plan. The second tranche (“Second Tranche”) will be granted on the date of the meeting of the Board of Directors to be held to approve the accounts for the year ended 31 December 2010. The third tranche (“Third Tranche”) will be granted on the date of the meeting of the Board of Directors to be held to approve the accounts for the year ended 31 December 2011. The last tranche (“Fourth Tranche”) will be granted on the date of the meeting of the Board of Directors to be held to approve the accounts for the year ended 31 December 2012. The Options so granted will vest provided that both of the following conditions are met:

1. save as otherwise specifically determined in case of termination as an employee and/or director, in any case, and for all options granted, the continuing relationship between the Company and the Beneficiary on the options’ vesting date; and

2. with reference to the options granted with the First Tranche, the EBIT reported in any of the Company’s consolidated financial statements for the years ended 31 December 2010, 31 December 2011 or 31 December 2012 amounts at least to 60,000,000 Euro ("First Target”); with reference to the options granted with the Second Tranche, the EBIT reported in any of the Company’s consolidated financial statements for the years ended 31 December 2011, 31 December 2012 or 31 December 2013 amounts at least to 66,000,000 Euro ("Second Target”); with reference to the options granted with the Third Tranche, the EBIT reported in any of the Company’s consolidated financial statements for the years ended 31 December 2012, 31 December 2013 or 31 December 2014 amounts at least to 72,500,000 Euro ("Third Target”); with reference to the options granted with the Fourth Tranche, the EBIT reported in any of the Company’s consolidated financial statements for the years ended 31 December 2013, 31 December 2014 or 31 December 2015 amounts at least to 80,000,000 Euro ("Fourth Target”).

144 ______Consolidated Financial Statements Safilo Group S.p.A.

In relation to the achievement of the targets, EBIT means net operating income in a given financial year, as adjusted to take account of any investments and divestments, as reported in ther audited financial statements to be approved by the Company’s Body of Shareholders and as determined by the Company’s Board of Directors. The subscription price will be equal to the weighted average of the prices recorded by the ordinary Safilo Group S.p.A. shares in the Mercato Telematico Azionario organized and operated by Borsa Italiana S.p.A. in the month preceding the meeting of the Board of Directors that grants the options issued under the Plan (the preceding month being the period starting on the same day of the previous calendar month and it being understood that, in relation to this period, the calculation of the weighted average will take into account only trading days), except for the First Tranche. The price for the First Tranche is 8.0470 Euro, as determined on the basis of the weighted average of the prices recorded by the ordinary Safilo Group S.p.A. shares in the Mercato Telematico Azionario organized and operated by Borsa Italiana S.p.A. in the month preceding the date on which the Remuneration Committee submitted to the Board of Directors, for the first time, a proposal to approve the guidelines of a share incentive plan to be adopted. For more detailed information about the Plan, reference should be made to the disclosure prepared pursuant to article 84-bis of the Regulation on Issuers, as subsequently supplemented, as well as to all the documents related to the above Plan, prepared in accordance with the applicable laws, which are available on the Company’s web site in the Investors Relations – Corporate Governance section.

The table below shows the changes in the stock option plans occurred during the year:

Options attributable to Executive members of the Options attributable to Board of Directors managers Grand total

Average Average Average No. of exercise price No. of exercise price No. of exercise price options in Euro options in Euro options in Euro

Outstanding at the beginning of the year ------Granted during the year 190,000 8.047 510,000 8.047 700,000 8.047 Not vested ------Exercised ------Lapsed ------Outstanding at year-end 190,000 8.047 510,000 8.047 700,000 8.047

______145 Consolidated Financial Statements Safilo Group S.p.A.

5. Notes to the consolidated income statement

5.1 Net sales

Group sales in 2010 amounted to 1,079,937 thousand Euro, showing a 6.8% increase on the previous year (1,011,236 thousand Euro).

For a discussion on sales trends, reference should be made to the report on operations, section on the Group’s performance.

5.2 Cost of sales

This item breaks down as follows:

(Euro/000) 2010 2009

Purchase of raw materials and finished goods 316,370 263,429 Capitalization of costs for increase in tangible assets (-) (7,409) (8,738) Change in inventories (10,280) 56,557 Payroll and social security contributions 98,561 85,984 Subcontracting costs 19,868 7,889 Depreciation 18,956 22,220 Rental and operating leases 923 1,125 Other industrial costs 13,037 10,286

Total 450,026 438,752

The change in inventories can be broken down as follows:

(Euro/000) 2010 2009

Finished products 238 53,945 Work-in-progress (1,202) 736 Raw materials (9,316) 1,876

Total (10,280) 56,557

The average number of employees by rank is shown below:

2010 2009

Executives 119 126 Clerks and middle management 3,093 3,551 Factory workers 5,032 4,703

Total 8,244 8,380

146 ______Consolidated Financial Statements Safilo Group S.p.A.

5.3 Selling and marketing expenses

This item breaks down as follows:

(Euro/000) 2010 2009

Payroll and social security contributions 103,513 109,056 Commissions to sales agents 67,133 63,528 Royalty expenses 90,562 81,280 Advertising and promotional costs 98,161 93,929 Amortisation and depreciation 8,470 13,766 Logistic costs 16,513 16,333 Consultants fees 4,019 3,973 Rental and operating leases 16,421 23,207 Utilities 1,463 2,432 Provision for risks 3,841 294 Other sales and marketing expenses 18,201 19,473

Total 428,297 427,271

5.4 General and administrative expenses

This item breaks down as follows:

(Euro/000) 2010 2009

Payroll and social security contributions 62,865 59,139 Allowance for doubtful accounts and loss on trade receivables 9,224 8,934 Amortisation and depreciation 12,613 13,544 Consultants fees 11,507 10,104 Rental and operating leases 9,676 8,613 EDP costs 4,274 4,242 Insurance costs 2,750 2,755 Utilities, security and cleaning 7,393 7,329 Taxes (other than on income) 3,635 3,338 Other general and administrative expenses 12,050 13,404

Total 135,987 131,402

______147 Consolidated Financial Statements Safilo Group S.p.A.

5.4.1 Remuneration (including all possible or deferred remuneration) and benefits in kind received by Directors, Statutory Auditors and managers with strategic responsibilities (Consob resolution no. 15520)

For the year ended on 31 December 2010, the remuneration payable to directors, members of the Board of Statutory Auditors, and to strategically accountable managers of the parent company in office on the date of shareholder approval of annual financial statements, for performance of their tasks, also for subsidiaries, was as follows:

5.4.2 Stock option granted to Directors, Statutory Auditors and key executives (Consob resolution n. 15520)

No. of No. of No. of options options options outstanding granted outstanding Exercise Average at 31 Dec. during the at 31 Dec. price in length Name or category Office 2009 year 2010 Euro in years

Directors

- Roberto Vedovotto Chief executive Officer - 160,000 160,000 8.047 5.573 - Massimiliano Tabacchi Director - 30,000 30,000 8.047 5.573

Board of Statutory Auditors - - -

Key executives Executives - 60,000 60,000 8.047 5.573

148 ______Consolidated Financial Statements Safilo Group S.p.A.

5.5 Other income and expenses, net

This item breaks down as follows:

(Euro/000) 2010 2009

Losses on disposal of assets (251) (426) Other operating expenses (418) (1,588) Gains on disposal of assets 46 66 Other operating incomes 2,801 4,278

Total 2,178 2,330

Other operating expenses refer mainly to costs not directly related to the ordinary activity carried out during the year, while other operating revenues mainly include insurance reimbursements.

5.6 Non-recurring restructuring costs

In 2010, there has been no non-recurring restructuring charges. In the previous year had been incurred costs for the restructuring of the Italian and Slovenian manufacturing sites for a total of Euro 7,422 thousand.

5.7 Loss due to subsidiaries disposals

On 23 December 2010 the Group sold to HAL, the leading shareholder, the 60% interest in Tide Ti S.A. de C.V., the company that operates the Mexican retail chains Sunglass Island and Island Optical (57 shops). Following this sale, the Safilo Group completed the planned divestment of non-core retail assets, in keeping with the restructuring agreement signed in October 2009.

______149 Consolidated Financial Statements Safilo Group S.p.A.

The table below provides a breakdown of the assets and liabilities sold:

(Euro/000) Book value at the

Current assets Cash in hand and at bank 831 Trade receivables, net 23 Inventories 4,222 Other current assets 878 Total current assets 5,954

Non-current assets Tangible assets 4,402 Intangible assets 694 Goodwill 3,018 Deferred tax assets 364 Other non-current assets 515 Total non-current assets 8,993

Total assets of disposals subsidiaries 14,947

Current liabilities Trade payables 2,998 Other current liabilities - Provisions for risks and charges 117 Total current liabilities 3,115

Non-current liabilities Long-term borrowings 1,209 Employees benefit liabilities - Deferred tax liabilities 105 Other non-current liabilities 3,182 Total non-current liabilities 4,496

Total liabilities of disposals subsidiaries 7,611

Total book value of disposals subsidiaries 7,336

The following table provides detasils of the loss incurred with the sale of the equity interest in Tide Ti S.A. de C.V., which was covered via the release of provisions made in the previous year:

(Euro/000)

Consideration received 6,684 Net assets disposed of (7,336) Cumulative exchange differences reclassified from equity (1,613) (Allowance)/Release of provision for risk on retail subsidiaries disposal 2,265

Loss on subsidiaries disposal -

150 ______Consolidated Financial Statements Safilo Group S.p.A.

5.8 Share of income/(loss) of associated companies

This item totalled 500 thousand Euro (vs. 360 thousand Euro in 2009) and consists of the profits and losses stemming from valuation using the equity method of investments in associate companies (note 4.9).

5.9 Financial charges, net

This item breaks down as follows:

(Euro/000) 2010 2009

Interest expense on loans 7,647 23,137 Interest expense and charges on High Yield 19,836 19,784 Bank commissions 5,676 4,762 Negative exchange rate differences 17,154 10,435 Fair value financial derivative instruments - 5,235 Financial discounts 1,528 2,118 Write downs of available-for-sale financial assets 240 2,063 Other financial charges 1,530 2,602 Total financial charges 53,611 70,136

Interest income 518 347 Positive exchange rate differences 13,383 15,391 Dividends 11 - Other financial income 144 141 Total financial income 14,056 15,879

Total financial charges, net 39,555 54,257

The item “Write-down of available-for-sale financial assets” refers to the loss incurred in relation to the investment in Gruppo Banco Popolare (see note 4.10)

5.10 Income taxes and write-down of deferred tax assets

(Euro/000) 2010 2009

Current taxes (33,254) (28,786) Deferred taxes 28,427 33,463 Total income taxes (4,827) 4,677

Write downs of deferred tax assets (19,359) (30,888) Total write downs of deferred tax assets (19,359) (30,888)

Total (24,186) (26,211)

______151 Consolidated Financial Statements Safilo Group S.p.A.

The taxes for the year can be reconciled with the theoretical tax burden as follows:

(Euro/000) % 2010 % 2009

Profit before taxation 100% 28,750 100% (324,578)

Theoretical taxes -27.5% (7,906) 27.5% 89,259 IRAP (current and deferred) and other taxes -17.2% (4,951) -0.7% (2,345) Effect of foreign tax rates 9.0% 2,595 -0.5% (1,499) Non-taxable incomes 9.9% 2,856 -0.0% 117 Non-deductible costs -5.5% (1,592) -0.2% (689) Taxable intercompany dividends - - -3.0% (9,724) Impairment of goodwill not deductible - - -21.8% (70,872) Effect of deferred tax assets not recognised -67.3% (19,359) -9.5% (30,888) Use of tax losses for which no deferred tax assets were recognised 1.6% 469 0.1% 217 Other permanent differences 12.9% 3,702 0.1% 214

Total -84.1% (24,186) -8.1% (26,211)

Theoretical income taxes are calculated at 27.5% on the estimated taxable income. This percentage represents the tax rate (IRES) to which the income of the Italian holding company is subject to for the 2010 financial year.

As shown in note 4.11 “Deferred tax assets and deferred tax liabilities”, deferred tax assets (net of deferred tax liabilities) relating to losses for the period of certain Group companies and the temporary differences that emerged between the tax base of assets or liabilities and the related book value, were written down by a total of EUR 19,359 thousand through the provisioning of an adjustment reserve in that it is not currently possible to forecast future taxable income allowing for recovery of the amounts.

This write-down may be annulled, as prescribed by International Accounting Standard 12, in future financial years if the taxable income is sufficient to absorb the fiscal losses and the temporary differences between the book value of the assets and liabilities and the relative tax base.

152 ______Consolidated Financial Statements Safilo Group S.p.A.

5.11 Earnings per share

The calculation of base and diluted earnings per share (EPS) is shown in the tables below:

Basic 2010 2009

Earnings (loss) attributable to ordinary shares (in Euro/000) 731 (351,448) Average number of ordinary shares (000’s) 49,271 14,270

Basic earnings (loss) per share (in Euro) 0.01484 (24.6289)

Diluted 2010 2009

Earnings (loss) attributable to ordinary shares (in Euro/000) 731 (351,448) Amount attributable to preference shares - - Reported profit (loss) 731 (351,448)

Average number of ordinary shares (in thousands) 49,271 14,270 Dilutive effects: - stock options (in thousands) 258 - Total 49,529 14,270

Diluted earnings (loss) per share in Euro 0.01476 (24.6289)

The average number of ordinary shares was calculated as a weighted average of shares outstanding during the twelve months taking into particular consideration the operation of capital increase occurred during the first quarter that brought the number of actions to 285,394,128 shares to 1,136,439,310 and the grouping of these shares (called Reverse Stock Split) approved by the Extraordinary Shareholders' Meeting on 30th April 2010 which was made in the ratio of 1 new share for every 20 shares.

According to IAS 33 the effect of this grouping was disclosed as if it were at the beginning of the earliest period reported and then at January 1st, 2009, creating the need to recalculate the average number of ordinary shares and loss per share as at December 31st 2009.

The issuance of stock option plan, which took place in the last quarter has resulted in a dilutive effect on earnings per share for the year to be negligible.

5.12 Dividends

The parent company Safilo Group S.p.A. did not distribute dividends to shareholders during 2010. The year ended 31 December 2009 posted a loss.

______153 Consolidated Financial Statements Safilo Group S.p.A.

5.13 Segment information

Management has identified the “Wholesale” and “Retail” operating segments consistently with the operating and control model applied by the Group. More specifically, the criteria used to identify these segments were based on the approaches via which management manages the Group and attributes operating responsibility.

Below we provide disclosure by segment for the FYs ended on 31 December 2010 and 2009.

Breakdown of 2010 consolidated income statement by operating segment

December 31, 2010 (Euro/000) WHOLESALE RETAIL Eliminat. Total

Net sales - to other segment 14,025 - (14,025) - - to third parties 992,875 87,062 - 1,079,937 Total net sales 1,006,900 87,062 (14,025) 1,079,937

Gross profit 574,857 55,004 50 629,911

Operating profit 74,281 (6,477) 1 67,805

Share of income of associates 500 - 500 Financial charges, net (39,555) Income taxes (24,186) Net profit 4,564

Gross profit margin 57.1% 63.2% 58.3% Operating profit margin 7.4% -7.4% 6.3%

Segment assets 1,345,327 44,734 1,390,061 Investment in associates 13,202 - 13,202 Unallocated corporate assets 83,046 Consolidated total assets 1,486,309

Segment liabilities 338,717 10,578 349,295 Unallocated corporate liabilities 369,979 Consolidated total assets 719,274

Other information Capital expenditure 25,716 3,701 29,418 Depreciation & amortization 31,834 8,204 40,039 Goodwill impairment - - - Non cash items other than depreciation and 19,379 3,099 22,477

154 ______Consolidated Financial Statements Safilo Group S.p.A.

Breakdown of 2009 consolidated income statement by operating segment

December 31, 2009 (Euro/000) WHOLESALE RETAIL Eliminat. Total

Net sales - to other segment 12,005 191 (12,196) - - to third parties 904,385 106,851 - 1,011,236 Total net sales 916,390 107,042 (12,196) 1,011,236

Gross profit 506,030 66,404 50 572,484

Operating profit (176,302) (94,377) (2) (270,681)

Share of income of associates 360 - 360 Financial charges, net (54,257) Income taxes (26,211) Net profit (350,789)

Gross profit margin 55.2% 62.0% 56.6% Operating profit margin -19.2% -88.2% -26.8%

Segment assets 1,255,507 57,217 1,312,724 Investment in associates 12,032 - 12,032 Unallocated corporate assets 65,868 Consolidated total assets 1,390,624

Segment liabilities 272,361 5,479 277,840 Unallocated corporate liabilities 666,792 Consolidated total assets 944,632

Other information Capital expenditure 31,548 5,339 36,887 Depreciation & amortization 36,264 13,266 49,529 Goodwill impairment 204,939 52,776 257,715 Non cash items other than depreciation and 22,878 (223) 22,655

______155 Consolidated Financial Statements Safilo Group S.p.A.

Breakdown of revenues and non-current assets by geographic area

Revenue from external customers Non-current assets December 31, December 31, December 31, December 31, (Euro/000) 2010 2009 2010 2009

Italy (1) 210,729 208,960 28,377 33,407 Europe (2) 265,867 268,284 184,946 181,577 America (3) 456,843 396,938 233,971 228,145 Asia (4) 146,498 137,054 237,050 215,205 Corporate (5) - - 99,263 101,700

Total 1,079,937 1,011,236 783,607 760,034

(1) Operating companies with registered head office in Italy. (2) Operating companies with registered head office in European countries other than Italy, in India and in South Africa. (3) Operating companies with registered head office in USA, Canada and Brazil. (4) Operating companies with registered head office in the Far East and Australia. (5) Non-operating companies.

It must be noted that grouping by geographic area depends on the location of the registered head office of each Group company; therefore the sales identified in accordance with this segmentation are determined by origin of invoicing and not by target market.

Non-current assets include derivative financial instruments, deferred tax assets, claims on the INPS Treasury fund for the employee severance indemnities transferred to INPS.

156 ______Consolidated Financial Statements Safilo Group S.p.A.

6. Transactions with related parties

In compliance with applicable legislative and regulatory requirements, on 23 March 2007 the parent company’s Board of Directors passed a resolution indicating and adopting a number of guidelines to govern transactions of major strategic, economic, capital or financial significance for the Company – including those undertaken with related parties. The aim of the guidelines is to establish competences and responsibilities concerning significant transactions and to assure their transparency and material and procedural correctness. Our notion of related party is based on the definition given in IAS 24.

Following the resolution CONSOB 17721 of March 12, 2010, as amended by Resolution No. 17 389 of 23 June 2010, the Board of Directors of the November 5, 2010 approved the "Regulations for the transactions with related parties", which replaces those guidelines, by adopting procedures that ensure transparency and fairness and procedural related party transactions.

The table below shows the operating and financial figures determined by related party transactions as of 31 December 2010 and 31 December 2009.

______157 Consolidated Financial Statements Safilo Group S.p.A.

Related parties transactions December 31, December 31, (Euro/000) Relationship 2010 2009

Receivables Optifashion As (a) 73 15 Elegance International Holdings Ltd (b) 8 419 Companies controlled by HAL Holding N.V. (c) 12.407 n.a.

Total 12.488 433

Trade Payables Elegance International Holdings Ltd (b) 4.823 5.956 Companies controlled by HAL Holding N.V. (c) 364 n.a.

Long term borrowings (High Yield) HAL International Investments N.V. (c) 98.657 n.a.

Total 103.843 5.956

Related parties transactions December 31, December 31, (Euro/000) Relationship 2010 2009

Revenues Optifashion As (a) 179 68 Elegance International Holdings Ltd (b) 22 2 Companies controlled by HAL Holding N.V. (c) 35.597 n.a.

Total 35.798 70

Operating expenses Optifashion As (a) - 3 Elegance International Holdings Ltd (b) 16.687 13.949 Tbr Inc. (b) 1.294 1.200 Companies controlled by HAL Holding N.V. (c) 468 n.a.

Financial expenses HAL International Investments N.V. (c) 9.496 n.a.

Total 27.946 15.152

(a) Unconsolidated subsidiary (b) Associated company (c) Companies controlled by Group's reference shareholder, considered related parties starting from 2010

Transactions with related parties, including intercompany transactions, involve the purchase and sale of products and provision of services on an arm’s length basis, similarly to what is done in transactions with third parties.

In regard to the table illustrated above, note that:

158 ______Consolidated Financial Statements Safilo Group S.p.A.

¾ Optifashion As is a production and commercial company based in Istanbul, Turkey, of which the Safilo Group owns 50%.

¾ Elegance International Holdings Limited (“Elegance”), a company listed on the Hong Kong stock exchange, is 23.05% owned by Safilo Far East Limited (an indirect subsidiary) and produces optical products for the Group in Asia. The price and other conditions of the production agreement between Safilo Far East Limited and Elegance are in line with those applied by Elegance to its other customers.

¾ TBR Inc., a company two-thirds owned by Vittorio Tabacchi, a shareholder of Safilo Group S.p.A., and one- third by Safilo Group S.p.A.. On 14 February 2011, the Group acquired 66.7% of this company, turning it into a wholly-owned subsidiary. The purchase price was USD 9.3 million. The subsidiary Safilo USA leases its head office and distribution centre in the U.S. (New Jersey) from TBR Inc.

¾ The companies of HAL Holding N.V., primary shareholder of Safilo Group, mainly refer to the retail companies belonging to the Pearle Europe and GrandVision Groups, with which Safilo carries out commercial transactions in line with market conditions.

¾ HAL International Investments N.V., during the restructuring process of the Group, acquired from third parties 50,99% of Safilo Capital International Senior Notes (High Yield).

In addition, during the year the shareholders of Only 3T S.r.l. which holds a stake of 10.02% in Safilo Group S.p.A. have accrued by various way remunerations for a total amount of Euro 2,640 thousand.

7. Contingent liabilities

The Group does not have any significant contingent liabilities not covered by adequate provisions. Nevertheless, as of the balance sheet date, various legal actions involving the parent company and certain Group companies were pending.

Among the most significant litigation in terms of the entity of claims made, we highlight the following cases:

¾ Tax litigation, initiated by Safilo in 1997, against two tax demands issued by the Pieve di Cadore Tax Office - relating to a dividend-stripping transaction executed in the 1991 tax period, which concerned a shareholding of Falck S.p.A. – for taxes and fines totalling approximately Euro 1,800 thousand. This legal dispute, which is currently in the court of third instance, was won by Safilo in the courts of both first and second instance. In 2010, the Company, acting in accordance with article 3, paragraph 2-bis, sub- paragraph b), Law Decree no. 40/2010 as converted into law no. 73/2010, resolved the pending case by making the payment provided for by law, thus settling the matter, and simultaneously requested the cancellation of the case from the docket of the court of third instance. However, the Supreme Court ordered the suspension of the case and requested the European Court of Justice to issue a preliminary ruling on matters related to the interpretation of EU law in connection with the above law no. 73/2010. A decision of the ECJ is pending and, in any case, any such decision is not expected to be adopted shortly;

¾ Two lawsuits, initiated in 2003, at the Padua courts, by two ex-agents of Safilo, asking for a ruling ordering to pay the respective sums of Euro 955 thousand and Euro 1,100 thousand for commission differences and for cessation of the agency relationship. Both cases are currently pending in the court of first instance.

______159 Consolidated Financial Statements Safilo Group S.p.A.

¾ A lawsuit initiated in 2010 before the Court of Padua by a former Safilo agent claiming a payment for approximately 750 thousand Euro as compensation for allegedly violating territorial exclusivity and for the termination of the agency agreement. The case is currently pending before the court of first instance.

We also report that, in June 2009, the French antitrust authority launched an extensive inquiry – involving the main players in the sunglass and prescription eyewear industry – to ascertain the existence of anti-competition price- fixing practices. As part of this inquiry, the Group’s French branch, Safilo France S.a.r.l. underwent inspection. If responsibility is definitively ascertained, this could cause adverse effects on the Group’s economic results. As at balance sheet no accusation had been notified by the French antitrust authority nor had any information been received concerning future assessments. It is therefore impossible to estimate whether the antitrust authority has found any irregularities in the French subsidiary’s conduct and what sanctions, if any, it might apply.

8. Commitments

At the balance sheet date, the Group had no significant purchase commitments. At the balance sheet date, however, the Group had contracts in force with designers for the production and sale of sunglasses and frames bearing their signatures. The contracts not only establish minimum guarantees, but also a commitment for advertising investments.

9. Subsequent events

In the period following 31 December 2010, there were no events that might affect to a significant extent the data contained in this document, in addition to those reported in the paragraph “Subsequent events” included in the report on operations.

10. Significant non-recurring events and transactions

Save as otherwise indicated in paragraphs 5.7 of these notes, in 2010 the Group did not undertake any significant non-recurring transactions pursuant to the Consob Communication dated 28 July 2006.

11. Transactions resulting from unusual and/or abnormal operations

Pursuant to Consob Communication of 28 July 2006, in 2009 the Group did not put in place any unusual and/or atypical operations, as defined in the said Communication.

160 ______Consolidated Financial Statements Safilo Group S.p.A.

APPENDIX

Information requested by art. 149-duodecies of the Regulation on Issuers issued by Consob.

The following table, prepared in accordance with Art. 149-duodecies of the Regulation on Issuers issued by Consob, reports the amount of fees charged in 2010 relating to the audit and other audit related services rendered by the same Audit company.

Safilo Group's company that has (Eur/000) Audit Company received services Fees 2010

Audit PricewaterhouseCoopers S.p.A. Holding Company - Safilo Group S.p.A. 93 PricewaterhouseCoopers S.p.A. Subsidaries 149 Network PricewaterhouseCoopers Subsidaries 940

Attestation PricewaterhouseCoopers S.p.A. Holding Company - Safilo Group S.p.A. 30 PricewaterhouseCoopers S.p.A. Subsidaries 44 Network PricewaterhouseCoopers Subsidaries -

Other services PricewaterhouseCoopers S.p.A. Holding Company - Safilo Group S.p.A. - PricewaterhouseCoopers S.p.A. Subsidaries - Network PricewaterhouseCoopers Subsidaries 214

Totale 1,470

______161 Consolidated Financial Statements Safilo Group S.p.A.

ATTESTATION OF THE CONSOLIDATED FINANCIAL STATEMENTS PURSUANT TO ART. 154-BIS OF LEGISLATIVE DECREE 58/98

1. The undersigned Roberto Vedovotto, as Chief Executive Officer, and Francesco Tagliapietra, as the manager responsible for preparing SAFILO GROUP S.p.A.’s financial statements, hereby attest, having also taken into consideration the provisions of Article 154-bis, paragraphs 3 and 4, of Italian Legislative Decree 58 of 24 February 1998:

• the adequacy with respect to the company structure and

• the effective application

of the administrative and accounting procedures for the preparation of the consolidated financial statements for the 2010 fiscal year.

2. The assessment of the adequacy of the administrative and accounting procedures used for the preparation of the statutory financial statements at 31 December 2010 was based on a process defined in accordance with the theorical reference model CoSO Report – Internal Control Integrated Framework, an internationally generally accepted reference framework.

3. The undersigned also attest that:

3.1 the consolidated financial statements for the year ended on 31 December 2010:

a) have been prepared in accordance with International Financial Reporting Standards, as endorsed by the European Union through Regulation (EC) 1606/2002 of the European Parliament and Counsel, dated 19 July 2002;

b) correspond to the amounts shown in the Company’s accounts, books and records; and

c) provide a fair and correct representation of the financial conditions, results of operations and cash flows of the Company and its consolidated subsidiaries as of 31 December 2010 and for the year then ended.

3.2 The report on operations includes a reliable operating and financial review of the Company and of the Group as well as a description of the main risks and uncertainties to which they are exposed.

16 March 2011

The Chief Executive Officer The manager responsible for preparing the company’s financial statements Dr Roberto Vedovotto Dr Francesco Tagliapietra

162 ______Consolidated Financial Statements Safilo Group S.p.A.

REPORT OF INDEPENDENT AUDITORS ON THE CONSOLIDATED FINANCIAL STATEMENTS

______163