Writing Instruments and Accessories
We manufacture and market fine quality writing instruments under the Cross^® brand consisting of ball-point pens, fountain pens, selectip rolling ball pens, which accommodate various types of refills, and mechanical pencils. We also manufacture and market a variety of refills for most of our product types. In addition to Cross branded writing instruments, we design and market writing instruments sold under the Penatia^™ and Omni^® by Cross brands and a line of writing instruments sold under the licensed name of Bill Blass^®. The Company is an Original Equipment Manufacturer ("OEM") of writing instruments. In addition to writing instruments, we also design and market desk sets. In 2003, we launched a line of business accessories, which we designed. They include pad portfolios, personal digital assistant ("PDA") cases, business card cases, key rings, letter openers and money clips. We also design and market a line of watches, primarily for th e business gift market. The Company periodically launches new products.

Our writing instruments are offered in a variety of styles and materials at various price points. They are packaged and sold as individual units or in matching sets. The majority of the Company's writing instrument sales occur at suggested retail price points between approximately $10 and $50. We continue to be a market leader in the United States at these price points. Products in this price range include: Classic^® Century^®, Ion^®, Morph^®, MicroPen, Cross Matrix^®, Radiance, Solo^®, and selected Century II and ATX^® writing instruments. The Cross Townsend^®, Verve^™ and Century II lines provide the Company a presence in the $55 to $300 price range. The Penatia brand, which is not a "Cross" branded line of writing instruments, provides the Company a presence in the under $10 price range. Watches are priced between $70 and $190, and business accessories are pri ced between $20 and $110.

The Company emphasizes styling, innovation, craftsmanship and quality in the design and production of all of its products. All Cross branded writing instruments carry a full warranty of unlimited duration against mechanical failure. Our watches are sold with a limited ten-year warranty, and business accessories are sold with a limited one-year warranty.

The Company's products are sold throughout the United States by our direct sales force and manufacturers' agents or representatives to approximately 6,200 retail and wholesale accounts. Retail accounts include: gift stores, department stores, jewelers, stationery, office supply and pen specialty stores, mass merchandisers, catalogue showrooms, United States military post exchanges, service centers and central buying operations. Our wholesale accounts distribute the Company's products to retail outlets that purchase in smaller quantities. The Company's products are also sold to consumers in the United States, Canada and Hong Kong on the Company's web site: www.cross.com. Advertising specialty representatives market the Company's writing instruments, accessories and watches in the United States to business accounts. Typically, such products are engraved or carry the purchaser's name or emblem and are used for gifts, sales promotions, incentive purposes or advertising.

Sales of the Company's products outside the United States during 2004 were made to foreign distributors and retailers worldwide by the Company and its wholly-owned subsidiaries.

Optical
The Company, through its wholly-owned subsidiary Costa Del Mar Sunglasses, Inc., designs, manufactures and markets premium, high-quality, polarized eyewear through its optical segment under the brand name Costa Del Mar^®. Offered in more than 35 styles and 16 lens options at suggested retail price points between approximately $100 and $300, our eyewear is sold by employee representatives and manufacturer's agents to approximately 3,000 retail accounts throughout the United States. Retail accounts include optical and sunglass specialty shops, department stores and sporting goods retailers. Costa Del Mar sunglasses are sold with a lifetime warranty against defects in materials or workmanship.

2

The majority of component materials for the optical segment are imported from specialized manufacturers located in Europe and Japan.

To maintain the highest level of product quality, we rely on a limited number of domestic and foreign suppliers for certain raw materials and manufacturing technologies. The Company may be adversely affected in the event that these suppliers cease operations or if pricing terms become less favorable. The Company believes, but cannot be assured, that the raw materials currently supplied by these vendors could be obtained from other sources and that the manufacturing technologies could either be developed internally or that suitably similar technologies could be located.

Costa Del Mar historically has generated its strongest sales in the first half of its fiscal year.

3

The sunglass market in the United States is estimated to be $1.2 billion at wholesale. The Company's optical segment under the brand name Costa Del Mar competes in the premium-priced ($50+ retail) sunglass market segment, which is estimated to be from $800 million to $900 million at wholesale. Several other sunglass companies also compete in the premium segment. Costa Del Mar sunglasses are sold with a lifetime warranty against defects in materials or workmanship.

See also the "Risks and Uncertainties; Forward-Looking Statements" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Annual Report on Form 10-K.

4

The Company currently owns and occupies approximately 269,000 square feet of manufacturing, warehouse and office space in Lincoln, Rhode Island. This facility, which is well maintained and in good repair, is utilized in a manufacturing, distribution and administrative capacity. The production capacity of this facility is sufficient to meet the Company's needs for the foreseeable future.

The Company leases administrative facilities and/or warehouse space for its operations in France, the United Kingdom, The Netherlands, Spain, Germany, Japan, Taiwan, Hong Kong, Singapore, Lincoln, Rhode Island, Boston, Massachusetts, Miami and Ormond Beach, Florida. The Company also leases retail facilities in Cambridge and Newton, Massachusetts.

5

On or about April 21, 2000, the Company, certain officers and directors of the Company and others were named as defendants in an action filed in the United States District Court for the District of Rhode Island. The suit, which is brought by a purchaser of the Company's Class A common stock, alleges that the defendants violated Federal securities laws by making material misstatements and omissions in the Company's public filings and statements relating to the Company's former Pen Computing Group business. The suit seeks class action status including all purchasers of the Company's Class A common stock between September 17, 1997 and April 22, 1999. The damages sought are unspecified.

On June 30, 2000, the Company filed a Motion to Dismiss the action in the United States District Court in Rhode Island. The United States District Court for the District of Rhode Island granted the Company's Motion to Dismiss in June 2001. In July 2001, the Plaintiff filed an appeal with the First Circuit Court of Appeals. The appeal was before the First Circuit Court of Appeals. Oral argument was held February 8, 2002.

On March 20, 2002, the Court of Appeals for the First Circuit issued a judgment affirming the dismissal of all claims asserted against the W. Russell Boss Jr. Trust A, W. Russell Boss Jr. Trust B and W. Russell Boss Jr. Trust C and reversing the District Court's dismissal of the Section 10(b) and 20(a) claims asserted against the Company and the named individual defendants. The Court of Appeals' ruling was limited to a finding that the plaintiff's complaint had satisfied the pleading requirements of the Private Securities Litigation Reform Act of 1995; the Court did not opine on the merits of plaintiff's claims. On January 8, 2004, the District Court heard oral argument on defendants' motion for summary judgment. On July 21, 2004, the Court issued its Memorandum and Order partially granting defendants' motion for summary judgment and narrowing the class period to encompass only purchases made between July 16, 1998 and April 22, 1999. Due to the revised class period, the plaintiff's two proposed class representatives no longer had standing to assert claims on behalf of the proposed class. The Court, however, allowed the plaintiff class an opportunity to recruit new class representatives. Discovery concerning plaintiff's proposed substitute class representatives is ongoing. The Company maintains that the claims are without merit and will continue to vigorously contest the litigation.

In June 2002, the United States Environmental Protection Agency ("EPA") served the Company with a Notice of Potential Liability and Request for Information regarding the J.M. Mills Landfill, which is part of the Peterson/Puritan Superfund site in Cumberland, Rhode Island. The Notice also requests that the Company pay past and future costs associated with the site. To date, approximately sixty entities have received Notice Letters from the EPA relative to the site. The Company filed its response in October 2002.

The Company is also named as one of approximately sixty defendants in a contribution suit brought by CCL/Unilever relating to the J.M. Mills Landfill site. These complaints allege that the Company is liable under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") for contribution for past and future costs incurred at the site. Past and future costs, excluding the required remedy, are currently estimated at $5 million to $7 million. No discovery has been taken to date.

The Company is involved in various other litigation and legal matters that have arisen in the ordinary course of business. To its knowledge, management believes that the ultimate resolution of any of those existing matters will not have a material adverse effect on the Company's consolidated financial position or results of operations.

Not applicable.

6

Issuer Purchases of Equity Securities

On October 23, 2002, the Company's Board of Directors authorized a plan to repurchase up to 10% of the Company's outstanding Class A common stock. Under this plan, the Company plans to purchase approximately 1.4 million shares of stock on the open market, subject to regulatory considerations, from time to time, depending on market conditions. At January 1, 2005, the Company had repurchased 987,000 shares under this plan for approximately $5.4 million at an average price per share of $5.42. In the fourth quarter of 2004, 109,500 shares were purchased for approximately $557,000 at an average price per share of $5.09.

7

The Company has been operating in a difficult economic environment in a mature and competitive category. Fiscal 2004 represented the fourth consecutive year in which the Company's core writing instrument and accessory segment reported a decline in sales. Several years ago, the Company challenged itself to build upon its unique attributes in order to develop a vibrant, diversified and modern company poised for sustainable growth and long-term profitability. Such attributes include a strong brand name, 158-year heritage, reputation for quality and craftsmanship, global distribution network and strong balance sheet. The Company established several strategic initiatives to build upon these attributes and overcome its challenges, including: becoming an innovative leader in the fine writing category, extending the Cross brand into new categories, developing avenues for diversification and streamlining its operating structure.

The Company is competing vigorously to build its position as the category leader in terms of product innovation, marketing and merchandising. For the fifth consecutive year, approximately 20% of writing instrument and accessory revenue was derived from new products. The Company defines new product sales as those sales generated in a product's first twenty-four months. New products launched in 2004 included the Verve line; Cross Townsend line additions: Herringbone, Platinum Plated and Black Lacquer with Rhodium Plated appointments; Ion Metal new colors; Century II: Engelsberger, Art Deco and Kimono; additions to Cross's Penatia brand and licensed Bill Blass offerings as well as new watches and business accessories. They represent the new generation of Cross - sleek, innovative design fused with traditional functionality and craftsmanship. The Company has introduced marketing, packaging and point of purchase displays that reflect this image.

The Company's sales force is organized around three major geographic regions; the Americas, Asia and Europe, Middle East and Africa ("EMEA"). Within each of these regions, the Company uses a combination of direct sales force, manufacturers' representatives and distributors. From mid-2003 and throughout 2004 the Company transitioned from using manufacturers' sales representatives to a direct sales force for its United States carriage trade retail business in order to improve sales results. The Company believes this change has had positive results at accounts now served by this new direct sales force.

The execution of 2004 holiday product and marketing programs, developed with several of our national accounts in the United States, proved successful. However, strict inventory controls at these national account customers, as well as slower sell through at non-holiday periods, had the result of significantly lower sales. In 2004, the Company discontinued certain slower moving products and expects that a more focused product line, as well as lower price points on certain products now sourced overseas, will improve performance at these accounts.

Corporate gift sales to business and industry through our special markets division also declined in 2004 due to the continuing trend in this market toward lower priced writing instruments or away from the writing category altogether. In 2005, the Company plans to focus on taking share from its competitors in this market with new products and compelling programs.

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As global economies recover, we are benefiting from our international efforts as evidenced by broad based revenue growth in these markets. We expect this positive momentum to continue into 2005.

The Cross brand has a strong awareness and, more importantly, consumers associate the Cross name with quality and style. The strong awareness of our name and the positive attributes associated with our brand supported the extension of the Cross brand into related personal accessory categories. Importantly, we wanted to move to categories that would allow us to further utilize our existing sourcing infrastructure and global distribution network. Our priority for all of our brand extensions is to incorporate the quality, design and craftsmanship that consumers enjoy from Cross's fine writing instruments. We have done this with our Cross branded accessories. In 2004, under a licensing agreement with Sun Optics, the Company introduced a line of Cross branded precision reading glasses. Four styles were introduced, each featuring a contemporary, rimless design and available in the six most popular diopter powers in the United States. In addition to Cross Readers, the company introduced seventeen new styl es to its watch collection featuring vivid colors, geometric shapes and larger faces and dials designed to bring the Cross brand to younger fashion-forward consumers. The Company's accessories line, which currently includes items such as business card holders, money clips and day planners, will be expanded and improved upon in 2005. In 2004, watches and business accessories comprised approximately 2% of WI&A sales. We have developed a foothold in these categories and look forward to further strengthening our presence in 2005.

The 2003 acquisition of Costa Del Mar proved to be very successful. Since the acquisition we have benefited from revenue diversification and top and bottom line growth. In 2004, Costa Del Mar grew its business 18% on a full year comparable basis through new product introductions and increased distribution. Costa Del Mar developed fifteen new products and launched nine, with the remaining six to be launched in early 2005. Costa Del Mar upholds our commitment to delivering to our consumers exceptional product, innovation and quality. Costa Del Mar also benefits from the strong optical business backgrounds of certain key members of the Cross senior management team. The Company continues to look for appropriate acquisitions that will add to top and bottom line growth.

Our 'Cross into the Future' corporate restructuring program that we announced in July 2003, which involves streamlining our operations and sourcing certain products overseas, is designed to reduce our cost structure. The funds we generate will be used to invest in growing our businesses while at the same time generating an appropriate level of profitability. Our corporate reorganization program has two components: administrative and manufacturing. On the administrative side, we have streamlined our North American non-manufacturing operations and shifted resources to our marketing and selling functions. On the manufacturing side, as we are keenly aware that our consumers look to Cross for the highest-quality writing instruments in the world, our number one priority is and will always be maintaining our strict quality standards. As such, our transition to an overseas sourcing model will be a very deliberate and gradual process. The first products moved offshore during 2004. Further outsourcing will b e dependent on our complete satisfaction that all product meets the high-quality standards that consumers expect from Cross. We believe these actions are necessary to preserve Cross's ability to remain a competitive, profitable company. We look forward to our 'Cross into the Future' program continuing to provide a more efficient operating structure that will allow us to focus more intensely on building and growing our portfolio of market-leading branded accessories. For an analysis of the corporate restructuring program, see Note D to the Company's consolidated financial statements in Item 8 of this Annual Report on Form 10-K.

These non-GAAP results are among the indicators management uses as a basis for evaluating financial performance as well as for forecasting future fiscal periods. For these reasons, management believes that these non-GAAP measures can be useful to the reader of these financial statements and footnotes. This presentation of non-GAAP information is not meant to be considered in isolation or as a substitute for net (loss) income and net (loss) income per share prepared in accordance with GAAP.

9

Writing instruments and accessories revenue in the Americas region declined by $7.2 million, or 11.7%. This decline was primarily due to an 11.2% decline in domestic sales, as our national accounts division declined by 20% in 2004 compared to 2003. Office superstore accounts, which are handled by the national accounts division, reduced their on hand inventory levels of Cross product by approximately 18% during the year. In addition, sell through of the Company's products was down 13% year on year.

Business gift sales in the United States were 12% below 2003 as corporate demand for fine writing products declined due to competition from lower priced writing instrument products and other product categories.

Retail sales in the United States, consisting of sales to carriage trade customers and direct to consumer sales, primarily through the Company's web site, increased 2%. Sales through the Company's web site, www.cross.com, increased 64%. However, this was partially offset by a 4.5% decline in sales to carriage trade retailers. Starting in mid-2003, the Company transitioned from manufacturers' sales representatives to a direct sales force. The sales results for the east coast sales force, which transitioned mid-2003, increased 13% in 2004 compared to 2003. Sales for the west coast, which transitioned early in 2004, was down 2% for the year, but showed improved results compared to 2003 for the second, third and fourth quarters. The central/southern region, in the midst of transition, performed poorly as did military accounts. The Company's manufacturers' sales representatives for collegiate accounts improved results by 26.5%.

The increase in sales in the EMEA region was largely due to the effects of foreign exchange as the weaker United States dollar versus the euro and pound sterling resulted in higher translated United States dollar sales. Foreign exchange was favorable to EMEA sales results by approximately 8.7 percentage points as sales volume increased approximately 2% for the full year. Sales to customers in our subsidiary markets in the United Kingdom, France, Germany and Ireland were up 18%, 28%, 8% and 13% respectively.

Asia revenue of $18.5 million increased 10.2% compared to fiscal 2003 and increased by approximately 6% excluding the favorable effects of foreign exchange. Sales by our Hong Kong subsidiary increased 35% in 2004 as the Company launched a major effort in China to place Cross "shop-in-shops" in important stores in a number of large cities.

The Company's other sales consist of OEM sales of writing instruments and digital pens as well as its two retail test stores opened during 2004 in the greater Boston area. OEM sales decreased 40% compared to fiscal 2003 largely the result of a decline in the sales of digital pens for tablet PC products. Revenue from the Company's two retail test stores partially offset this decline.

The optical segment, which consists of the Company's Costa Del Mar subsidiary, increased revenue by 18% in fiscal 2004 compared to the comparable 2003 fiscal period. This increase was due to a number of new product introductions made in 2004 along with expanded distribution on the west coast of the United States.

The following chart details gross profit margins for both the writing instruments and accessories segment as well as the consolidated gross profit margins:

Writing instrument and accessory margins were adversely affected by additional inventory obsolescence reserves recorded in the fourth quarter of 2004 for certain slow-moving or discontinued products as the Company streamlined its product offering for 2005. This higher provision for inventory obsolescence comprised 1.4 percentage points of the 2.7 percentage point decline in writing instruments and accessories gross margin. The remaining decline was largely attributable to the highly competitive market conditions, which affected margins throughout 2004. The optical segment's gross margin for fiscal 2004 had a slight, but favorable effect on the consolidated gross margin for the year.

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Consolidated selling, general and administrative ("SG&A") expenses of approximately $57.4 million were $1.4 million, or 2.4%, higher than in 2003. SG&A expenses were 44.3% of net sales in both 2004 and 2003. SG&A expenses for WI&A of approximately $51.1 million were $0.8 million lower than fiscal 2003. The effect of foreign exchange in the WI&A segment resulted in approximately $1.6 million of higher SG&A expenses, which was more than offset by savings resulting from the Company's restructuring program. SG&A expenses for the optical segment were $6.3 million in fiscal 2004 and $4.1 million from the April 2003 acquisition date through January 3, 2004.

Service and distribution ("S&D") expenses of $3.5 million were $0.3 million higher than fiscal 2003 and are in line with the increase in revenue compared to fiscal 2003.

Research and development ("R&D") expenses of $1.8 million were $0.2 million lower than fiscal 2003. This was due primarily to more WI&A segment R&D work being outsourced than performed in-house. Offsetting this somewhat was an increase in R&D at the optical segment in support of the new product lines.

Restructuring charges of $2.3 million were recorded in the Company's WI&A segment in fiscal 2004 compared to $2.4 million in fiscal 2003. These charges were related to the corporate restructuring program announced in July 2003. As a result of the restructuring program, the Company expects to realize G&A savings of $4 million to $5 million annually, on a 2002 cost base, beginning in fiscal 2004. For an analysis of the corporate restructuring program, see Note D to the Company's consolidated financial statements in Item 8 of this Annual Report on Form 10-K.

A $1.0 million gain on disposition of asset held for sale was recorded in fiscal 2003 as a result of the 2003 sale of the Company's former manufacturing and distribution facility in Ireland, which was closed in 2001.

Consolidated interest income in fiscal 2004 was $0.7 million compared to $0.5 million in 2003. In 2004, the Company recorded $0.4 million of interest income on the property tax settlement with the Town of Lincoln, Rhode Island. In 2003, the Company recorded $156,000 of interest income on the value added tax claim settlement with the Spanish government. Excluding these one-time events, interest income in 2004 was 23% lower than 2003 due to the lower level of average invested funds on relatively flat average interest rates.

The following chart details the major components of other income and (expense):

In fiscal 2004, the Company's effective tax rate was 45.0% compared to 19.9% in fiscal 2003. The increase in 2004 over the Federal statutory rate was primarily related to the reduction in the reserve for potential income tax exposures. In 2003, the rate was favorably affected by a benefit from foreign sourced income taxed at lower rates. Excluding unusual items, the Company expects that the tax rate in future years will be comparable to the Federal statutory rate. For an analysis of income taxes see Note K to the Company's consolidated financial statements in Item 8 of this Annual Report on Form 10-K.

As a result of the foregoing, the consolidated net loss in fiscal 2004 was $0.9 million ($0.06 net loss per share, basic and diluted) as compared to the fiscal 2003 net income of $1.8 million ($0.12 net income per share, basic and diluted).

The following chart details net sales performance by segment and operating unit:

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Writing instrument and accessory revenues in the Americas region of $61.7 million declined $2.1 million, or 3.2%, compared to fiscal 2002. Domestic writing instrument net sales of $51.8 million decreased $2.2 million, or 4%, while international Americas writing instrument net sales of $9.9 million were about flat compared to fiscal 2002. Domestic writing instrument volume for the full year was adversely affected by continued weak economic conditions. These adverse conditions affected both the retail, primarily carriage trade accounts, and business gift divisions, which were below 2002 sales levels by 4.1% and 4%, respectively. This poor performance at retail was somewhat offset by improved performance at certain national accounts, where holiday programs put in place proved successful, and the mid-2003 establishment of a direct retail sales force on the east coast.

Writing instruments and accessory sales in the EMEA and Asia regions of $51.4, up 2.6% for the year, were favorably affected by foreign exchange as the weaker United States dollar versus the euro, yen and pound sterling resulted in higher translated United States dollar sales. Foreign exchange was favorable to EMEA and Asia sales results by approximately 8.8 percentage points for the full year.

Writing instrument and accessory revenues in the EMEA region of $34.6 million increased $1 million, or 2.8%, compared to fiscal 2002. Retail and business gift sales improved over the prior year by 0.7% and 4%, respectively, due entirely to the favorable effects of foreign exchange. Excluding these favorable effects, EMEA revenues would have been down 8.4% year on year. This decline is attributable to the poor economic conditions in this region and the direct effects of the war in the Middle East.

Writing instrument and accessory revenues in Asia of $16.8 million increased $0.3 million, or 2%, compared to fiscal 2002. Business gift sales, which make up approximately 40% of the regions sales, were up 5% over fiscal 2002 while retail sales were essentially flat. The effects of favorable foreign exchange added approximately 4 percentage points to the full year sales improvement. The Asia region, which had been adversely affected by the outbreak of the SARS virus primarily during the first half of the year, improved 17.7% in the last six months of 2003 compared to the last six months of 2002. This was due, in part, to pent up demand in the first half of fiscal 2003 and favorable foreign exchange, which comprised 3.6 percentage points of the sales increase.

OEM sales of writing instruments and digital pens of $4.4 million was essentially even with fiscal 2002.

Consolidated gross profit margins of 51.4% in fiscal 2003 were higher than fiscal 2002 by 0.1 percentage points:

Writing instrument and accessory margins in fiscal 2003 were 51.1%, or 0.2 percentage points, less than fiscal 2002. They were adversely affected by changes in product mix to lower margined writing instruments. This unfavorable shift was somewhat offset by lower levels of manufacturing overhead and variances for the year. The optical segment's gross margin for fiscal 2003 had a small but favorable effect on the consolidated gross margin for the year.

Consolidated SG&A expenses of approximately $56.0 million were $4 million, or 7.6%, higher than in fiscal 2002 and were 44.3% of net sales in fiscal 2003 compared to SG&A expenses of $52.1 million, or 44.0% of net sales, in fiscal 2002. SG&A expenses for WI&A of approximately $51.9 million were about equal to fiscal 2002. SG&A expenses for the optical segment of $4.1 million in fiscal 2003 were all incremental to fiscal 2002. The effect of foreign exchange in the WI&A segment resulted in approximately $2.1 million of higher SG&A expenses, which was offset by savings resulting from the Company's restructuring program and expense reductions initiated prior to the implementation of the restructuring program in response to lower sales volume in the first half of 2003.

S&D expenses of $3.2 million were $2.6 million higher than fiscal 2002. This increase was primarily due to an approximate $2.2 million favorable pre-tax adjustment to the Company's accrued warranty costs that was recorded in the fourth quarter of fiscal 2002.

R&D expenses of approximately $1.9 million were $0.2 million lower than fiscal 2002. WI&A segment R&D expense was $1.9 million, $0.3 million, or 12.2%, lower than fiscal 2002, due to lower developmental expenditures for digital pen products.

Restructuring charges of $2.4 million were recorded in the Company's WI&A segment in fiscal 2003. These charges were related to the corporate restructuring program announced in July 2003. As a result of the restructuring program, the Company expects to realize SG&A savings of $4 million to $5 million annually beginning in fiscal 2004. It is estimated that approximately $1 million of operating expense savings were realized in fiscal 2003. For an analysis of the corporate restructuring program, see Note D to the Company's consolidated financial statements in Item 8 of this Annual Report on Form 10-K.

A $1 million gain on disposition of asset held for sale was recorded in fiscal 2003 as a result of the 2003 sale of the Company's former manufacturing and distribution facility in Ireland, which was closed in 2001.

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There was no environmental remediation expense recorded in fiscal 2003 compared to the $0.2 million reduction recorded in fiscal 2002 due to a change in the estimated cost of environmental remediation for the Company's facility in Ireland. This facility was sold in 2003 and the remaining approximate $0.5 million liability was reversed and included in the gain on disposition of asset held for sale as the purchaser of this facility assumed responsibility for its environmental remediation.

Interest and other (expense) income for fiscal 2003 was expense of $66,000 as compared to income of $0.7 million in fiscal 2002. WI&A segment interest and other (expense) income was expense of $59,000 and optical segment interest and other (expense) income was expense of $7,000.

Consolidated interest income in fiscal 2003 was $37,000, or 6.6%, lower than interest income in 2002 as interest rates and average invested funds were lower than the prior year, partially offset by $0.2 million of interest received in 2003 from the Spanish government for the settlement of a value added tax claim. Other income (expense) was an expense of $0.6 million in 2003 compared to other income in 2002 of $0.2 million. Other expense in 2003 included $0.3 million more interest expense compared to 2002 due to the additional level of borrowings and an unrealized loss on trading securities of $0.1 million compared to an unrealized gain of $0.1 million in 2002.

In fiscal 2003, the Company recorded an income tax provision of $0.4 million on approximately $2.2 million of income from continuing operations. The effective tax rate was 19.9% as compared to 26.5% in fiscal 2002. This decrease in tax rate was primarily due to a favorable shift in the mix of foreign and United States sourced income as well as higher than expected export tax benefits. For an analysis of income taxes from continuing operations, see Note K to the Company's consolidated financial statements in Item 8 of this Annual Report on Form 10-K.

As a result of the foregoing, the consolidated net income in fiscal 2003 was $1.8 million ($0.12 net income per share, basic and diluted) as compared to the fiscal 2002 net income of $4.9 million ($0.31 net income per share, basic and diluted).

The Company's cash balance of $15.5 million at the end of fiscal 2004 declined $0.7 million from the prior year, a result of many factors, the most significant of which are described in this section.

Accounts receivable decreased approximately $2.2 million from the prior year. WI&A segment accounts receivable of $27.1 million declined approximately $3.5 million from the prior year while optical segment accounts receivable of $2.8 million increased by $1.3 million from a year ago. The Company offers a dating program, primarily to its domestic retail writing instrument customers, whereby they may either delay payment on certain third and fourth quarter purchases until January of the next year or earn a greater discount if payment is made earlier. The earlier start to this year's dating program as well as early payment by certain customers, some of which took advantage of the discount offered, was the primary cause of the lower accounts receivable balance for WI&A. The increase in the optical segment accounts receivable was largely the result of the fourth quarter sales increase as Costa Del Mar launched a number of new products in 2004.

Total inventory of approximately $15.5 million decreased by $0.6 million compared to year end 2003. WI&A segment inventory declined by $1.9 million, primarily due to the Company's restructuring program, as five warehouse locations in Europe were reduced to one at the United Kingdom subsidiary. The increase in inventory at the optical segment was due largely to build up of inventory for several new product launches in the 2004 fourth quarter and fiscal 2005.

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In fiscal 2004, approximately $3.0 million was paid as a result of a corporate restructuring program initiated in July 2003. The amount paid since the inception of the program through the end of fiscal 2004 was $4.5 million. The total cost of this restructuring program is expected to be approximately $6.5 million incurred over the life of the program, assuming full implementation, which is expected to take several years. The total cash portion of this restructuring program is expected to be approximately $6.5 million. As a result of this reorganization program, the Company expects to realize general and administrative savings of approximately $4 million to $5 million annually, on a 2002 cost base, beginning in 2004 and, assuming the manufacturing plan is fully implemented, the Company expects to realize manufacturing cost savings of approximately $5 million to $7 million annually, on a 2002 cost base,

In February 2004, the Company and the Town of Lincoln, Rhode Island settled a dispute regarding the assessed value used to determine taxes on the Company's properties for the years 1994 through 2003. The Company received credits of $473,000 in real estate taxes payable and a $610,000 cash payment. The entire amount was realized in 2004.

The Company's working capital was $36.8 million at the end of fiscal 2004, a decrease of $4 million from fiscal 2003, and its current ratio at the end of fiscal 2004 and 2003 was 2.0:1 and 2.1:1, respectively. Operating cash flow from operations was $6.2 million in fiscal 2004 compared to $2.1 million in fiscal 2003. This increase was largely due to the effect of lower accounts receivable at the end of 2004 compared to the end of 2003.

Additions to property, plant and equipment were approximately $4.5 million in fiscal 2004 compared to $4.1 million in fiscal 2003. In fiscal 2005, the Company expects capital expenditures to be somewhat higher than 2004 and more in line with 2002 levels of approximately $5.3 million. Depreciation expense in 2005 is expected to approximate that of 2004.

On October 23, 2002, the Company's Board of Directors authorized a plan to repurchase up to 10% of the outstanding Class A common stock. Under this plan, the Company plans to purchase approximately 1.4 million shares of stock on the open market, subject to regulatory considerations, from time to time, depending on market conditions. In 2004, the Company repurchased 312,500 shares for approximately $1.6 million at an average price per share of $5.27. At January 1, 2005, the Company had repurchased 987,000 shares under this new plan for approximately $5.4 million at an average price per share of $5.42.

The Company maintains a $25 million unsecured line of credit with a bank. This agreement requires the Company to meet certain covenants. The most restrictive covenant is that over the three fiscal years from 2003 through 2005 the Company cannot incur extraordinary charges, as defined by the bank, such as restructuring charges, in excess of approximately $6.5 million. In the two fiscal years from 2003 through 2004, the Company has incurred approximately $4.8 million of restructuring charges. There is also a restriction on the Company's ability to grant security interests in its assets. Any amounts borrowed under this agreement are payable on demand. Under this agreement, the Company has the option to borrow at either the bank's prime lending rate or at one percent per annum in excess of the London Interbank Offering Rate ("LIBOR"). The unused and available portion of the Company's $25 million unsecured line of credit was $22 million at January 1, 2005.

The Company will make a cash contribution of approximately $1.8 million to its defined benefit retirement plan in 2005.

The Company expects fiscal 2005 research and development expenses to be about equal to fiscal 2004.

The Company believes that existing cash and funds from operations, supplemented, as appropriate, by the Company's short-term borrowing arrangements, will be adequate to finance its foreseeable operating and capital requirements, service its long-term debt and the remaining requirements of the restructuring and stock repurchase plans. Should operating cash flows in 2005 not materialize as projected, the Company has a number of planned alternatives to ensure that it will have sufficien