UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

[ ]	REGISTRATION STATEMENT PURSUANT TO SECTION 12 (b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

[X]	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2005

OR

[ ] 	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from N/A to N/A

OR

[ ] 	SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event requiring this shell company report

Commission file number: 1 - 10230

BENETTON GROUP S.p.A.

(Exact name of Registrant as specified in its charter)

ITALY

(Jurisdiction of incorporation or organization)

VIA VILLA MINELLI 1, 31050 PONZANO VENETO (TV), ITALY

(Address of principal executive offices)

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

Title of each class 						 Name of each exchange on which registered
American Depositary Shares					 The New York Stock Exchange

each representing two ordinary shares 

of Euro 1.30 par value each

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report

Ordinary Shares 181,558,811 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.	

	Yes [ ] No [X]

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.	Yes [ ] No [X]

Note-Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [ ] Accelerated filer [X]	 Non-accelerated filer [ ]

Indicate by check mark which financial statement item the registrant has elected to follow.	 Item 17 [X] Item 18 [ ]

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).	 Yes [ ] No [X]
**Table of contents

PAGE	ITEM

3	Forward-Looking Statements

	References

4	Part I

5	1. Identity of Directors, Senior Management and Advisers

	2. Offer Statistics and Expected Timetable

	3. Key Information

11	4. Information on the Company

19	4A. Unresolved Staff Comments

	5. Operating and Financial Review and Prospects

35	6. Directors, Senior Management and Employees

47	7. Major Shareholders and Related Party Transactions

49	8. Financial Information

50	9. The Offer and Listing

51	10. Additional Information

63	11. Quantitative and Qualitative Disclosures About Market Risk

66	12. Description of Securities Other than Equity Securities

67	Part II

68	13. Defaults, Dividend Arrearages and Delinquencies

	14. Material Modifications to the Rights of Security Holders and Use of Proceeds

	15. Controls and Procedures

	16A. Audit Committee Financial Expert

69	16B. Code of Ethics

	16C. Principal Accountant Fees and Services

	16D. Exemptions from the Listing Standards for Audit Committee

	16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

70	Part III

71	17. Financial Statements

146	18. Financial Statements

	19. Exhibits
** 

				

Forward-Looking Statements**
Certain statements contained in this Form 20-F, including those statements contained under the captions "Information on the Company" and "Operating and Financial Review and Prospects" that are not statements of historical fact, are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such statements can be generally identified by the use of terms such as "believes", "expects", "may", "will", "would", "could", "plans", or "anticipates", the negatives of such terms, or comparable terms. 

In addition to the statements contained in this Form 20-F, the Company (or directors or executive officers of the Company authorized to speak on behalf of the Company) from time to time may make forward-looking statements, orally or in writing, regarding the Company and its business, including press releases, oral presentations, filings under the Securities Act, the Exchange Act or securities laws of other countries, and filings with other stock exchanges.

Such forward-looking statements represent the Company's judgment or expectations regarding the future, and are subject to risks and uncertainties that may cause actual events and the Company's future results to be materially different than expected by the Company or indicated by such statements. Accordingly, no assurance can be given that the results anticipated by the Company, or indicated by any such forward-looking statements, will be achieved.
**References**
Unless the context otherwise requires, the term the "Company" refers to Benetton Group S.p.A. (the Parent Company), and the terms the "Group" and "Benetton" refer to Benetton Group S.p.A. and its consolidated subsidiaries.
** 

 

 

 

 

 

 

 

 

 

 

 

 

 

PART**I

 

 

Item 1: Identity of Directors, Senior Management and Advisers. Not applicable.
** 

Item 2: Offer Statistics and Expected Timetable. Not applicable.
** 

Item 3: Key Information

A. Selected financial data**
The Company publishes its consolidated financial statements in Euro. 

The summary consolidated financial information detailed below for each of the years ended December 31, 2004 and 2005 has been derived from our audited consolidated financial statements included in Item 17 of this annual report on Form 20-F. The financial information included in this section should be read in conjunction with these audited consolidated financial statements and the notes thereto.

The audited consolidated financial statements from which the summary consolidated financial information has been derived was prepared in accordance with IFRS. See Note 28 to the audited consolidated financial statements for details of the transition to IFRS.

This is the first year in which the Group has prepared its financial statements under IFRS and the comparative financial statements have been restated from Italian GAAP. 

IFRS differ in some respects to U.S. GAAP. Consolidated net income attributable to the Group and total shareholders equity has been reconciled to U.S. GAAP. For a discussion of the principal differences between IFRS and U.S. GAAP see Note 29 to our audited consolidated financial statements. 
**> Amounts in accordance with IFRS***Year ended December 31,*Key operating data (millions of Euro) *2004*%*2005*%
Revenues
1,704 
100.0 
1,765 
100.0 
Gross operating income
775 
45.5 
770 
43.6 
Contribution margin 
654 
38.4 
643 
36.4 
Adjusted EBITDA (1)
312 
18.3 
285 
16.2 
Operating profit
158 
9.3 
157 
8.9 
Net income/(loss)
108 
6.4 
114 
6.5 
Earnings/(loss) per share (Euro) 
0.60 
0.62 *Year ended December 31,*Key financial data (millions of Euro)*2004*2005
Total assets
2,601 
2,407 
Net working capital (2)
711 
688 
Net financial debt (3)
441 
351 
Total Shareholders' equity
1,213 
1,275 
Share capital
236 
236 
Average number of shares outstanding
181,558,811 
181,558,811 
(1) Adjusted EBITDA consists of net income before income taxes, net financial expenses and exchange difference, depreciation and amortization, impairment of property plant and equipment and intangible assets, and stock option cost. Adjusted EBITDA in 2004 included the effect of a provision for the closure of a number of stores in France, which, however, continued to operate throughout 2005, thus eliminating the need for the related provision. Adjusted EBITDA is not a measurement of performance under IFRS or U.S. GAAP and Adjusted EBITDA should not be considered an alternative to (a) operating profit or net income (as determined in accordance with generally accepted accounting principles) as a measure of our operating performance, (b) cash flows from operating, investing and financing activities (as determined in accordance with generally accepted accounting principles) as a measure of our ability to meet cash needs or (c) any other measures of performance under IFRS or U.S. GAAP. Adjusted EBITDA is a measure commonly reported and widely used by investors and other interested parties as a measure of a company's operating performance and debt servicing ability because it assists in comparing performance on a consistent basis without regard to depreciation, amortization and impairment charges, which can vary significantly depending upon accounting methods (particularly when acquisitions are involved) or non-operating factors (such as historical cost). Accordingly, this information has been disclosed in this annual report to permit a more complete and comprehensive analysis of our operating performance relative to other companies and of our debt servicing ability. Because not all companies calculate Adjusted EBITDA in the same manner, the presentation of Adjusted EBITDA may not be comparable to the Adjusted EBITDA of other companies.

The following is a reconciliation of net income for the year to Adjusted EBITDA:
*(millions of Euro)*2004*2005
Net income for the year
108
114
Income taxes
28
20
Net financial expenses and exchange differences
22
23
Depreciation and amortization
95
85
Impairment of property, plant and equipment and intangible assets
49
50
Stock option cost
1
(A)
2
(A)
Provisions for closure of stores/(Release of provisions for closure of stores)
9
(B)
(9) 
(B)**Adjusted EBITDA	**312 **285 
(A)	Stock option cost is included in "Payroll and related costs" of financial statements in Item 17.

(B) 	Provisions for closure of stores/(Release of provisions for closure of stores) are included respectively in "Provisions for risks" and "Other operating income" of financial statements included in Item 17.
(2) Net working capital includes trade receivables net of allowances for doubtful accounts, inventories, trade payables, and other non-financial receivables and payables (i.e. VAT receivable and payable, other receivables and payables, parent company receivables and payables, taxes payable, deferred tax assets, accruals and prepayments, social security and employee payables, receivables and payables for the purchase of non-current assets). 

(3) A reconciliation of net financial debt is included in Item 5.B "Liquidity and capital resource".
** 

> Amounts in accordance with U.S. GAAP***(thousands of Euro except per share amounts and weighted average number of shares outstanding)*Year ended December 31,
2001
2002
2003
2004
2005
Net income/(loss)
154,678
65,513
126,542
106,972
95,981
Weighted average number of 

shares outstanding 
180,720,969
181,341,018
181,558,811
181,558,811
181,558,811
Earnings/(loss) per share (1):

Basic and diluted
0.86
0.36
0.70
0.59
0.53
Cash dividend per share (1)

paid in each year
0.46
0.41
0.35
0.38
0.34
Shareholders' equity 
1,099,388
1,096,791
1,150,513
1,191,420
1,231,428
(1) 	Since each ADS represents two ordinary shares, the financial data as it relates to an ADS may be calculated by multiplying the per share data by two.**> Dividends declared and paid
*Year*Dividend per ordinary share (Euro)
2006 (1)
0.34
2005 
0.34
2004 
0.38
2003 
0.35
2002 
0.41
2001 (2)
0.46
(1) 	Dividend paid on May 18, 2006.

(2) 	Restated to reflect the reverse split of the Company's ordinary shares approved by the Shareholders' Meeting of May 8, 2001.**> Exchange rates 

The following table sets forth, for each of the years indicated, the high, low, average and year-end exchange rate for converting United States Dollars into Euro based on the Noon Buying Rate in New York City for cable transfers in Euro as certified for customs purposes by the Federal Reserve Bank of New York. The Noon Buying Rates are expressed in USD per Euro 1.00.

 
*Year ended December 31,*High*Low*Average (*)*End of Year
2001
0.95
0.84
0.90
0.89
2002
1.05
0.86
0.95
1.05
2003
1.26
1.04
1.13
1.26
2004
1.36
1.18
1.24
1.35
2005
1.35
1.17
1.24
1.18
(*)The average of the Noon Buying Rates on the last day of each month during the year. 
 

The following table sets forth, for each month during the previous six months, the high and low exchange rate for United States Dollars into Euro based on the Noon Buying Rate in New York City for cable transfers in Euro as certified for customs purposes by the Federal Reserve Bank of New York. The Noon Buying Rates are expressed in USD per Euro 1.00.
*High*Low
December 2005
1.20
1.17
January 2006
1.23
1.20
February 2006
1.21
1.19
March 2006
1.22
1.19
April 2006
1.26
1.21
May 2006
1.29
1.26** 

B. Risk factors 

Benetton's business is subject to the following risks:
**> Benetton's business is subject to competitive pressure. The Group operates in the apparel segment, which is highly competitive in the production, sales and distribution areas. The number of competitors has grown considerably in the last few years as the number of companies manufacturing in countries with a low cost base has increased. To respond to this, the Group maintains a strategic focus on production and organizational efficiency policies related to production decentralization, completion of production cycles in overseas units, and organizational cost reduction. Competition could increase, in particular, in distribution because there are few barriers to entry. Benetton competes with local, national and global department stores, specialty retailers, independent retailers and manufacturing companies, as well as with mail order companies, which use catalogues to target customers. Increased competition could lead to pricing pressure and loss of market share, which would have a material adverse effect on the Group's financial condition and performance. **> The success of Benetton's strategies is influenced by the response of the sales network. In line with the business model, there is an incentive scheme in place for Benetton's network of commercial partners. The objective of this policy is to encourage partners to increase their investment capacity in order to open new stores, renew existing ones, and increase their ability to compete on price to the final consumer. The success of this strategy depends on the ability to motivate and incentivize the network by setting specific objectives and monitoring progress on a regular basis. If Benetton's sales partners are not incentivized to increase their investments, this could result in a loss of market share, which could have a material adverse effect on the Group's financial condition and results of operations. Furthermore, linked to the present model of business, there could be significant risks of delayed payments from customers or difficulties in the collection of receivables.
**> Benetton's future performance depends on its ability to develop its business in emerging markets. The Group is implementing new commercial strategies to develop business, especially in emerging markets. Special emphasis is being placed on certain emerging markets, such as China and India, including through agreements with large-scale retailers for the opening of "stores in stores" in big department stores in the main cities. The Group's initiatives include the creation of new partnerships to manage and develop commercial activities. If Benetton fails to implement its strategy for emerging market growth, it could have a material adverse effect on the Group's financial condition and results of operation.
**> Benetton's business is sensitive to changes in customer spending habits. Benetton's business is sensitive to changes in consumer spending patterns and may be affected by, amongst other things, business outlook, interest rates, taxation, local economic conditions, uncertainty over future economic prospects and a shift in discretionary spending towards other goods and services. Consumer preferences and economic conditions may change from time to time in each and every market in which the Group operates. Benetton's future performance will be subject to such factors, which are beyond its control, and there can be no assurance that such factors would not have a material adverse effect on the Group's results of operations.
**> Benetton's success depends on its ability to anticipate and respond to changing trends. Sales and profitability levels also depend on the ability to anticipate and react immediately to changes in fashion trends and consumer tastes. If Benetton's collections were not to meet with the customers' approval, the Group would have lower than expected sales, a higher level of discounts, and reduced margins on goods sold. Although Benetton is constantly reviewing emerging consumer preferences, any failure by Benetton to identify and respond to such trends in a timely manner could have a material adverse effect on the Group's business and results of operations.
**> The Group's growth and expansion strategy has led to an increase in fixed and operating costs. To strengthen Benetton's image and market share, Benetton has, in recent years, invested to sell products through directly owned retail stores, although the Group has traditionally distributed its products through a network of independent stores. At the end of 2005, the Group managed around 280 wholly-owned shops, which were strategic as far as the demographic and commercial profile of their locations were concerned. These retail stores have, however, led to an increase in fixed costs and operating expenses. These investments expose the Group to the additional risk that some of the chosen locations may turn out to be inadequate because of changes in the area's demographic profile or the location of shopping districts. Failure or changes in any areas in which the Group has stores could have a material adverse effect on the Group's business and results of operations.
**> Benetton is exposed to risks linked with its strategies. The Group strives to develop the existing commercial network and to strengthen its brand. However, this growth is subject to Benetton being able to: (i) identify suitable markets and locations for new stores; (ii) maintain the service levels expected by customers; (iii) avoid sales and profit margin decrease at third-party managed stores selling Benetton-branded goods when directly-managed megastores are opened in the same areas or shopping districts; (iv) manage inventories effectively; and (v) deliver goods on time. In addition, the Group's systems, procedures, controls, and resources need to be aligned to support its expansion plans. Moreover, there can be no assurance that this strategy will be successful or that the Group's overall net revenues will increase as a result. If the Group is unable to manage its expansion effectively and increase sales, this may have a material adverse effect on the Group's business, financial condition and results of operations. 
**> The protection of Benetton's intellectual property rights is subject to risks. To safeguard the rights on the Group's core products that are instrumental in the Group's success and competitiveness, including design, proprietary technologies and manufacturing processes, product and concept research, acknowledged trademarks, Benetton relies on the laws on business secrecy, unfair competition, trade dress, trademarks, patents, and copyrights. Nonetheless, trademark registration requests may not result in effective registrations, and even if registrations are granted, they may be ineffective and could be subsequently invalidated. Moreover, the actions undertaken to protect intellectual property rights may turn out to be ineffective against counterfeiting.~~~~In addition, the Group's know-how may become known to competitors, and Benetton may not be able to fully protect its intellectual property rights. Other companies may also develop products independently which are substantially similar or better to Benetton's, without infringing the Group's intellectual property rights. In addition, in some countries there is no legislation protecting proprietary rights. The already substantial amount of resources allocated to the protection of proprietary rights could be significantly increased should the level of infringement by third parties increase. Furthermore, judgments against Benetton in disputes relating to the Group's proprietary rights may (i) impose the granting of licences to third parties or the requesting for licences from third parties; (ii) prevent the production or sale of the Group's products; and (iii) lead to substantial losses. 
United Colors of Benetton, Undercolors, Sisley, Playlife, Killer Loop, and other commercial and service trademarks have been registered or are subject to registration requests with the trademarks and patent offices of many foreign countries and are protected by ordinary legislation. The infringement by others on the Group's trademarks, patents, proprietary technology and other intellectual property could have a material adverse effect on the Company's business and results of operations.
**> The real estate market for commercial sites is very competitive. The ability of Benetton and its partners to find locations for new stores depends on the availability of adequate buildings and the ability to negotiate terms that are in line with established financial targets. Moreover, the Group must ensure that existing lease agreements can be renegotiated effectively. Failure by the Group to identify and acquire locations for new stores and renew existing lease agreements may have a material adverse effect on the Company's business and results of operations.
**> The Group is implementing a number of changes to its information technology systems which entail the risk of inaccurate transfer of data, as well as temporary downtime. In accordance with its strategic development plans, Benetton has begun changing and replacing its IT systems. The changes primarily involve the upgrading of current business systems, the development of system modifications, and the purchase of systems with new features. Upgrades and modifications include risks, such as the inaccurate transfer of data and possible system downtime. If the Group is unable to implement the changes to its information technology system or if in the course of such implementation, data is not transferred accurately or if the system downtime cannot be minimized, its business and results of operations could be adversely affected.
**> Benetton's sales and operating income may be influenced by foreign exchange rate and interest rate fluctuations. The Group's sales and operating income will continue to be influenced by foreign exchange rate fluctuations in the sale currencies, which in turn impact on the prices of products sold, the cost of sales, and operating income. Foreign currency exchange rate fluctuations relative to the Euro may have an adverse effect on sales, operating income, and the international competitiveness of the production facilities of the various business units. Even an appreciation of the Euro could have an adverse effect on the Group's sales and operating income. While Benetton engages in foreign currency hedging in order to manage its foreign currency exposure, the strategies adopted may not be sufficient to protect operating income from the effects of future exchange rate fluctuations. 

Benetton holds assets and liabilities which are necessary in managing liquidity and financial needs, but are sensitive to interest rate variations. These assets and liabilities are exposed to interest rate risk, which is, at times, managed, to some extent, through the use of derivative financial instruments. Such derivative financial instruments may not be adequate to protect against the negative effects of interest rate fluctuations, which may have an adverse effect on the Group's financial condition and results of operations.
**> Benetton is exposed to risks associated with the international aspects of its business activities. Benetton's business is subject to risks associated with the international aspects of its business, including risks relating to late payments in some countries or, in general, to credit collection difficulties. The business is also exposed to political and economic instability in the countries in which Benetton operates, as well as to changes in legislation, to linguistic and cultural barriers, tariffs or trade barriers, and price or exchange rate controls. If the Group's international operations were not successful, its business and results of operations would be adversely affected.
**> Identification of significant deficiencies or material weaknesses as a result of the implementation of procedures designed to comply with Section 404 of the Sarbanes-Oxley Act of 2002 relating to evaluation of Group's internal control over financial reporting may have an adverse impact on the trading price of our securities. Commencing with the annual report on Form 20-F for the year ending December 31, 2006, the Group will include a report from the management relating to its evaluation of internal control over financial reporting as required under Section 404 of the U.S. Sarbanes-Oxley Act of 2002. As a consequence of systems and procedures currently being reviewed and implemented to comply with these requirements, the Group may uncover circumstances that may be determined to be significant deficiencies or material weaknesses, or that may otherwise result in disclosable conditions. Although the Group intends to take prompt measures to remediate any such identified significant deficiencies or material weaknesses in internal control structure, measures of this kind may involve significant effort and expense, and any disclosure of such significant deficiencies, material weaknesses or other disclosable conditions may result in a negative market reaction.
**> Benetton's ADS holders may face disadvantages compared to an ordinary shareholder when attempting to exercise voting rights.**Holders of our ADSs may instruct the depositary to vote the ordinary shares underlying the ADSs. For the depositary to follow the voting instructions, it must receive them on or before the date specified in our voting materials. The depositary must try, as far as practical, subject to Italian law and our Articles of Association, to vote the ordinary shares as instructed. The depositary is not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that ADS holders may not be able to exercise their right to vote and there may be nothing they can do if their ordinary shares or other deposited securities are not voted as requested.
**Item 4: Information on the Company

A. History and development of the Company**
Benetton Group S.p.A. is a limited liability company (Società per Azioni) organized under the laws of Italy. It was established on March 2, 1965 as a partnership by the Benetton family in Ponzano Veneto, Italy. It was reorganized as a limited liability company in 1978. The Company adopted the name Benetton Group S.p.A. in a corporate reorganization effective in December 1985. Prior to June 1986, the Company was wholly-owned by the Benetton family. In June 1986, shareholders affiliated with the Benetton family sold shares representing approximately 11% of the ordinary shares to the public in Europe. (The Company received no proceeds from such offering). The Benetton family initiated the public offering of such ordinary shares in order to establish a liquid public market for the Company's ordinary shares and to facilitate the Company's access to the international capital markets. 

In June 1989, the Company made a public offering of 7,000,000 American Depositary Shares ("ADS"), each representing the right to receive two ordinary shares and listed the ADSs on the New York Stock Exchange. A public offer of 11,000,000 newly issued shares was made in a 1994 global offering.

The present term of the Company expires on December 31, 2050, unless extended by the shareholders in a general meeting.

The Company's principal offices are located at Via Villa Minelli 1, 31050 Ponzano Veneto - TV, Italy. 

Its telephone number is +39-0422-519111.
**> Capital expenditures***Year ended December 31,*(thousands of Euro)*2004*2005
Property, plant and equipment:
- commercial network and real estate
96,295
46,203
- production facilities
21,866
18,697
- other investment
5,438
7,417**Total property, plant and equipment**123,599**72,317
Intangible assets:
- commercial network
19,129
40,320
- other investment
9,033
11,137**Total intangible assets**28,162**51,457**Total**151,761**123,774
In 2005, capital expenditures amounted to Euro 124 million compared to Euro 152 million in 2004. Capital expenditures in 2005 mainly included Euro 87 million invested in connection with the acquisition of retailing companies and properties, as well as upgrades and improvements to Euro 115 million in 2004. In 2005, capital expenditures relevant to production facilities amounted to Euro 19 million.

In 2005, total investments in property, plant and equipment and intangible assets was Euro 124 million, including "Other investment", which refers primarily to software, concessions and licences. 

In 2005, the Group spent approximately Euro 87 million for the upgrade of the commercial network and the lease or acquisition of new locations. The majority of the investments in 2005 were made primarily in Italy, and also in United States, Spain, France, Japan and Belgium. Investments in production facilities consisted primarily of those in plant facilities and machinery such as looms, spoolers, thread spoolers and dye kitchens, and also for the construction of a new production plant in Croatia.

The remaining investments were in intangible assets. The costs incurred for software licences and in-house software development in 2005 amounted to approximately Euro 9 million, of which approximately Euro 4 million was for SAP licences and implementation advice to integrate software across all areas.

In the first quarter of 2006, the Group invested approximately Euro 31 million in property, plant and equipment and intangible assets. Around 75% and 18% of investments in the first quarter of 2006 were made respectively on the commercial network and on plants and the renewal of machinery at certain of the Italian factories. 

In 2004, total capital expenditures came to approximately Euro 152 million. The Group spent approximately Euro 115 million for the upgrade of the commercial network and the lease or acquisition of new locations. The majority of the investments in 2004 were made in Italy, Spain, France and Belgium. Investments in production facilities consisted primarily of those in plant facilities and machinery such as looms, spoolers, thread spoolers and dye kitchens. The costs incurred for software licenses and in-house software development in 2004 amounted to approximately Euro 6 million, of which approximately Euro 3 million was for new SAP licenses and implementation advice to integrate software across all areas.

In 2003, total capital expenditures came to approximately Euro 151 million. The Group spent approximately Euro 117 million on the acquisition of commercial enterprises and buildings, and on upgrades and improvements to sales space. The majority of the investments in 2003 were made in Italy, Austria, France and Spain. Investments in production facilities consisted mainly of those in plant facilities and machinery such as looms, spoolers, thread spoolers and dye kitchens. The costs incurred for software licenses and for in-house software development in 2003 amounted to approximately Euro 8 million, of which approximately Euro 5 million was for new SAP licenses and implementation advice as this project involved integrating all areas of the Company**.
> Disposals***Year ended December 31,*(thousands of Euro)*2004*2005
Property, plant and equipment
58,543
19,350
Intangible assets
3,111
835**Total**61,654**20,185**> Acquisition/Sales of investment 

On February 17, 2004, Benfin S.p.A. bought the remaining 15% of Olimpias S.p.A. from third parties for Euro 15 million and now owns the entire company. In July 2005, Euro 7.5 million was paid for the residual liabilities linked to this acquisition. Olimpias S.p.A. produces textiles (fabrics, knitted fabrics, yarn, woven and printed fabrics), and acts as a dyehouse and laundry, mainly for Group companies.

In May 2005, the Group, through Benetton International S.A., a Luxembourg sub-holding company, acquired from third parties 50% of the shares and voting rights in Benetton Giyim Sanayi A.S., a Turkish company that performs the manufacturing and distribution activities previously performed under license by the Turkish partner.
** 

 

B. Business overview**
Benetton Group is among the leaders in the design, manufacture and marketing of distinctive apparel for men, women and children with a global image tailored to the requirements of the relevant markets, present in approximately 120 countries around the world. 

The apparel business is the Group's core activity and it markets distinctive casual and leisure-wear under the following brand names: the casual "United Colors of Benetton" adult and children lines, the fashion-oriented "Sisley", "Playlife" leisure-wear and "Killer Loop" street-wear. 

Benetton's philosophy of quality, knowledge and team effort are the basis of its apparel business and the criteria with which the Group selects the granting of its licences. Benetton licences its trademarks for products manufactured by others in different sectors such as homeware, new born products, jewellery, watches, fragrances and sport-leisure accessories.

The Group produced approximately 113 million garments in 2005. The distribution network of over 5,000 stores worldwide offers a wide selection of styles in different store formats which requirements of the many markets where Benetton is present.

In 2005, the Group's activities have been divided into three segments that provide the basis for effective decision-making and supply accurate and relevant information about the Group's performance. The three business segments are as follows:
Apparel, carrying the "United Colors of Benetton", "Undercolors" and "Sisley" brands, and leisure-wear with "Playlife" and "Killer Loop" brands. The information and results relating to the real estate companies are also included in this segment; 

Textile, consisting of production and sales activities of raw materials (fabrics, yarns and labels), semi-finished products and industrial services; and

Other and unallocated, which includes activities relating to sports equipment produced for third parties.

**> Apparel**
In the last two years the Group focused on increasing its ability to compete and offering greater flexibility by increasing the number of propositions. From the traditional two main collections a year produced on orders, Benetton has been structuring retail commercial calendars to guarantee frequent in-season theme deliveries for quick and appealing store renewals, introducing coordinated window display programs and POS (Point of Sale) materials.

Improvements in product planning are intended to reduce the time needed to restock stores, in order to be able to offer, with the "base", "flash" and "in season" collections, new proposals every four weeks in the important months of the seasons.

In the "evergreen" collection, which represents the very genetic makeup of each brand, a selected number of items reassortable via web will be made available, on a continuous basis, with re-supply times that are expected to be increasely shorter. 

These projects, which started to be rolled out in Fall-Winter 2005, are currently planned to be progressively introduced season after season.

The project Benettontv, one of the many IT initiatives of the Group, calls for the implementation of a new portal for Benetton partners (agents, clients, shops, and buyers), which will make it possible, in a secure mode, to provide information to the entire Benetton commercial network in real time, updating everyone on initiatives (for example, new collections, reassortments, display methods and distance learning for employees) and receiving orders via web. 

In 2005, the work on the product mix continued with a two-fold objective: on the one hand, to increase the average retail ticket price and on the other, to improve product rotation.

Hanging garments (like coats and jackets), men collections together with accessories and an additional new category of products at entry retail prices, were strengthened to complement the product offering.

In May 2005, a worldwide exclusive partnership was concluded with Mattel for a stylish girl fashion collection "Barbie loves Benetton", which was one of the Company's new global initiatives in co-branding. 

Highlights in the area of licensing include the agreement with Zorlu Holding, one of the largest Turkish groups for Sisley Casa products, as well as the exclusive agreement with Selective Beauty, a French company, for the development and global distribution of "United Colors of Benetton" perfumes, colognes and fragrances.

As a result of Benetton's wholesale business model, the contribution of the Spring-Summer and Fall-Winter collections to the Group's revenues does not coincide with the Company's fiscal year. Annual revenues generally include a portion of the Spring-Summer collections related to the fiscal year of reference, the entire Fall-Winter collections related to the fiscal year of reference and an anticipation of the Spring-Summer collections related to the following fiscal year. The contribution of each single collection or part of it to revenues in any fiscal year depends on factors such as the collection structure, product mix, production and delivery considerations.
**> Markets organization and presence**
Benetton's presence in some 120 countries relies on a network of independent partners who manage 4,868 stores, coordinated both by independent sales representatives, as well as by a dedicated team of area managers directly employed by Benetton. Storeowners do not pay Benetton any fees or other consideration for establishing a Benetton store or for the use of the Group's tradenames, nor do they pay any royalty based on a percentage of sales or profits. The storeowners purchase, display and sell Benetton-branded goods, for which Benetton provides guidelines. 

At the end of 2005 there were 55 independent sales representatives dedicated to the casualwear brands "United Colors of Benetton" and "Sisley", each of whom is assigned a geographical territory. 

In leisure-wear there were 16 sales representatives both "Killer Loop" and "Playlife" products, which are mainly distributed together both in mono-branded stores and in other generic channels (shop-within-shops and corners). At the end of 2005, in the leisure-wear there were about 100 mono-branded shops, mainly in southern Europe. 

This system of independent sales representatives was first developed by Benetton in Italy and later applied worldwide during Benetton's international expansion after 1978. The sales representatives receive commissions on sales realized by Benetton in their territories. In some cases, they own stores that sell Benetton products. 

At the end of 2005, around 18% of the Group's revenues were realized from the almost 300 directly operated stores. The main countries where the Group operates directly are Germany, Japan and Spain. After the adoption of the IFRS, revenues realized in Korea are also consolidated at retail prices.

Analysis and reliability of the new information system for the retail channel, which is based on the Oracle platform and manages the main processes (financial planning and management of both corporate activities and stores activities) globally through a single centralized system, was completed during 2005. 

The progressive roll-out of the system will be accomplished mainly during 2006 and 2007 and will benefit directly operated stores as well as a number of representative independent shops. 

In order to strengthen the Group's image and market share, the Benetton store network is moving in the direction of medium size stores where greater emphasis will be given to high quality services. 

In conjunction with this, and with a view to provide a distinctive and appropriate shopping environment, the evolution of the interior design elements of the stores continued also in 2005, after the debut in 2004 of the "Twins" concept for "United Colors of Benetton". In 2005, the new Sisley concept, known as Pentagram, was launched to express a better fit for the glam image and the brand positioning. 

While in previous years the Group invested mainly to secure prime commercial locations in prestigious city centers and shopping malls, by either buying or leasing directly some stores, today Benetton is mainly focused on commercial investments that either help the restructuring, modernization and upgrading of existing stores or facilitate new openings by third parties. 

The areas at greatest growth in 2005 were Eastern Europe, the Mediterranean - Spain, Greece, and Turkey - and Korea. In Turkey, a partnership has also been established with the Boyner Group in order to develop production and sales in the country and certain surrounding geographical areas.
** 

> Revenues**
The following table sets forth the Group's revenues by geographical area for the apparel business segment for the last two years.

 *Year ended December 31,*(thousands of Euro)*2004*% change*2005
Apparel segment:
- Italy
769,151
(2)
756,655
- Rest of the Europe
558,325
7
596,240
- The Americas
71,579
3
73,465
- Asia
166,628
20
199,378
- Rest of the world
1,971
56
3,067**Total apparel segment revenues**1,567,654**1,628,805
The following table sets forth the numbers of stores and outlets at the end of 2004 and 2005.
*Number of stores, (1) as at December 31,*2004*2005**********************************************************************************************************************