**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

**FORM 20-F**
| **(Mark One)**                                        | ** ** | ** **                                                                                                         |
|-------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|
| **o**                                                 | ** ** | **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**                                                |
| ** **                                            | ** ** | ** **                                                                                                         |
| **o**                                                 | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**            |
| ** **                                            | ** ** | ** **                                                                                                         |
| **o**                                                 | ** ** | **SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                   |

 

**Commission file number 1-10421**

**LUXOTTICAGROUP S.p.A.**(Exact name of Registrant as specified in its charter)(Translation of Registrant’s name into English)

**REPUBLICOF ITALY**(Jurisdiction of incorporation or organization)

**VIA CANTÙ2, MILAN 20123, ITALY**(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) ofthe Act.

| **Title of each class**     |   | **Name of  each exchange of which registered** |
|-----------------------------|--------|------------------------------------------------|
| ORDINARY SHARES,  PAR VALUE |   | NEW YORK STOCK  EXCHANGE                       |
| EURO 0.06 PER  SHARE*       |   |                                           |
|                        |   |                                           |
| AMERICAN  DEPOSITARY        |   | NEW YORK STOCK  EXCHANGE                       |
| SHARES, EACH  REPRESENTING  |   |                                           |
| ONE ORDINARY  SHARE         |   |                                           |

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* Not for trading,but only in connection with the registration of American Depositary Shares,pursuant to the requirements of the New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) ofthe Act:

**None.**

Securitiesfor which there is a reporting obligation pursuant to Section 15(d) ofthe Act.

**None.**

Indicatethe number of outstanding shares of each of the issuer’s classes of capital orcommon stock as of the close of the period covered by the annual report.

| **ORDINARY SHARES, PAR VALUE EURO  0.06 PER SHARE** |   | **457,975,723** |
|-----------------------------------------------------|--------|-----------------|

Indicateby check mark if the Registrant is a well-known seasoned issuers, as defined inRule 405 of the Securities Act.

Yes o   No x

If thisreport is an annual or transition report, indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1034.

Yes  o  Nox

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

Yes x   No o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer.

Largeacceleratedfiler                                Acceleratedfiler                                X- Non-accelerated filer

Indicateby check mark which financial statement item the registrant has elected tofollow.

Item 17o   Item18 x

 

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| **PART I**        |       |          |
|------------------------|------------|---------------|
| ** **             | ** ** | **ITEM 1.**   | ** ** | **IDENTITY OF  DIRECTORS, SENIOR MANAGEMENT AND ADVISERS** |   |   |
| ** **             | ** ** | **ITEM 2.**   | ** ** | **OFFER  STATISTICS AND EXPECTED TIMETABLE** |   |   |
| ** **             | ** ** | **ITEM 3.**   | ** ** | **KEY INFORMATION** |   |   |
| ** **             | ** ** | **ITEM 4.**   | ** ** | **INFORMATION ON THE  COMPANY** |   |   |
| ** **             | ** ** | **ITEM 5.**   | ** ** | **OPERATING AND  FINANCIAL REVIEW AND PROSPECTS** |   |   |
| ** **             | ** ** | **ITEM 6.**   | ** ** | **DIRECTORS,  SENIOR MANAGEMENT AND EMPLOYEES** |   |   |
| ** **             | ** ** | **ITEM 7.**   | ** ** | **MAJOR  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS** |   |   |
| ** **             | ** ** | **ITEM 8.**   | ** ** | **FINANCIAL INFORMATION** |   |   |
| ** **             | ** ** | **ITEM 9.**   | ** ** | **THE OFFER AND LISTING** |   |   |
| ** **             | ** ** | **ITEM 10.**  | ** ** | **ADDITIONAL  INFORMATION** |   |   |
| ** **             | ** ** | **ITEM 11.**  | ** ** | **QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK** |   |   |
| ** **             | ** ** | **ITEM 12.**  | ** ** | **DESCRIPTION OF  SECURITIES OTHER THAN EQUITY SECURITIES** |   |   |
| ** **             | ** ** | ** **    | ** ** | ** ** |   |   |
| **PART II**       |       |          |
| ** **             | ** ** | **ITEM 13.**  | ** ** | **DEFAULTS,  DIVIDEND ARREARAGES AND DELINQUENCIES** |   |   |
| ** **             | ** ** | **ITEM 14.**  | ** ** | **MATERIAL  MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS** |   |   |
| ** **             | ** ** | **ITEM 15.**  | ** ** | **CONTROLS AND  PROCEDURES** |   |   |
| ** **             | ** ** | **ITEM  16.** | ** ** | **[RESERVED]** |   |   |
| ** **             | ** ** | **ITEM 16A.** | ** ** | **AUDIT  COMMITTEE FINANCIAL EXPERT** |   |   |
| ** **             | ** ** | **ITEM 16B.** | ** ** | **CODE OF ETHICS** |   |   |
| ** **             | ** ** | **ITEM 16C.** | ** ** | **PRINCIPAL  ACCOUNTANT FEES AND SERVICES** |   |   |
| ** **             | ** ** | **ITEM 16D.** | ** ** | **EXEMPTIONS  FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES** |   |   |
| ** **             | ** ** | **ITEM 16E.** | ** ** | **PURCHASES OF  EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS** |   |   |
| ** **             | ** ** | ** **    | ** ** | ** ** |   |   |
| **PART III**      |       |          |
| ** **             | ** ** | **ITEM 17.**  | ** ** | **FINANCIAL STATEMENTS** |   |   |
| ** **             | ** ** | **ITEM 18.**  | ** ** | **FINANCIAL STATEMENTS** |   |   |
| ** **             | ** ** | **ITEM  19.** | ** ** | **EXHIBITS** |   |   |
| ** **             | ** ** | ** **    | ** ** | ** ** |   |   |
| **SIGNATURES**         |       |          |
| ** **             |       |          |
| **EXHIBIT INDEX** |       |          |

 

2

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**FORWARD-LOOKING INFORMATION**

Throughoutthis annual report, management has made certain “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of 1995which are considered prospective. These statements are made based on management’scurrent expectations and beliefs and are identified by the use offorward-looking words and phrases such as “plans,” estimates,” “believes” or “belief,”“expects” or other similar words or phrases.

Suchstatements involve risks, uncertainties and other factors that could causeactual results to differ materially from those which are anticipated. Suchrisks and uncertainties include, but are not limited to, fluctuations inexchange rates, economic and weather factors affecting consumer spending, theability to successfully introduce and market new products, the availability ofcorrection alternatives to prescription eyeglasses, the ability to successfullylaunch initiatives to increase sales and reduce costs, the ability toeffectively integrate recently acquired businesses, including Cole NationalCorporation and its subsidiaries (“Cole”), risks that expected synergies fromthe acquisition of Cole will not be realized as planned and that thecombination of Luxottica Group’s managed vision care business with Cole willnot be as successful as planned, as well as other political, economic andtechnological factors and other risks and uncertainties described in ourfilings with the Securities and Exchange Commission (the “SEC”). Theseforward-looking statements are made as of the date hereof, and we do not assumeany obligation to update them.

Throughoutthis annual report, when we use the terms “Luxottica,” “Company,” “we,” “us”and “our,” unless otherwise indicated or the context otherwise requires, we arereferring to Luxottica Group S.p.A. and its consolidated subsidiaries.

**TRADEMARKS**

Ourhouse brands and designer line prescription frames and sunglasses that arereferred to in this annual report, and certain of our other products, are soldunder names that are subject to registered trademarks held by us or, in certaininstances, our licensors. These trademarks may not be used by any personwithout our prior written consent or the consent of our licensors, asapplicable.

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**PART I**

**ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS**

Notapplicable.

**ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE**

Notapplicable.

**ITEM 3.KEY INFORMATION**

Thefollowing tables set forth selected consolidated financial data for the periodsindicated and are qualified by reference to, and should be read in conjunctionwith, our consolidated financial statements, the related notes thereto, andItem 5—“Operating and Financial Review and Prospects” contained elsewhereherein. We prepare our financial statements in accordance with accountingprinciples generally accepted in the United States of America, or U.S. GAAP.The selected consolidated financial information for and as of the years ended December 31,2001, 2002, 2003, 2004 and 2005 is derived from our consolidated financialstatements, which have been audited by Deloitte & Touche S.p.A.,independent registered public accounting firm.

[TABLES APPEAR ON THE FOLLOWING PAGE]

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| ** **                                                     | ** ** | **Year Ended December 31,**   | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                     | ** ** | **2001(9)(6)**                               | ** ** | **2002(9)** | ** ** | **2003(7)(9)** | ** ** | **2004(8)(9)** | ** ** | **2005(7)** | ** ** | **2005(7)** | ** ** |
| ** **                                                     | ** ** | **(In thousands of Euro)(3)** | ** ** | **(In thousands  of U.S.$)  (1)(3)** | ** ** |
| **STATEMENT  OF INCOME DATA:**                                 |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Net Sales                                                      |       | 3,105,498                                    |       | 3,201,788 |   | 2,852,194 |   | 3,255,300 |   | 4,370,744 |   | 5,175,835 |   |
| Cost of Sales                                                  |       | (923,537                                     | )          | (946,134 | ) | (903,617 | ) | (1,040,697 | ) | (1,380,653 | ) | (1,634,969 | ) |
| Gross Profit                                                   |       | 2,181,960                                    |       | 2,255,654 |   | 1,948,577 |   | 2,214,603 |   | 2,990,091 |   | 3,540,866 |   |
| OPERATING EXPENSE                                              |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Selling and Advertising                                        |       | (1,303,397                                   | )          | (1,360,339 | ) | (1,235,757 | ) | (1,376,546 | ) | (1,909,747 | ) | (2,261,522 | ) |
| General and Administrative                                     |       | (369,071                                     | )          | (293,806 | ) | (281,033 | ) | (345,243 | ) | (477,790 | ) | (565,799 | ) |
| Total                                                          |       | (1,672,468                                   | )          | (1,654,146 | ) | (1,516,790 | ) | (1,721,789 | ) | (2,387,537 | ) | (2,827,321 | ) |
| Income from Operations                                         |       | 509,492                                      |       | 601,508 |   | 431,787 |   | 492,814 |   | 602,554 |   | 713,544 |   |
| OTHER INCOME  (EXPENSE)                                        |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Interest Income                                                |       | 15,060                                       |       | 5,036 |   | 5,922 |   | 6,662 |   | 5,650 |   | 6,691 |   |
| Interest Expense                                               |       | (91,978                                      | )          | (65,935 | ) | (47,117 | ) | (56,115 | ) | (66,332 | ) | (78,550 | ) |
| Other—Net                                                 |       | 8,737                                        |       | (1,167 | ) | (799 | ) | 13,792 |   | 15,697 |   | 18.588 |   |
| Other Income (Expenses)—Net                               |       | (68,181                                      | )          | (62,066 | ) | (41,994 | ) | (35,661 | ) | (44,985 | ) | (53,271 | ) |
| Income Before Provision for Income Taxes                       |       | 441,311                                      |       | 539,442 |   | 389,793 |   | 457,153 |   | 557,569 |   | 660,273 |   |
| Provision for Income Taxes                                     |       | (123,450                                     | )          | (162,696 | ) | (117,328 | ) | (161,665 | ) | (206,022 | ) | (243,971 | ) |
| Income Before Minority Interests in Consolidated  Subsidiaries |       | 317,861                                      |       | 376,746 |   | 272,465 |   | 295,488 |   | 351,547 |   | 416,302 |   |
| Minority Interests in Income of Consolidated  Subsidiaries     |       | (1,488                                       | )          | (4,669 | ) | (5,122 | ) | (8,614 | ) | (9,253 | ) | (10,957 | ) |
| Net Income                                                     |       | 316,373                                      |       | 372,077 |   | 267,343 |   | 286,874 |   | 342,294 |   | 405,345 |   |
| Weighted Average  Shares Outstanding (thousands)               |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| —Basic                                                    |       | 451,037.0                                    |       | 453,174.0 |   | 448,664.4 |   | 448,275.0 |   | 450,179.1 |   |   |   |
| —Diluted                                                  |       | 453,965.5                                    |       | 455,353.5 |   | 450,202.1 |   | 450,360.9 |   | 453,303.4 |   |   |   |
| Basic Earnings per Share(2)                                    |       | 0.70                                         |       | 0.82 |   | 0.60 |   | 0.64 |   | 0.76 |   | 0.90 |   |
| Diluted Earnings per Share(2)                                  |       | 0.70                                         |       | 0.82 |   | 0.59 |   | 0.64 |   | 0.76 |   | 0.89 |   |
| Cash Dividends  Declared per Share(4)(5)                  |       | 0.14                                         |       | 0.17 |   | 0.21 |   | 0.21 |   | 0.23 |   | 0.27 |   |

 

5

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(1)             Translatedfor convenience at the rate of Euro 1.00 = U.S. $1.1842, based on the NoonBuying Rate of Euro to U.S. dollar on December 31, 2005. See “ExchangeRate Information” below for more information regarding the Noon Buying Rate.

(2)             Earningsper Share for each year have been calculated based on the weighted-average numberof shares outstanding during the respective years. Each American DepositaryShare, or ADS, represents one ordinary share.

(3)             Exceptper Share amounts, which are in Euro and U.S. dollars, as applicable.

(4)             CashDividends Declared per Share are expressed in gross amounts without givingeffect to applicable withholding or other deductions for taxes.

(5)             Ourdividend policy is based upon, among other things, our consolidated net incomefor each fiscal year, and dividends for a fiscal year are paid in theimmediately following fiscal year. The dividends reported in the table weredeclared and paid in the fiscal year for which they have been reported.

(6)             Weacquired all of the outstanding shares of Sunglass Hut International, Inc.in April 2001. Therefore, 2001 includes approximately nine months ofoperating results of Sunglass Hut International, Inc. and its subsidiaries(“Sunglass Hut”).

(7)             Weacquired 82.57 percent of the outstanding shares of OPSM Group Limited(“OPSM”) in August 2003. As such, the results for 2003 includeapproximately five months of operating results of OPSM and its subsidiaries. InMarch 2005, we acquired the remaining 17.43 percent of the outstandingshares of OPSM and, from that date, 100 percent of the operating results ofOPSM and its subsidiaries are included above.

(8)             Weacquired all of the outstanding shares of Cole in October 2004. Therefore,2004 includes approximately three months of operating results of Cole.

(9)             Certainamounts in prior years have been reclassified to conform with the 2005presentation.
| ** **                                                           | ** ** | **As of December 31,**                                      | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2001**                                                                   | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                                                           | ** ** | **(In thousands of Euro except share data)** | ** ** | **(In thousands  of U.S. $)(1)** | ** ** |
| **BALANCE SHEET DATA:**                                              |       |                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| Working  Capital(2)                                                  |       | (872,107                                                                   | )          | 141,390 |   | (56,185 | ) | 130,587 |   | 267,858 |   | 317,197 |   |
| Total Assets                                                         |       | 3,948,362                                                                  |       | 3,586,332 |   | 3,912,676 |   | 4,556,058 |   | 4,973,522 |   | 5,889,645 |   |
| Long-Term Debt                                                       |       | 132,247                                                                    |       | 855,654 |   | 862,492 |   | 1,277,495 |   | 1,420,049 |   | 1,681,622 |   |
| Shareholders’  Equity                                           |       | 1,342,843                                                                  |       | 1,417,895 |   | 1,374,534 |   | 1,495,607 |   | 1,954,033 |   | 2,313,966 |   |
| Capital Stock                                                        |       | 27,172                                                                     |       | 27,256 |   | 27,269 |   | 27,312 |   | 27,479 |   | 32,541 |   |
| Number of Shares  Adjusted to Reflect Changes in Capital (thousands) |       | 452,865.8                                                                  |       | 454,263.6 |   | 454,477.0 |   | 455,205.5 |   | 457,975.7 |   |   |   |

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(1)                                  Translatedfor convenience at the rate of Euro 1.00 = U.S. $1.1842, based on the NoonBuying Rate of Euro to U.S. dollar on December 31, 2005. See “ExchangeRate Information” below for more information regarding the Noon Buying Rate.

(2)                                  Workingcapital is total current assets minus total current liabilities. See Item 5—“Operatingand Financial Review and Prospects—Liquidity and Capital Resources.”

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**Dividends**

We arerequired to pay an annual dividend on our ordinary shares if such dividend hasbeen approved by a majority of our shareholders at the annual general meetingof shareholders. Before we may pay any dividends with respect to a fiscal year,we are required to set aside an amount equal to five percent of our statutorynet income for such year in our legal reserve until the reserve, including anyamounts set aside during prior years, is at least equal to one-fifth of thenominal value of our issued share capital.

At ourannual general meeting of shareholders held on June 14, 2006, ourshareholders approved the distribution of a cash dividend in the amount of Euro0.29 per ordinary share. Our Board of Directors proposed, and the shareholdersapproved, the date of June 22, 2006 as the date for the payment of suchdividend to all holders of record of our ordinary shares on June 16, 2006,including Deutsche Bank Trust Company Americas, as depositary on behalf ofholders of our American Depositary Shares, or ADSs. Each ADS represents theright to receive one ordinary share and is evidenced by an American DepositaryReceipt, or ADR. The ADSs were traded ex-dividend on June 19, 2006, anddividends in respect of the ordinary shares represented by ADSs were paid toDeutsche Bank Trust Company Americas on June 22, 2006. Deutsche Bank TrustCompany Americas converted the Euro amount of such dividend payment into U.S.dollars on June 22, 2006. The dividend amount for each ADS holder will bepaid commencing on June 29, 2006 to all such holders of record on June 21,2006. Future determinations as to dividends will depend upon, among otherthings, our earnings, financial position and capital requirements, applicablelegal restrictions and such other factors as the Board of Directors and ourshareholders may determine.

Thetable below sets forth the cash dividends declared and paid on each ordinaryshare in each year indicated.
| **Year**   | ** ** | ** ** | ** ** | **Cash Dividends per  Ordinary Share(1)(2)(3)** | ** ** | **Translated into U.S. $  per Ordinary Share(4)** | ** ** |
|------------|------------|------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** ** | ** ** | **(Euro)** | ** ** | **(U.S. $)**                                              | ** ** |
| 2001       |       | 0.140      |       | 0.120                                                          |       |
| 2002       |       | 0.170      |       | 0.165                                                          |       |
| 2003       |       | 0.210      |       | 0.242                                                          |       |
| 2004       |       | 0.210      |       | 0.254                                                          |       |
| 2005       |       | 0.230      |       | 0.276                                                          |       |
| 2006       |       | 0.290      | (5)        | 0.364                                                          | (6)        |

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(1)                                  Cashdividends per ordinary share are expressed in gross amounts without givingeffect to applicable withholding or other deductions for taxes.

(2)                                  EachADS represents one ordinary share.

(3)                                  Ourdividend policy is based upon, among other things, our consolidated net incomefor each fiscal year, and dividends for a fiscal year are paid in theimmediately following fiscal year. The dividends reported in the table weredeclared and paid in the fiscal year for which they have been reported.

(4)                                  Translatedat the Noon Buying Rate on the payment date to holders of ADSs. See “ExchangeRate Information” below for more information regarding the Noon Buying Rate.

(5)                                  Thedividend of Euro 0.29 per ordinary share was approved by our Board of Directorson April 27, 2006 and was voted upon and approved by our shareholders atthe annual general meeting of shareholders held on June 14, 2006.

(6)                                  Thedividend per ordinary share was converted into U.S. dollars by Deutsche BankTrust Company Americas on June 22, 2006.

7

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**ExchangeRate Information**

Thefollowing tables set forth, for each of the periods indicated, certaininformation regarding the Noon Buying Rate in New York City for cable transfersin foreign currencies as certified for customs purposes by the Federal ReserveBank of New York, which we refer to as the Noon Buying Rate, expressed in U.S.$ per Euro 1.00:
| **Period**                         | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** | **Average(1)** | ** ** | **End of Period** | ** ** |
|------------------------------------|------------|------------|------------|----------|------------|---------|------------|----------------|------------|-----------------------------|------------|
| Year Ended  December 31, 2001 |       | 0.8384     |       | 0.9545   |       | 0.8957  |       | 0.8901         |       |
| Year Ended  December 31, 2002 |       | 0.8594     |       | 1.0485   |       | 0.9450  |       | 1.0485         |       |
| Year Ended  December 31, 2003 |       | 1.0361     |       | 1.2597   |       | 1.1307  |       | 1.2597         |       |
| Year Ended  December 31, 2004 |       | 1.1801     |       | 1.3625   |       | 1.2435  |       | 1.3538         |       |
| Year Ended  December 31, 2005 |       | 1.1667     |       | 1.3476   |       | 1.2444  |       | 1.1842         |       |

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(1)           The average of the Noon Buying Ratesin effect on each business day during the period.
| **Month**          | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------------|------------|------------|------------|----------|------------|---------|------------|
| December 2005 |       | 1.1699     |       | 1.2041   |       |
| January 2006  |       | 1.1980     |       | 1.2287   |       |
| February 2006 |       | 1.1860     |       | 1.2100   |       |
| March 2006    |       | 1.1886     |       | 1.2197   |       |
| April 2006    |       | 1.2091     |       | 1.2624   |       |
| May 2006      |       | 1.2607     |       | 1.2888   |       |

 

On June 23,2006, the Noon Buying Rate was U.S. $1.2522 per Euro 1.00.

Unlessotherwise indicated, all convenience translations included in this annualreport of amounts expressed in Euro into U.S. dollars for the relevant periodor date have been made using the Noon Buying Rate in effect as of the end ofsuch period or date, as appropriate.

Inthis annual report, unless otherwise stated or the context otherwise requires,references to “$”, “U.S. $”, “dollars” or “U.S. dollars” are to United Statesdollars, references to “Euro” and “€” are to the Common European Currency, theEuro, references to “Rs” are to Indian rupees, and references to “AUD$” or “A$”are to Australian dollars.

 

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**RiskFactors**

Ourfuture operating results and financial condition may be affected by variousfactors, including those set forth below.

**If we areunable to successfully introduce new products, our future sales and operatingperformance will suffer.**

Themid- and premium-price categories of the prescription frame and sunglassesmarkets in which we compete are particularly vulnerable to changes in fashiontrends and consumer preferences. Our historical success is attributable, inpart, to our introduction of innovative eyewear products which are perceived torepresent an improvement over products otherwise available in the market. Ourfuture success will depend on our continued ability to develop and introducesuch innovative products. If we are unable to continue to do so, our futuresales could decline, inventory levels could rise, leading to additional costsfor storage and potential writedowns relating to the value of excess inventory,and production costs would be negatively impacted since fixed costs would representa larger portion of total production costs due to the decline in quantitiesproduced.

**If wefail to maintain an efficient distribution network in our highly competitivemarkets, our business, results of operations and financial condition could suffer.**

Themid- and premium-price categories of the prescription frame and sunglassesmarkets in which we operate are highly competitive. We believe that, inaddition to successfully introducing new products, responding to changes in themarket environment and maintaining superior production capabilities, ourability to remain competitive is highly dependent on our success in maintainingan efficient distribution network. If we are unable to maintain an efficientdistribution network, our sales may decline due to the inability to timelydeliver products to customers and our profitability may decline due to anincrease in our per unit distribution costs in the affected regions, which mayhave an adverse impact on our business, results of operations and financialcondition.

**If we donot correctly predict future economic conditions and changes in consumerpreferences, our sales of premium products and profitability will suffer.**

Thefashion eyewear industry is cyclical. Downturns in general economic conditionsor uncertainties regarding future economic prospects, which affect consumerdisposable income, have historically adversely affected consumer spendinghabits in our principal markets and thus made the growth in sales andprofitability of premium-priced product categories difficult during suchdownturns. Therefore, future economic downturns or uncertainties could have amaterial adverse effect on our business, results of operations and financialcondition, including sales of our designer and other premium brands.

Theeyewear industry is also subject to rapidly changing consumer preferences.There can be no assurance that the growth of the fashion eyewear industry willcontinue or that consumer preferences will not change in a manner which willadversely affect the fashion eyewear industry as a whole or us in particular.Changes in fashion could also affect the popularity and, therefore, the valueof the fashion licenses granted to us by designers. Any event or circumstanceresulting in reduced market acceptance of one or more of these designers couldreduce our sales and the value of our inventory of models based on that design.Unanticipated shifts in consumer preferences may also result in excessinventory and underutilized manufacturing capacity. In addition, our successdepends, in large part, on our ability to anticipate and react to changingfashion trends in a timely manner. Any sustained failure to identify andrespond to such trends would adversely affect our business, results ofoperations and financial condition and may result in  the write down of excess inventory and idlemanufacturing facilities.

**If we areunable to achieve and manage growth, operating margins will be reduced as aresult of decreased efficiency of distribution.**

Inorder to achieve and manage our growth effectively, we will be required toincrease and streamline production and implement manufacturing efficiencieswhere possible, while maintaining strict quality control and the ability todeliver products to our customers in a timely and efficient manner. We mustalso continuously develop new product designs and features, expand ourinformation systems and operations, and train and manage an increasing numberof management level and other employees. If we are unable to manage thesematters effectively, our efficient distribution process could be at risk and wecould lose market share in affected regions.

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**If we donot continue to negotiate and maintain favorable license arrangements, oursales or cost of sales will suffer.**

Wehave entered into license agreements that enable us to manufacture anddistribute prescription frames and sunglasses under certain designer names,including *Chanel, Prada, Dolce & Gabbana, D&G,Versace, Bulgari, Miu Miu, Salvatore Ferragamo, Donna Karan, DKNY, Genny, Byblos,Brooks Brothers, Sergio Tacchini, Anne Klein, Moschino, Versus*and*Adrienne Vittadini* and, most recently, *Burberry*and *Polo Ralph Lauren.*These licenseagreements typically have terms of between three and ten years (except for  the license agreement for the *Moschino* line, which is terminable upon 12 months’notice), may contain options for renewal for additional periods and require usto make guaranteed and contingent royalty payments to the licensor. See Item 4—“Informationon the Company—Business Overview—Recent Developments” regarding our new licenseagreements for the Burberry and Polo Ralph Lauren names. We believe that ourability to maintain and negotiate favorable license agreements with leadingdesigners in the fashion and luxury goods industries is essential to thebranding of our products and, therefore, material to the success of ourbusiness. Accordingly, if we are unable to negotiate and maintain satisfactorylicense arrangements with leading designers, our growth prospects and financialresults could suffer from a reduction in sales or an increase in advertisingcosts and royalty payments to designers.

**If visioncorrection alternatives to prescription eyeglasses become more widelyavailable, or consumer preferences for such alternatives increase, our businesscould be adversely affected.**

Ourbusiness could be negatively impacted by the availability and acceptance ofvision correction alternatives to prescription eyeglasses, such as contactlenses and refractive optical surgery. According to industry estimates, over40 million people wear contact lenses in the United States, and disposablecontact lenses is the fastest growing segment of the lens subsector. Inaddition, the use of refractive optical surgery has grown substantially since itwas approved by the U.S. Food and Drug Administration in 1995.

Increaseduse of vision correction alternatives could result in decreased use of ourprescription eyewear products, including a reduction of sales of lenses andaccessories sold in our retail outlets, which would have a material adverseimpact on our business, results of operations, financial condition andprospects.

**If theEuro continues to strengthen relative to certain other currencies, ourprofitability as a consolidated group will suffer.**

Ourprincipal manufacturing facilities are located in Italy, and we maintain salesand distribution facilities throughout the world. As a result, we arevulnerable to foreign exchange rate fluctuations in two principal areas:

•                    we incur most of our manufacturing costs in Euro andreceive a significant part of our revenues in other currencies, particularlythe U.S. and Australian dollars. Therefore, a strengthening of the Eurorelative to other currencies in which we receive revenues could negatively impactthe demand for our products or decrease our profitability in consolidation,thus adversely affecting our business and results of operations; and

•                    a substantial portion of our assets, liabilities,revenues and costs are denominated in various currencies other than Euro, withmost of our operating expenses in U.S. dollars. As a result, our operatingresults, which are reported in Euro, are affected by currency exchange ratefluctuations, particularly between the U.S. dollar and the Euro.

As ourinternational operations grow, future changes in the exchange rate of the Euroagainst the U.S. dollar and other currencies may negatively impact our reportedresults.

SeeItem 11—“Quantitative and Qualitative Disclosures about Market Risk.”

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**If ourinternational sales suffer due to changing local conditions, our profitabilityand future growth will be affected.**

Wecurrently operate worldwide and intend to expand our operations in manycountries, including certain developing countries in Asia. Therefore, we aresubject to various risks inherent in conducting business internationally,including the following:

•                    exposure to local economic and political conditions;

•                    export and import restrictions;

•                    currency exchange rate fluctuations and currencycontrols;

•                    withholding and other taxes on remittances and otherpayments by subsidiaries;

•                    investment restrictions or requirements; and

•                    local content laws requiring that certain productscontain a specified minimum percentage of domestically produced components.

Thelikelihood of such occurrences and their potential effect on us vary fromcountry to country and are unpredictable, but any such occurrence may result inthe loss of sales or increased costs of doing business and may have asignificant effect on our business, results of operations, financial conditionand prospects.

**If we areunable to protect our proprietary rights, the loss of sales and the costs ofdefending such rights will adversely affect our business and financial results.**

Werely on trade secret, unfair competition, trade dress, trademark, patent andcopyright laws to protect our rights to certain aspects of our products,including product designs, proprietary manufacturing processes andtechnologies, product research and concepts and recognized trademarks, all ofwhich we believe are important to the success of our products and ourcompetitive position. However, pending trademark applications may not generateregistered trademarks, and any trademark registration that is granted may beineffective in preventing competition and could be held invalid if subsequentlychallenged. In addition, the actions we take to protect our proprietary rightsmay be inadequate to prevent imitation of our products. Our proprietaryinformation could become known to competitors, and we may not be able tomeaningfully protect our rights to proprietary information. Furthermore, othercompanies may independently develop substantially equivalent or better productsthat do not infringe on our intellectual property rights or could assert rightsin, and ownership of, our proprietary rights. Moreover, the laws of certaincountries do not protect proprietary rights to the same extent as the laws ofthe United States.

Wedevote significant resources toward defending our proprietary rights. However,if the level of potentially infringing activities by others were to increasesubstantially, we might have to significantly increase the resources we devoteto protecting our rights. Additionally, an adverse determination in any disputeinvolving our proprietary rights could, among other things, (i) require usto grant licenses to, or obtain licenses from, third parties, (ii) preventus from manufacturing or selling our products or (iii) subject us tosubstantial liability. Any of these possibilities could have a material adverseeffect on our business, results of operations, financial condition andprospects.

**If we areunable to maintain our current operating relationship with Cole Licensed Brandshost stores, we would suffer loss of sales and possible impairment of certainintangible assets.**

Oursales depend in part on our relationships with the host stores that sell Cole’sLicensed Brands products, including Sears. Our leases and licenses with Searsare terminable upon short notice. If our relationship with Sears were to end,we would suffer a loss of sales and the possible impairment of certainintangible assets. This could have a material adverse effect on our business,results of operations, financial condition and prospects.

**If we becomesubject to adverse judgments or determinations in legal proceedings to which weare, or may become, a party, then our business could be adversely affected.**

We arecurrently a party to certain legal proceedings as described in Item 8—“FinancialInformation—Legal Proceedings.” In addition, in the ordinary course of ourbusiness, we become involved in various other claims, lawsuits, investigationsand governmental and administrative proceedings, some of which are significant.Adverse judgments or determinations in one or more of these proceedings couldrequire us to change the way we do business or use substantial resources in adhering to the settlements and could havea material adverse effect on our business, results of operations and financialcondition.

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**If webecome subject to additional regulation by governmental authorities, ourcompliance with these regulations could have an adverse effect on our business,results of operations and financial condition.**

Ouroperations are subject to regulation by governmental authorities in the UnitedStates and other jurisdictions in which we conduct business. Governmentalregulations, both in the United States and other jurisdictions, havehistorically been subject to change. New or revised requirements imposed by governmentalregulatory authorities could have an adverse effect on us, including increasedcosts of compliance. We may also be adversely affected by changes in theinterpretation or enforcement of existing laws and regulations by governmentalauthorities that could affect sales or the way we currently distribute ourproducts.

SeeItem 4—“Information on the Company—Regulatory Matters” and Item 8—“FinancialInformation—Legal Proceedings.”

**If we arenot successful in completing and integrating strategic acquisitions to expandor complement our business, our future profitability and growth will be atrisk.**

Aspart of our growth strategy, we have made, and may continue to make, strategicbusiness acquisitions to expand or complement our business. Our acquisitionactivities, however, can be disrupted by overtures from competitors for thetargeted candidates, governmental regulation and rapid developments in ourindustry. We may face additional risks and uncertainties following anacquisition, including: (i) difficulty in integrating the newly-acquiredbusiness and operations in an efficient and effective manner; (ii) inabilityto achieve strategic objectives, cost savings and other benefits from theacquisition; (iii) the lack of success by the acquired business in itsmarkets; (iv) the loss of key employees of the acquired business; (v) thediversion of the attention of senior management from our operations; and (vi) liabilitiesthat were not known at the time of acquisition or the need to address tax oraccounting issues. Specifically, with regard to our acquisition of Cole, we mayface additional risks and uncertainties following such acquisition, including:(i) difficulty in integrating the newly acquired business and operationsin an efficient and effective manner; (ii) inability to achieve strategicobjectives, cost savings and other benefits from the acquisition; (iii) thelack of success by the acquired business in its markets; (iv) the loss ofkey employees of the acquired business; (v) the diversion of the attentionof senior management from our operations; (vi) liabilities that were notknown at the time of acquisition or creation of tax or accounting issues; (vii) difficultyin the consolidation of Cole’s headquarters with Luxottica Retail headquartersin Mason, Ohio; (viii) difficulty integrating Cole’s human resourcessystems, operating systems, inventory management systems, and assorted planningsystems with the Company’s systems; (ix) difficulty integrating Cole’sdistribution center with the Company’s distribution center; (x) difficultyfinalizing the integration of product assortment; (xi) difficultyintegrating Cole’s Managed Vision Care system with the Company’s Managed VisionCare system; (xii) the inability of the Company to minimize the disruptiveeffect of the integration on the management of the Company’s retail business;(xiii) difficulty in the timely creation and effective implementation ofuniform standards, controls, procedures and policies; and (xiv) thecultural differences between the Company’s organization and Cole’sorganization. Ifwe fail to timely recognize or address these matters or to devote adequateresources to them, we may fail to achieve our growth strategy or otherwise notrealize the intended benefits of any acquisition.

**ITEM 4.INFORMATION ON THE COMPANY**

**Overview**

Weoperate in two industry segments: (i) manufacturing and wholesaledistribution and (ii) retail distribution. Through our manufacturing andwholesale distribution segment, we are engaged in the design, manufacture,wholesale distribution and marketing of house and designer lines of mid- topremium-priced prescription frames and sunglasses. Based on sales, we are theworld leader in the design, manufacture and distribution of prescription framesand sunglasses in the mid- and premium-price categories.

Withrespect to our manufacturing activities, we operate six production facilitiesin Italy. A seventh facility was closed during 2004 and such closure did nothave a material effect on our 2004 statement of operations. In addition, weoperate a manufacturing facility in China. In 2005, we manufacturedapproximately 33.9 million prescription frames and sunglasses.

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Ourproducts are marketed under a variety of well-known brand names. Our housebrands include *Ray-Ban, Revo, Arnette, Killer Loop, Persol,Vogue, Luxottica* and *Sferoflex*. Ourdesigner lines include *Chanel, Prada, Dolce &Gabbana, D&G, Versace, Bulgari, Miu Miu, Salvatore Ferragamo, Donna Karan,DKNY, Genny, Byblos, Brooks Brothers, Sergio Tacchini, Anne Klein, Moschino,Versus*and*Adrienne Vittadini*.. Commencing in October 2006, our designer lines will include *Burberry*, and commencing on January 1, 2007, they willinclude *Polo Ralph Lauren*.

Withrespect to our distribution activities, we operate our business through anextensive worldwide wholesale and retail distribution network based primarilyin North America and Australia. In 2005, through our wholesale and retailnetworks, we distributed approximately 17.3 million prescription framesand approximately 21.8 million sunglasses in approximately 4,125 models.Our products are distributed in approximately 120 countries worldwide.

Ourwholesale network is comprised of 29 wholly- or partially-owned subsidiariesoperating in principal markets, over 1,300 sales representatives andapproximately 100 independent distributors. Our primary wholesale customersinclude retailers of mid- and premium-priced eyewear such as independentopticians, optical and sunglass chains, optical superstores, sunglass specialtystores and duty-free shops. In certain countries, and especially in NorthAmerica, wholesale customers also include optometrists and ophthalmologists,health maintenance organizations, or HMOs, and department stores.

Ourretail network is mainly comprised of our subsidiaries: in North America,LensCrafters, Inc. (“LensCrafters”), Sunglass Hut and Cole, which operatesPearle and our Licensed Brands; and in Australia, New Zealand and Asia, OPSM,of which we acquired majority control in August 2003 and full control in March 2005.Luxottica’s North American retail business is the largest optical retailbusiness in North America based on total sales. Our retail network in Asia hasexpanded in 2006 with two acquisitions. In April 2006, we completed ouracquisition of Beijing Xueliang Optical Technology Co. Ltd., a 79-storechain located in Beijing, China and, in July 2006, we expect to completeour acquisition of Ming Long Optical, a 133-store chain and the largestpremium optical chain in the province of Guangdong, China.

See “—Productsand Services” below for a more detailed discussion of our business.

**CompanyHistory**

In1961, Leonardo Del Vecchio and others established our original operations inAgordo, near Belluno, in northeastern Italy. Since that time, we have enjoyed significantgrowth in the scope and size of our operations. We have developed and grown inseveral phases, each of which is related to a specific business strategy.Throughout most of the 1960’s, we manufactured molds, metal-cutting machinery,frame parts and semi-finished products for the optical market. We thenprogressively expanded our production capabilities to enable us to produce afinished frame product.

In1969, we launched our first line of Luxottica brand frames and began ourtransformation from a third-party supplier to an independent manufacturer witha line of branded products.

In theearly 1970’s, we distributed our products exclusively through wholesalers. In1974, with the acquisition of the distributor that had marketed the Luxotticaproduct line in Italy since 1971, we took our first step towards verticalintegration.

LuxotticaGroup S.p.A. was organized as a corporation on November 23, 1981 under thelaws of the Republic of Italy. During the early 1980’s, we continued to pursuevertical integration by acquiring independent optical distributors and formingwholesale subsidiaries in strategic markets. In 1981, with our acquisition ofLa Meccanoptica Leonardo S.p.A., the owner of the *Sferoflex*brand and the holder of an important patent for a flexible hinge, we increasedour market share in Italy and various key European markets. During the late1980’s, we began to expand our product lines to include the design, manufactureand distribution of designer frames through license agreements with majorfashion designers.

In1990, our ADSs were listed on the New York Stock Exchange. Throughout the 1990’s,we continued to expand our distribution network by forming new wholesalesubsidiaries. In 1995, we became the first frame manufacturer to enter the NorthAmerican retail market through the acquisition of LensCrafters. Throughout the1990’s, we also expanded into the sunglasses business through variousacquisitions. In 1990, we acquired Florence Line S.p.A., the owner of the “Vogue”brand. In 1995, we acquired the medium- to high-end brand product line ofPersol S.p.A.

In June 1999,we acquired the Global Eyewear Division of Bausch & Lomb Incorporated,which we refer to as our Ray-Ban business. The Ray-Ban acquisitionsignificantly increased our presence in the sunglasses market, strengthened ourhouse brand portfolio and provided us with sunglass crystal lens manufacturingtechnology, manufacturing facilities and equipment.

In December 2000,our ordinary shares were listed on the Mercato Telematico Azionario della BorsaItaliana S.p.A., which we refer to as the Italian Stock Exchange.

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In April 2001,we continued to strengthen our sunglasses business by acquiring Sunglass Hut, aleading retailer of sunglasses worldwide based on sales. In May 2001, weacquired all of the issued and outstanding common stock of First AmericanHealth Concepts, Inc., which at that time was a leading provider ofmanaged vision care plans in the United States based on sales. In August 2003,we acquired 82.57 percent of the outstanding shares of OPSM (we acquiredthe remaining 17.43 percent interest in March 2005), resulting in ourleadership position in the prescription business based on sales in theAustralian and New Zealand markets, while at the same time presenting us withnew growth opportunities in the Asia-Pacific markets. In October 2004, westrengthened and expanded our North American retail and managed vision carebusiness with the acquisition of Cole. In 2005, we expanded our retail presencein China by entering into agreements to buy two premium retail chains, BeijingXueliang Optical Technology Co. Ltd. and Ming Long Optical, to become a leadingoperator of premium optical stores in China based on the number of stores, witha total of 278 locations in two of the top premium optical markets in MainlandChina, as well as Hong Kong, an important market in Asia for luxury goods. Weare awaiting customary approvals by the relevant Chinese governmentalauthorities regarding the agreement to acquire Ming Long Optical and anticipatereceiving such approvals by July 2006.

Ourprincipal executive offices are located at Via Cantù 2, Milan, 20123, Italy,and our telephone number at that address is (011) 39-02-863341.Our agent for service for limited purposes in the United States is CTCorporation, 111 Eighth Avenue, New York, New York 10011, telephone number(212) 894-8940. We are domiciled in Milan, Italy.

**BusinessOverview**

***RecentDevelopments***

*LicenseAgreements*

On October 7,2005, we announced the signing of a 10-year license agreement for thedesign, production and worldwide distribution of prescription frames andsunglasses under the Burberry name. The first Burberry eyewear collectionsunder the agreement will be presented in October 2006.

On February 27,2006, we announced the signing of a 10-year license agreement for thedesign, production and worldwide distribution of prescription frames andsunglasses under the Polo Ralph Lauren name. Performance under the agreementwill commence on January 1, 2007.

*RetailAcquisitions*

On July 7,2005, we announced that our subsidiary, SPV Zeta S.r.l., had entered into anagreement to acquire 100 percent of the equity interest in Beijing XueliangOptical Technology Co. Ltd. for a purchase price of Chinese Renminbi (“RMB”)169 million (approximately Euro 17 million), plus RMB 40 million (approximatelyEuro 4 million) in assumed liabilities. Xueliang Optical had unaudited salesfor the 2004 fiscal year of RMB 102 million (approximately Euro 10 million).Xueliang Optical has 79 stores in Beijing. The Company completed theacquisition in April 2006.

On October 4,2005, we announced that our subsidiary, SPV Eta S.r.l., had entered into anagreement to acquire 100 percent of the equity interests in Ming Long Optical,the largest premium optical chain, based on number of stores, in the provinceof Guangdong, China, with 133 stores, for a purchase price of RMB 290 million(approximately Euro 29 million). As a result, we will become  the leading operator of premium opticalstores in China based on the number of stores, with a total of 278 locations intwo of the top premium optical markets in Mainland China, as well as in HongKong, the most important market in Asia for luxury goods. Completion of thetransaction remains subject to customary approvals by the relevant Chinesegovernmental authorities. The Company currently anticipates receiving suchapprovals by July 2006.

On May 18,2006, we announced that we had entered into agreement to acquire ShoppersOptical, a 74-store Canadian-based optical chain owned by KingOptical Group Inc. Once the transaction is completed, we will manage a total of268 optical stores in Canada. Shoppers Optical operates across eight of Canada’sprovinces. Twenty-six of Shoppers Optical’s stores are in the province ofOntario, where nearly 40 percent of the Canadian population lives. In addition,this acquisition will bring into the organization the first full-serviceCanada-based central lens finishing lab with anti-reflective coating capability.The closing of the transaction, which is subject to customary closingconditions, is expected to take place at the end of June 2006.

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In June 2006,we announced that we plan to acquire 100 percent of the equity interest in ModernSight Optics, a leading premium optical chain that operates a total of 28stores in Shanghai, China, for total consideration of RMB 140 million (approximatelyEuro 14 million). Completion of the transaction is subject to customary approvalsby the relevant Chinese governmental authorities. We expect to receive suchapprovals by the end of 2006.

*RetailExpansion through Franchising*

In June 2006,we announced a five-year franchising agreement with Azal Group that will expandour Sunglass Hut chain by up to 50 stores in the Middle East by 2008. AzalGroup has operations in the Middle East and Europe and has a franchiseportfolio of over 30 brands, including some of the industry’s most recognizablebrands.

*LitigationSettlement*

On August 31,2005, we agreed with the plaintiffs in the previously disclosed actioncommenced in May 2001 (the “Action”) pending in the U.S. District Courtfor the Eastern District of New York relating to its acquisition of SunglassHut to a full and final settlement and release (the “Settlement”) of all claimsmade in the Action. In the Action, the plaintiffs’ principal claim was thatcertain payments made to the former Chairman of SGHI under a consulting,non-disclosure and non-competition agreement violated the “best price” rule underU.S. securities laws. The Settlement was approved by the Court, and finaljudgment has been entered dismissing the case with prejudice.

*CaliforniaVision Health Care Service Plan Lawsuit*

In March 2002, anindividual commenced an action in the California Superior Court for the Countyof San Francisco against Luxottica Group S.p.A. and certain of oursubsidiaries, including LensCrafters, Inc. and EYEXAM ofCalifornia, Inc. The plaintiff, along with a second plaintiff named in anamended complaint, seeks to certify this case as a class action.  The claims have been partiallydismissed.  The remaining claims, againstLensCrafters, EYEXAM and EyeMed Vision Care, LLC, allege various statutoryviolations relating to the confidentiality of medical information, theoperation of LensCrafters’ stores in California, including violations ofCalifornia laws governing relationships among opticians, optical retailers,manufacturers of frames and lenses and optometrists, false advertising andother unlawful or unfair business practices. The action seeks unspecifieddamages, disgorgement and restitution of allegedly unjustly obtained sums,statutory damages, punitive damages and injunctive relief, including an injunctionthat would prohibit defendants from providing eye examinations or otheroptometric services at LensCrafters stores in California. In May 2004, thetrial court stayed all proceedings in the case pending the California SupremeCourt’s decision in a case against Cole and its subsidiaries expected toaddress certain legal questions related to the issues presented in this case.On June 12, 2006, the California Supreme Court rendered its decision in thatcase, ruling that optical stores such as those operated by Cole must complywith Sections 655 and 2556 of the California Business and ProfessionsCode.  It is expected that plaintiffswill now seek to resume their prosecution of this action.  Although we believe that our operationalpractices in California comply with California law, an adverse decision in thisaction or the suit against Cole might cause LensCrafters, EYEXAM and EyeMed tomodify or close certain activities in California. Further, LensCrafters, EYEXAMand EyeMed might be required to pay damages and/or restitution, the amount ofwhich might have a material adverse effect on our operating results, financialcondition and cash flow.

*People v. Cole*

In February 2002, the State of California commenced an action inthe California Superior Court for the County of San Diego against Cole andcertain of its subsidiaries, including Pearle Vision, Inc. and PearleVision Care, Inc. The claims allege various statutory violations relatedto the operation of Pearle Vision Centers in California including violations ofCalifornia laws governing relationships among opticians, optical retailers,manufacturers of frames and lenses and optometrists, false advertising andother unlawful or unfair business practices. The action seeks disgorgement andrestitution of allegedly unjustly obtained sums, civil penalties and injunctiverelief, including an injunction that would prohibit defendants from providingeye examinations or other optometric services at Pearle Vision Centers inCalifornia. In July 2002, the trial court entered a preliminary injunctionto enjoin defendants from certain business and advertising practices. Both Coleand the State of California appealed that decision. On November 26, 2003,the Court of Appeal issued an opinion in which it stated that because Californialaw prohibited Pearle Vision from providing eye examinations and otheroptometric services at Pearle Vision Centers, the trial court should haveenjoined Pearle Vision from advertising the availability of eye examinations atPearle Vision Centers. ** **The appellate court also ruled inCole’s favor with respect to charging dilation fees, which ruling partiallylifted the preliminary injunction with respect to these fees that had beenimposed in July 2002.** **On March 3, 2004, theCalifornia Supreme Court granted Cole’s petition for review of the portion ofthe appellate court’s decision stating that California law prohibiteddefendants from providing eye examinations and other optometric services atPearle Vision Centers.  The appellatecourt’s decision directing the trial court to enjoin Pearle Vision fromadvertising these activities was stayed pending the Supreme Court’s resolutionof the issue.  On June 12, 2006, theCalifornia Supreme Court affirmed the Court of Appeal’s prior decision, andheld that optical stores such as those operated by Cole must comply withSections 655 and 2556 of the California Business and Professions Code.  The matter will now be remanded to the trialcourt for further proceedings to determine if, in fact, Cole’s operations complywith those laws.  In addition, thepreliminary injunction previously issued to enjoin advertising of theavailability of eye examinations at Pearle Vision Centers, may soon becomeoperative.  Although we believe thatCole’s operational practices in California comply with California law, anadverse decision in this action may compel Cole and its subsidiaries to modifyor close certain activities in California. Further, Cole and its subsidiariesmight be required to pay civil penalties and/or restitution, the amount ofwhich might have a material adverse effect on our operating results, financialcondition and cash flow.

*Cole SEC Investigation*

FollowingCole’s announcement in November 2002 of the restatement of its financialstatements, the SEC began an investigation into Cole’s previous accounting. TheSEC subpoenaed various documents from Cole and deposed numerous formerofficers, directors and employees of Cole. During the course of thisinvestigation the SEC staff had indicated that it intended to recommend that acivil enforcement action be commenced against certain officers and directors ofCole but not against Cole. Cole was obligated to advance reasonable attorneys’fees incurred by current and former officers and directors who were involved inthe SEC investigation subject to undertakings provided by such individuals.Cole has insurance available with respect to a portion of these indemnificationobligations. In March 2006, the SEC staff indicated that it had concludedits investigation and that, contrary to its earlier indication, it would not berecommending that an enforcement action be commenced against anyone inconnection with the investigation.

*AmendedCredit Agreement*

On March 10, 2006, we and our subsidiaryLuxottica U.S. Holdings Corp. (“U.S. Holdings”) and the bank group parties totheir three-Tranche credit agreement signed on June 3, 2004, agreed toamend the outstanding credit agreement. The amended agreement reduces theinterest margin as defined in the agreement, extends the termination date ofTranches B and C to five years from the date the amendment was signed, givesthe option at the end of the first and second anniversaries to extend thetermination for additional one-year periods and increases the borrowingcapacity of Tranche C to Euro 725.0 million from Euro 335.0 million.

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**Productsand Services**

***WholesaleOperations***

*OurBrands*

In ourwholesale operations, we manufacture and sell our prescription frames andsunglasses as either house brands or designer lines. House brands consist ofeyewear sold under brand names that we own. Designer lines are produced underdesigner names held by us under license agreements with third parties. Ourproducts, for both house brands and designer lines, consist of a variety ofdifferent styles, from conventional to contemporary and fashion forwardstyling. Each brand is tailored for a specific market segment based on certaincharacteristics, such as the consumer’s age, lifestyle and fashion consciousness.

*HouseBrands:*  Our housebrands, almost entirely designed and manufactured by us, are sold worldwideunder brand names such as *Luxottica, Sferoflex,Vogue,**Persol*,  *Ray-Ban, Revo, Killer Loop*and *Arnette*. We currently produceapproximately 1,600 distinct styles of frames within our house brands. Eachstyle is typically produced in three sizes and at least four colors. Actualavailability of product styles, colors and sizes varies among geographicmarkets depending upon local demand.

Thefollowing is a summary description of each of our most significant housebrands:

•                    **Ray-Ban**: Created in 1937, the *Ray-Ban* line isthe brand leader in the eyewear market based on sales, bringing togetherrenowned sunglass lenses and a timeless style.

•                    **Persol**: Created in 1917 and acquired by Luxottica in 1995, the *Persol* brand is synonymous with design, elegance, tradition,and technical precision. Our *Persol* line,which includes a wide range of prescription frames and sunglasses, is marketedas a timeless fashion accessory due to the elegance and design of our products.

•                    **Vogue**: Acquired by us in 1990, the *Vogue* brand isrecognized as trendy and innovative and symbolizes a young and dynamic stylethat stresses attention to detail and fashion.

•                    **Arnette**: Targeted to young consumers, this sports product line is characterizedby a very forward-thinking design.

•                    **Revo**: A product line targeted towards sport and leisure wearers, the *Revo* line is known for its high quality lenses which aretreated with a specialized coating process.

•                    **Luxottica**: *Luxottica* is our first product line,comprised of prescription frames and sunglasses. *Luxottica*targets a broad mix of consumers of eyewear.

•                    **Sferoflex**: This product line, which in 1981 became the first brand name acquired byLuxottica Group, the *Sferoflex* lineis comprised of prescription frames characterized by a classic and comfortablestyle, with flexible hinges that allow the frame to adapt to the unique faceshape of each wearer.

•                    **Killer Loop**: Created in 1989 as a sun and sports eyewear brand that combines designand quality, this brand has evolved throughout the years from exclusivelysports eyewear to also include leisure eyewear.

*DesignerLines:*  Our designerlines are produced and distributed through license agreements with majorfashion houses. Currently, we produce 18 designer lines under the names *Chanel, Prada, Dolce & Gabbana, D&G, Versace, Bulgari, MiuMiu, Salvatore Ferragamo, Donna Karan, DKNY, Genny, Byblos, Brooks Brothers,Sergio Tacchini, Anne Klein, Moschino, Versus*and*Adrienne Vittadini.*Commencing in October 2006, ourdesigner lines will include *Burberry*, andcommencing on January 1, 2007, they will include *Polo RalphLauren*. The license agreements governing these designer lines areexclusive contracts and typically have terms of between three and ten years(except the license agreement for the *Moschino* line,which is terminable upon 12 months notice). See “—Trademarks, Trade Names andLicense Agreements—License Agreements.” Designer collections are developedthrough the collaborative efforts of our in-house design staff and the branddesigner. Our designer lines presently feature approximately 2,500 differentstyles.

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Thefollowing is a summary description of our main designer lines:

•                    **Chanel**: In 1999, we became the first company licensed to produce *Chanel*products. The *Chanel* productline, targeting the high-end consumer, reflects the essential characteristicsof the brand: style, elegance and class.

•                    **Prada**: The *Prada* license agreement was signed in2003. The *Prada* collections offer a range ofglasses proposed in optical frames and sunglasses collections, and also aseries of models created for leisure time, identified by the unmistakable redstripe. The *Prada* collections have always beendistinctive not only for their high quality but also for their forward-thinkingapproach and style, enabling the brand to anticipate and often inspire trendsacross all sectors. Sophisticated, elegant and refined, *Prada*products are identified by their strong character and unique style.

•                    **Miu Miu**: The *Miu Miu* license agreement was signed in2003 and it comprises both optical frames and sunglasses. This brand addressesa clientele particularly attentive to the free and easy as well as to thesophisticated new trends. This collection expresses Miuccia Prada’s vision ofan alternative style, always characterized by a strong personality. The brand *Miu Miu* can be defined as: urban, young, sophisticated andsensual, an alternative vision, a “new classic.”

•                    **Versace**: *Versace* is a  lifestyle brand for the modern man or womanwho chooses to express his/her strength, confidence and uniqueness through abold and distinctive personal style. *Versace*represents the ideal of a sophisticated, free and highly desirable lifestyle.

•                    **Versus**: While staying true to the essence of the core brand, *Versus* represents a younger, edgier take on those themes.Filled with spirit and energy, *Versus*challenges convention, always in the vanguard of modern urban style.

•                    **Bulgari**: *Bulgari* eyewear is distinguished by thehigh quality of its material, attention to detail and elegant design. Thisproduct line is targeted towards a clientele who seek something exclusive.

•                    **Salvatore Ferragamo:** The first *Salvatore Ferragamo*eyewear line debuted in late 1998, the year we executed the *Salvatore Ferragamo* license agreement. The *Salvatore Ferragamo* collections include both optical framesand sunglasses; they are characterized by the greatest attention to detail aswell as by an original use of materials and choice of colors. The eyewearcollection is inspired—like all the other *Salvatore Ferragamo*products—by the craftsmanlike tradition of this fashion house, reinterpretedaccording to contemporary trends.

•                    **Moschino**: Original and different, with a combination of shapes, materials andcolors which become provocative, amusing, innovative and at times surprisinglyfascinating and seductive.

•                    **Byblos**: *Byblos* presents an elegant, dynamiccollection that is lively and concrete in its essentialism but which at thesame time knows how to be sporty without being excessive or aggressive. Thedistinctive trait of the *Byblos*collections is the winning combination of sport and fashion, with an eye ontrends to keep its designs always up to date.

•                    **Genny**: The first *Genny* branded women’s eyewearline was manufactured and distributed in 1989. Targeted at the premium-pricemarket segment, *Genny* eyewear is designed for aclassic and sophisticated woman who is feminine, self-assured, aware of fashiontrends and who wants a distinctive yet not excessive style.

•                    **Sergio Tacchini**: Our *Sergio Tacchini*line is a sports and leisure eyewear brand that offers a combination of dynamicand elegant design.

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•                    **Brooks Brothers**: . Characterized by lightweight materials and aslender line, the Brooks Brothers collections reflect the unique features ofthe style of this American brand. This is an affordable product line withclassic style that delivers functionality, lightness and high quality.

•                    **Anne Klein**: This product line targets successful professional women who place anemphasis on quality and image.

•                    **Donna Karan**: This product line reflects the design sensibility and spirit of theDonna Karan Collection, offering men and women styles that are sophisticated,using modern and lightweight materials.

•                   **DKNY**: DKNY is fast fashion with an urban mind-set, the New York Citystreet-smart look. DKNY Eyewear addresses modern, urban, fashion-consciouswomen and men with multifaceted lifestyles: international, eclectic, fun andreal.

•                    **Dolce & Gabbana:** Our first Dolce &Gabbana eyewear collection draws its inspiration from the 60s and 70s. Thiscollection brings the period’s shapes up to date and highlights its materials,characterized by precious details such as logos in Swarovski crystals orelegant metal circles.

•**               ****D&G**: The D&G eyewear collection has a youthful, innovative andanti-conventional spirit. The new D&G models manufactured by Luxottica arecharacterized by vintage forms that take their inspiration from the 70s and80s, as well as loud and colorful sporty frames reminiscent of the racingworld.

•                **Burberry**: A license agreement between Burberry Group Plc and Luxottica was signedin October 2005 for the first release of the Burberry Eyewear Collectionin October 2006. This collection will feature the brand’s core values ofform and function, innovation and the essence of classic style.

•                **Polo Ralph Lauren**: During the first quarter of 2006, a ten-yearlicense agreement was negotiated and signed with Polo Ralph Lauren Corp. forthe manufacturing and distributing the Polo Ralph Lauren brands. The firsteyewear collection will be presented in the fourth quarter of 2006 for salesbeginning in January 2007.

Thefollowing table presents the respective percentages of our total unit (a “unit”represents an eyeglass frame or sunglass and excludes sales of other materials)sales that our designer and house brands comprised during the periodsindicated:
| ** **                                                              | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **(as a percentage of total unit sales)** | ** ** | ** **                                 | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| Designer brands                                                         |       | 40.6                                       |       | 39.5 |   | 33.6 |   | 32.8 |   | 35.9 |   |
| House brands                                                            |       | 59.4                                       |       | 60.5 |   | 66.4 |   | 67.2 |   | 64.1 |   |
| Total unit sales                                                        |       | 100.0                                      |       | 100.0 |   | 100.0 |   | 100.0 |   | 100.0 |   |
|                                                                         |            |                                            |            |  |  |  |  |  |  |  |  |  |  |

 

*PrescriptionFrames and Sunglasses*

In2005, we produced a combined total of approximately 33.9 million prescriptionframes and sunglasses. In 2004 and 2003, we produced a combined total ofapproximately 30.5 million and 28.7 million prescription frames and sunglasses,respectively.

Since1990, sunglasses have become an increasingly significant product line for us aswe seek to capitalize on growth opportunities in the sunglasses segment. In1990, we acquired a distributor that supplied sunglasses under the *Vogue* brand name. In 1995, we expanded our activities in thesunglasses market by acquiring Persol S.p.A., an Italian producer ofhigh-quality, fashionable sunglasses and prescription frames in thepremium-priced segment of the market. In 1999, we acquired the Ray-Ban businessfrom Bausch & Lomb Incorporated, including the *Ray-Ban,Revo, Arnette* and *Killer Loop*brand names. As a result of our acquisition of the Ray-Ban business, thepercentage of our unit sales represented by sunglasses that we manufacture hasgrown significantly. This trend continued with the acquisition of Sunglass Hut.However, with the acqusitions of OPSM and Cole, which tend to focus on sales ofopthalmic products and accessories, we have seen a steady decrease in ourpercentage units of sunglass sales to total unit sales over the last few years.We believe that this percentage of sales of sunglass units will continue toslightly decline in 2006 and 2007 due to our acquisitions in China and 

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Canada beforestabilizing in the low to mid 50 percent range. Unit sales of sunglassesmanufactured by us and third parties in 2005, as a percentage of total unit sales,were 55.8 percent, as compared to 58.9 percent in 2003 and 57.3 percent in2004.

Thefollowing table presents the respective percentages of our total unit salesthat our prescription frames and sunglasses comprised for the periodsindicated:
| ** **           | ** ** | **Year Ended December 31,**                              | ** ** |
|----------------------|------------|-------------------------------------------------------------------------|------------|
| ** **           | ** ** | **(as a percentage of total unit sales)** | ** ** |
| ** **           | ** ** | **2001**                                                                | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| Prescription  frames |       | 42.8                                                                    |       | 40.3 |   | 41.1 |   | 42.7 |   | 44.2 |   |
| Sunglasses           |       | 57.2                                                                    |       | 59.7 |   | 58.9 |   | 57.3 |   | 55.8 |   |
| Total unit sales     |       | 100.0                                                                   |       | 100.0 |   | 100.0 |   | 100.0 |   | 100.0 |   |

 

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***RetailOperations***

OurRetail Division is operated by our subsidiaries LensCrafters, Sunglass Hut,OPSM and the Cole group of companies. LensCrafters and Sunglass Hut are strongtrade names in the North American retail market place, and OPSM owns three maintrade names in the Asia-Pacific market. The Cole National group of companiesoperates Pearle and our Licensed Brands—Sears Optical, Target Optical and BJ’sOptical. In addition to ophthalmic products and sunglasses, we also sellwatches and accessories under the store names “Watch World” and “Watch Station”and personalized gifts under the store name “Things Remembered.”

*LensCrafters.*Through LensCrafters, we operate a retail network of over 893locations which offer a wide selection of prescription frames, sunglasses,lenses and other optical products in the North American market. LensCrafters iscurrently the largest optical retail chain in North America in terms of sales.LensCrafters stores sell not only Luxottica products, but also a wide range oflenses and optical products made by other suppliers. LensCrafters’ productsinclude innovative lenses, such as FeatherWatesÔ(lightweight, thin and impact-resistant lenses), FeatherWates Complete withScotchgardÔ (thin, light, scratch and impact resistant, anti-reflectiveand easy-to-clean lenses), DURALENSÔ (superscratch-resistant lenses), ByeLinesÔ (bifocal lenseswithout visible lines), InvisiblesÔ (anti-reflectivelenses) and “MVP Maximum View Progressives” (multi-focal lenses without visiblelines). Substantially all of our LensCrafters stores are located inhigh-traffic commercial malls and shopping centers, have an employedoptometrist or an independent, licensed optometrist on site (thereby allowingthe customer to have an eye examination on site), provide a large range ofprescription eyewear choices and include a laboratory, which enables us toprovide the selected frame with prescription lenses to our customers inapproximately one hour.

Webelieve that our acquisition of LensCrafters in 1995 has allowed us to:

•                    obtain a significant competitive advantage formarket share in the North American market; and

•                    enter a complementary segment that allows for adirect distribution to, and closer relationship with, the end customer.

Whenwe acquired LensCrafters in 1995, LensCrafters had approximately 600 stores.Between 1995 and 1998, we opened new stores and acquired other retail chains,reaching over 850 stores in North America by 1999.

From1999 to 2004, LensCrafters’ expansion focused primarily on further developmentof those stores opened between 1996 and 1998. However, we will continue toevaluate potential retail expansion opportunities in North America through theopening of retail chains and stores in areas where we are not already heavilyrepresented and in other prime locations. As of December 31, 2005,LensCrafters leased 893 retail stores.

Sincethe LensCrafters’ acquisition, we have improved the efficiency of LensCraftersstores by managing the inventory from our central worldwide distribution centerin Italy. This has improved inventory service and allowed for a more rapidsupply of styles based on daily sales and inventory data. This has alsoincreased the percentage of our products available in LensCrafters stores. Inaddition, we have focused our promotional activities on those customers lookingfor a better purchase experience with high-quality products, rapid andefficient customer service and innovative lens and frame technology. In orderto increase LensCrafters’ focus on sunglasses, we added a section, “one-thirdsun,” devoted only to sunglasses, in many stores. As a result of theseinitiatives, LensCrafters’ net sales have increased significantly since 1995.

During thelast few years we have shifted LensCrafters to a more premium brand. Duringthis time we have added additional elements such as a new store concept,associate training, advertising and marketing that together represent thepremium brand and future direction of LensCrafters.

One of themost visible changes in LensCrafters’ shift toward a premium and stylisheyewear shopping experience is a new design for the stores, which will be adoptedin new and remodeled store locations across North America. The store designfeatures elegant eyewear display boxes, wood flooring, fashion graphics, sleekdecorative accents and artistic lighting fixtures. Every feature of the designdirects the spotlight on the shopping gallery of designer eyewear collections,while the “fit and finish” stations are more private and separated from theshopping and frame selection. We have begun to display the eyewear collectionsby designer brand to help our customers shop for the style that is right forthem.

Aspart of the brand transformation, LensCrafters has rolled out a newstyle-focused magazine advertising campaign to communicate the brand’s approach to eyewear style. The ads haveappeared in more than two dozen premium fashion, 

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lifestyle,cultural and entertainment magazines for women and men. Titled “Make anAppearance,” they are distinguished from other LensCrafters’ ads, using bold,engaging visuals to emotionally appeal to the fashion and style desires withineyeglass wearers.

*SunglassHut.*With the acquisition of Sunglass Hut in 2001, we becamethe world’s leading specialty retailer of sunglasses based on sales, and aworld leader in specialty retailing of popular priced watches based on sales.Sunglass Hut has about 1,850 retail locations located throughout North America,Europe and Australia. Sunglass Hut operates in-line stores and kiosks in shoppingmalls, as well as stores in street centers in high-traffic streets and inairports. We have increased sales of Luxottica-manufactured products atSunglass Hut locations from approximately 14.3 percent of total Sunglass Hutnet sales in April 2001 (the first month following the acquisition) to61.9 percent in December 2005. In addition to sunglasses that wemanufacture, Sunglass Hut continues to sell a variety of frames manufactured bythird-party vendors, including Oakley Inc., Maui Jim, Inc. and others.Oakley Inc. is our largest third-party supplier, accounting for approximately8.7 percent, 6.8 percent and 4.9 percent of our total merchandise purchasesfrom suppliers in 2003, 2004 and 2005, respectively. Although we buy productsfrom third parties, including Oakley Inc., we do not believe that the loss ofany one supplier would have a siginificant impact on our future operations aswe could easily replace lost supply with other sunglasses manufactured by us orother third-party vendors. After the acquisition of Sunglass Hut, weconsolidated the administrative and certain other functions of the Sunglass Hutbusiness with our LensCrafters operations allowing us to realize significantsynergies between the two optical retailing companies. As of December 31,2005, Sunglass Hut operated an aggregate of 1,849 outlets throughout NorthAmerica, Europe and Australia. Sunglass Hut outlets are located mostly inenclosed malls and airports with an average retail space of approximately 500 squarefeet per kiosk/store.

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*ColeNational.* With the acquisition of Cole in October 2004,we acquired a group of distribution outlets and a provider and administrator ofmanaged vision care services under one group. Cole through its wholly ownedsubsidiaries operates retail vision locations under the name “Pearle Vision” aswell as under the names “Sears Optical,” “Target Optical” and “BJ’s Optical,”which we refer to as our Licensed Brands. It administers managed vision careprograms and benefits previously sold through the Cole Managed Vision Division;renewals and new sales will be through Eyemed Visioncare. Additionally, ColeNational operates a chain of personalized gift stores, e-commerce and catalogsunder the name “Things Remembered.”  Thelicensed brands (Sears, Target and BJ’s) optical retail locations are locatedin the host stores that bear their names. Pearle Vision stores are mostlylocated in strip malls outside of the conventional malls where mostLensCrafters and Sunglass Hut stores are located. In addition, we havefranchised Pearle Vision locations located throughout North America. TheCompany believes that its combination with Cole will:

•                    strengthen itsretail operations in the United States;

•                    strengthen itsmanaged vision care business by increasing the number of people for whom itprovides managed vision care benefits as well as by adding well establishedretailers to its existing family of retailers; and

•                    provide theCompany with the opportunity to increase its sales of frames manufactured bythe Company in Cole retail stores.

TheCompany has nearly completed its strategic integration plan with respect toCole. See Item 5—“Operating and Financial Review and Prospects—Overview” formore information. As of December 31, 2005, Cole operated about 2,400 ownedand leased department locations and over 450 franchise locations throughoutNorth America as of December 31, 2005.

Wewill continue to look to expand our retail operations in North America throughopening of new stores or kiosks, or strategic acquisitions when we deem them tobe appropriate.

*OPSM.*In August 2003, we completed the acquisition of 82.57 percent of OPSM, andwe completed the acquisition of the minority interest in OPSM in March 2005.This acquisition has resulted in what we believe is a leadership position inthe prescription business in the Australian and New Zealand markets andprovided us with new growth opportunities in the Asian market. As of December 31,2005, OPSM had 474 stores in Australia operating under three brands, OPSM,Laubman & Pank and Budget Eyewear, each of which targets a clearlydefined market segment. OPSM is the market leader in New Zealand, with38 stores as of December 31, 2005, and has expanded into Asia, with66 stores in Hong Kong. OPSM sold its businesses in Singapore and Malaysiaduring 2005.

*MainlandChina and Hong Kong*. We signed agreements during 2005 to acquire two retailers in the MainlandChina  retail optical market and anagreement in 2006 to acquire a retailer in Shanghai. The acquisitions areexpected to close after receiving customary approvals by the relevant Chinesegovernmental authorities. These agreements demonstrate our continued commitmentto expand our retail presence in strategic markets throughout the world. Theacquisitions will give us an additional 238 retail locations  in Asia. These additional retail stores arelocated in premium optical markets in Mainland China. In addition, they willexpand our presence in Hong Kong, which we believe to be the most important marketin Asia for luxury goods.

Our PrincipalMarkets

The followingtable presents our net sales by geographic market for the periods indicated:

 
| ** **                 | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------|------------|--------------------------------------------|------------|
| ** **                 | ** ** | **(In thousands of Euro)**  | ** ** |
| ** **                 | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| Italy Wholesale            |       | 743,327                                    |       | 832,813 |   | 998,420 |   |
| North America  Retail      |       | 1,812,322                                  |       | 1,937,484 |   | 2,868,746 |   |
| North America  Wholesale   |       | 137,370                                    |       | 146,076 |   | 179,595 |   |
| Asia-Pacific  Retail       |       | 121,276                                    |       | 348,300 |   | 365,867 |   |
| Asia-Pacific  Wholesale    |       | 155,350                                    |       | 116,605 |   | 150,926 |   |
| Other Retail               |       | 60,565                                     |       | 60,898 |   | 61,165 |   |
| Other Wholesale            |       | 384,894                                    |       | 425,732 |   | 514,031 |   |
| Adjustment/Eliminations(1) |       | (562,910                                   | )          | (612,608 | ) | (768,006 | ) |
| Total                      |       | 2,852,194                                  |       | 3,255,300 |   | 4,370,744 |   |

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(1)             “Adjustment/Eliminations”represents the elimination of intercompany sales.

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** **

**Seasonality andEffect of 53-Week Year**

Wehave also historically experienced sales volume fluctuations by quarter due toseasonality associated with the sale of sunglasses, which represented 55.8percent and 57.3 percent of our units sold in 2005 and 2004, respectively. As aresult, our net sales are typically higher in the second quarter, whichincludes wholesale sales to customers and increased sales in our Sunglass Hutretail outlets, and lower in the first quarter, as sunglass sales fall in thecooler climates of North America, Europe and Northern Asia. These seasonalvariations could affect the comparability of our results from period to period.Our retail fiscal year is either a 53-week year or a 52-week year,which also can affect the comparability of our results from period to period. Whena 53-week year occurs, we generally add the extra week to the fourthquarter. A 53-week year occurs in five to six year intervals and isexpected to occur again in fiscal 2008.

**ProductionProcess**

***Overview***

Weproduce both metal and plastic frames. In addition to our frame manufacturingcapacity, since 1999 we have also produced crystal and polycarbonate sunglasslenses exclusively for our sunglasses collections. Production is principallycarried out in our six Italian manufacturing facilities. In China, we producecertain products distributed mainly by our North American retail group andcertain finished products for our wholesale business. Each of our facilities istailored to a specific production technology that we believe allows us toachieve a high level of productivity.

***Designand Prototype Selection***

Webelieve that an important aspect of our success has been our emphasis on designand the continuous development of new styles. Our in-house designers workjointly with external designers to develop new models.

Forour designer line products, our design team works with licensors to discuss thebasic themes and fashion concepts for each product and then works closely withthe licensor’s designers to refine such themes. In addition, our design teamworks directly with our marketing and sales departments, which monitor demandfor our current models as well as general style trends in eyewear. The dataobtained from our marketing and sales departments is then used to refineexisting product designs and market positioning in order to react to changingconsumer preferences.

Oncethe product concepts have been selected and approved, we produce prototypesthat are used to evaluate the proposed design. Our prototypes are developedusing computer-aided design/computer-aided manufacturing technology, known asCAD/CAM, which is fully integrated with our manufacturing processes. CAD/CAMtechnology allows a designer to view and modify two- and three-dimensionalimages of a new frame. Because this technology is fully integrated with themanufacturing processes, the conversion from prototype to production isstreamlined.

Allprototypes are subject to review and approval by our licensors and ourdesigners to ensure consistency with the distinctive image of each productline. Our collections consist of both new models and the most successfulexisting models. Each year, we add approximately 1,500 new models to oureyewear collections. The ability to constantly renew our product base hasenabled us to meet consumer demand in each market segment in which our brandsare targeted. See Item 3—“Key Information—Risk Factors— If we do notcorrectly predict future economic conditions and changes in consumerpreferences, our sales of premium products and profitability will suffer.”

***Sourcing***

Theprincipal raw materials and parts purchased for our manufacturing processinclude plastic resins, metals, lenses and frame parts. We purchase asubstantial majority of our raw materials in Europe and to a lesser extent inAsia and the United States. In addition, we use certain external suppliers foreyeglass cases and packaging materials. The Ray-Ban acquisition provided uswith know-how and sunglass crystal lens manufacturing capabilities. We believethat our ability to produce sunglass crystal lenses is strategically importantgiven our expanded presence in the sunglasses market.

We donot depend on any single supplier for any of our principal raw materials.Although we do not have formal, long-term contracts with our suppliers, we havenot experienced any significant interruptions in our supplies. Historically,prices of the principal raw materials used in our manufacturing processes havebeen stable.

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*** ***

***Manufacturing***

Wehave six frame manufacturing facilities in Italy. Five facilities are locatedin northeastern Italy, the area in which most of the country’s optical industryis based, and the remaining facility is located near Turin. All of ourfacilities are highly automated, which has allowed us to maintain a high levelof production without significant capital outlay. In certain of thesefacilities, we also produce sunglass crystal lenses and polycarbonate lenses.From 1998 to 2001, we operated, through our 50 percent-owned joint venture(Tristar Optical Company Ltd.) with a Japanese partner, a facility in China tomanufacture prescription frames for distribution primarily in North America. In2001, we acquired the remaining 50 percent interest in this Chinese company sothat it became one of our wholly-owned subsidiaries.

Overthe past several years, we have consolidated our manufacturing processes bytailoring each of our manufacturing facilities in Italy to a specific productiontechnology. This consolidation has allowed us to improve both the productivityand quality of our operations. We produce plastic frames in our facilities inSedico, Pederobba and Turin, while metal frames are produced in our facilitiesin Agordo and Rovereto. Certain frame parts are produced in our facility inCencenighe. In 2005, approximately 56 percent of the frames manufactured by uswere metal-based, and the remainder were plastic.

Themanufacturing process for both metal and plastic frames and sunglasses beginswith the fabrication of precision tooling and molds based on prototypesdeveloped by our in-house design and engineering staff. We believe that ourin-house capacity to engineer and produce precision tooling and molds gives usa strong competitive advantage by enabling us to reduce the lead time forproduct development and thereby adapt quickly to market trends, containproduction costs, and maintain smaller and more efficient production runs sothat we can better respond to the varying needs of different markets.

Themanufacturing process for metal frames is comprised of approximately 70 phases,beginning with the production of basic components such as rims, temples andbridges, which are produced through a molding process. These components arewelded together to form frames through numerous stages of detailed assemblywork. Once assembled, the metal frames are treated with various coatings toimprove their resistance and finish, and then prepared for lens fitting andpackaging.

Wemanufacture plastic frames using either a milling process or injection molding,depending upon the style and color of the frame. In the milling process, acomputer-controlled machine carves frames from colored plastic sheets. Thisprocess produces rims, temples and bridges that are then assembled, finishedand packaged. In the injection molding process, plastic resins are liquefiedand injected in molds. The plastic parts are then assembled, coated, finishedand packaged.

Ourefficient distribution network allows us to track sales and inventory data on aweekly basis. As a result, we are able to:

•                    make and revise manufacturing plans on the basis ofcurrent sales information;

•                    reallocate inventory within our wholesalesubsidiaries, thereby reducing overall inventory levels and the risk ofobsolescence; and

•                    react quickly to changing market trends by providingrapid feedback to our in-house design team.

Weengage in research and development activities relating to our manufacturingprocesses on an on-going basis. As a result of such activities, we haveinvested, and will continue to invest, in automation, thus increasingefficiency while improving quality. Much of our manufacturing process isautomated, including the production of metal and plastic frame parts and thegalvanization of metal frames.

***QualityControl***

One ofour key strategic objectives is ensuring the quality of our products. In 1997,we were among the first companies in the eyewear industry to obtain ISO 9001certifications. Subsequently, in 2003, we obtained the “Vision 2000”certification, which is the third-generation industry recognition for qualityproduction. To ensure the high quality of our products, our quality control andprocess control teams regularly inspect work-in-progress at various stages ofthe production cycle. In addition, the majority of materials that we purchaseare quality tested. We also conduct inspections of, and certify compliancewith, the production processes of our main suppliers. Each of our prescriptionframes and sunglasses undergoes several stages of quality inspection. Due tothe efficiency of our quality controls, the return rate for defectivemerchandise manufactured by us is approximately one percent.

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**Distribution**

Wedistribute our products through wholesale and retail channels.

***Distributionby Wholesale Division***

Wecurrently distribute our products in approximately 120 countries and operate 29wholly or partially owned wholesale distribution subsidiaries strategicallylocated in major markets worldwide. In markets where we do not have wholesaledistribution subsidiaries, we employ approximately 100 independentdistributors.

Eachwholesale distribution subsidiary operates its own network of salesrepresentatives, who are normally retained on a commission basis. Our networkof wholesale distribution subsidiaries represents a key element of ourbusiness. We believe that control over an extensive distribution networkprovides us with a competitive advantage, because it enables us to maximize ourbrand image, marketing efforts and customer service activities by tailoring ouroperations to meet the specific needs and peculiarities of local markets.

Thefollowing table sets forth certain information regarding our wholesaledistribution subsidiaries and affiliates:

 
| **Subsidiary**                      | ** ** | ** **           | ** ** | **Country of Formation** | ** ** | **Percentage  Ownership** |
|-------------------------------------|------------|----------------------|------------|--------------------------|------------|---------------------------|
| Luxottica S.r.l.                    |       | Italy                |       | 100%                     |
| Luxottica Fashion Brillen GmbH      |       | Germany              |       | 100%                     |
| Luxottica Portugal S.A.             |       | Portugal             |       | 100%                     |
| Luxottica France S.A.R.L.           |       | France               |       | 100%                     |
| Luxottica Iberica S.A.              |       | Spain                |       | 100%                     |
| Luxottica U.K. Ltd.                 |       | United Kingdom       |       | 100%                     |
| Luxottica Belgium N.V.              |       | Belgium              |       | 100%                     |
| Luxottica Sweden A.B.               |       | Sweden               |       | 100%                     |
| Oy Luxottica Finland A.B.           |       | Finland              |       | 100%                     |
| Luxottica Vertriebsgesellschaft MbH |       | Austria              |       | 100%                     |
| Luxottica Norge A.S.                |       | Norway               |       | 100%                     |
| Avant-Garde Optics, LLC             |       | U.S.A.               |       | 100%                     |
| Luxottica Canada Inc.               |       | Canada               |       | 100%                     |
| Luxottica Do Brasil Ltda            |       | Brazil               |       | 100%                     |
| Luxottica Mexico S.A. de C.V.       |       | Mexico               |       | 100%                     |
| Luxottica Argentina S.r.l.          |       | Argentina            |       | 100%                     |
| Mirari Japan Ltd.                   |       | Japan                |       | 100%                     |
| Luxottica South Africa Pty Ltd.     |       | South Africa         |       | 100%                     |
| Luxottica Middle East FZE           |       | United Arab Emirates |       | 100%                     |
| Luxottica (Switzerland) A.G.        |       | Switzerland          |       | 97%                      |
| Luxottica Australia Pty Ltd.        |       | Australia            |       | 100%                     |
| Luxottica Optics Ltd.               |       | Israel               |       | 74.9%                    |
| Luxottica Hellas A.E.               |       | Greece               |       | 70%                      |
| Luxottica Nederland B.V.            |       | The Netherlands      |       | 51%                      |
| Luxottica Gozluk Ticaret A.S.       |       | Turkey               |       | 51%                      |
| Luxottica Poland Sp. Z.o.o.         |       | Poland               |       | 100%                     |
| Mirarian Marketing Ltd.             |       | Singapore            |       | 51%                      |
| Ray Ban Sun Optics India Ltd.(1)    |       | India                |       | 44.2%                    |
| Luxottica Korea Ltd.                |       | Korea                |       | 100%                     |

 

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(1)                                  Theshares of Ray Ban Sun Optics India Ltd. are publicly traded on the BSE StockExchange, Mumbai. Because we do not own a 50% equity interest in the entity, weaccount for this entity under the equity method of accounting.

We maintainclose contact with our distributors in order to monitor sales and to controlthe quality of the points of sale that display products. We typically enterinto distribution agreements with importers and distributors that establishminimum annual purchases and impose territorial limitations. In addition, tothe extent permitted by law, we allow for distribution only throughspecifically authorized retail channels and qualified sales agents.

Nosingle customer or group of related customers accounted for more than twopercent of our consolidated net sales in any of the past three years. We do notbelieve that the loss of any single customer would have a material adverseeffect on our financial condition or results of operations.

Ourdistribution system is integrated internationally. A worldwide computerizedinformation network links the distribution and sales systems with theproduction facilities in Italy. This network enables us to monitor worldwidesales trends and inventory positions on a daily basis and to allocateproduction resources accordingly.

Webelieve that one of our key competitive strengths is our ability to promptlysatisfy customer demand in a timely manner, both prior to and following a sale.In order to further improve our customer service capabilities, we havecentralized our distribution centers in Europe (Italy) and Asia (Japan) and arein the final stages of centralizing our distribution centers in North America(United States). We believe that centralizing our distribution centers improvesthe efficiency of our distribution operations while reducing the related costs.

***Distributionby Retail Division***

Throughour Retail Division, we believe we operate the largest group of opticalsuperstores in both the United States and Canada based on both sales and storecount. We believe we are the largest specialty retailer of sunglasses in theworld based on 2005 revenues and believe we have become a leading player in theAustralian prescription segment. We also sell watches and accessories in certainsunglass retail locations and under the store names “Watch World” and “WatchStation” and personalized gifts under the name “Things Remembered.”

In our optical retailstores, customers can choose from a large selection of frames and lensesoffering a high level of comfort and fit. LensCrafters customers can obtain acompleted pair of prescription glasses in approximately one hour because ofon-site lens grinding laboratories. In our Sunglass Hut locations, customerscan choose from a large selection of Luxottica and third-party vendormanufactured sunglasses. In addition, Sunglass Hut locations can assistcustomers in purchasing other accessories to complement their sunglasses. As ofDecember 31, 2005, our retail division consisted of 5,679 owned or leaseddepartment retail locations and 491 franchised locations as follows:

|                              | ** ** | **North  America** | ** ** | **Europe** | ** ** | **Asia-  Pacific*** | ** ** | **Total** | ** ** |
|------------------------------|------------|--------------------|------------|------------|------------|---------------------|------------|-----------|------------|
| LensCrafters                 |       | 893                |       |       |       |                |       | 893       |       |
| Sunglass Hut                 |       | 1,557              |       | 110        |       | 182                 |       | 1,849     |       |
| OPSM Group                   |       |               |       |       |       | 549                 |       | 549       |       |
| Cole National  Group Optical |       | 1,724              |       |       |       |                |       | 1,724     |       |
| Things  Remembered           |       | 664                |       |       |       |                |       | 664       |       |
| Franchised  Locations        |       | 462                |       |       |       | 29                  |       | 491       |       |
|                         |       | 5,300              |       | 110        |       | 760                 |       | 6,170     |       |

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*                    Asia-Pacificfor our Retail Division consists of Australia, New Zealand, Malaysia, Singaporeand Hong Kong.

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In 2005,approximately 68.4 percent, 12.5 percent, 21.2 percent and 61.9 percent of thetotal sales of frames based on units sold by LensCrafters, Cole, OPSM andSunglass Hut, respectively, were produced by our manufacturing facilities. OPSMwas acquired in August 2003 and at such time 3.5 percent of the totalsales of frames sold were produced by our manufacturing facilities. ColeNational was acquired in October 2004, and at such time less than 1percent of the total sales of frames sold were produced by our manufacturingfacilities. The Retail Division’s outlets sell not only frames that wemanufacture but also a wide range of frames, lenses and other ophthalmicproducts manufactured by other companies.

Substantiallyall LensCrafters, Cole National and OPSM stores have an employed or independentoptometrist on site, allowing the customer to have an eye examination, selectfrom a large range of prescription eyewear, and receive the selected frame withprescription lenses from one location. In addition, substantially all of ourLensCrafters stores have a lens grinding laboratory on site, which allows ourcustomers to receive a complete set of prescription frames or sunglasses inapproximately one hour.

**Competition**

Theprescription frame and sunglasses industry is highly competitive andfragmented. As we market our products throughout the world, we compete withmany prescription frame and sunglasses companies in various local markets. Webelieve that our principal competitor in the design, manufacture and distributionof eyewear within the prescription frames market is Safilo Group S.p.A.,or Safilo. We believe that our principal competitors in the sunglasses marketinclude Safilo, De Rigo S.A. and Oakley, Inc. Several of our mostsignificant competitors in the manufacture and distribution of eyewear aresignificant vendors to our Retail Division. Our success in these markets willdepend on, among other things, our ability to manage an efficient distributionnetwork and to market our products effectively as well as on the popularity andmarket acceptance of our brands. See Item 3—“Key Information—RiskFactors—If we are unable to successfully introduce new products, our futuresales and operating performance will suffer” and “—The markets in which wecompete are highly competitive, and our failure to maintain an efficientdistribution network could harm our business.”

Thehighly competitive optical retail market in North America includes a largenumber of small independent competitors and several national and regional chainsof optical superstores. In recent years, a number of factors, includingconsolidation among retail chains and the emergence of optical departments indiscount retailers, have resulted in significant competition within the opticalretailing industry. We compete against several large optical retail chains inNorth America, including Wal-Mart and Eye Care Centers of America, and, in thesunglasses area, numerous sunglass outlet centers. Our optical retailoperations emphasize product quality, selection, customer service andconvenience. We do not compete primarily on the basis of price.

**Marketing**

Ourmarketing and advertising activities are designed primarily to enhance theimage of Luxottica and our brand portfolio and to drive traffic into our retaillocations. Advertising expenses amounted to approximately six percent of ournet sales in each of 2003, 2004 and 2005.

***MarketingStrategy for Our Wholesale Business***

Ourmarketing strategy in the wholesale distribution segment is focused onpromoting our extensive brand portfolio, our corporate image and the value ofour products. Advertising is extremely important in supporting our marketingstrategy, and we therefore engage in extensive advertising activities, both atthe point-of-sale and through various media directed at the end consumer of ourproducts.

Ourpoint-of-sale marketing materials consist of displays, counter cards, catalogs,posters and product literature . Many of these materials are linked to ourconsumer advertising campaigns.

In ourmedia advertising, we utilize direct media, such as print, radio andtelevision, as well as billboard advertising. The extent of our advertisingactivities and the selection of different media depend upon the competitiveconditions in each particular market. In addition, we advertise in publicationstargeted to independent practitioners and other market-specific magazines.

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Wealso benefit from brand-name advertising carried out by licensors of ourdesigner lines intended to promote the image of the designer line. Ouradvertising and promotional efforts in respect of our licensed brands aredeveloped in coordination with our licensors. We contribute to the designer aspecified percentage of our sales of the designer line to be devoted toadvertising and promotion.

Finally,we participate in major industry trade fairs (including the MIDO fair in Milan,Vision Expo in the United States and the SILMO in Paris), where our newcollections are displayed and promoted to the market.

***MarketingStrategy for Our Retail Business***

Inaddition to the marketing activities described above, we engage in promotionaland advertising activities through our Retail Division with both short- andlong-term objectives. Our short-term objectives are to attract customers to ourstores and promote sales. Our long-term objective is to build the image andvisibility of our retail brands throughout the world, such as the LensCraftersand Pearle Vision brands in North America, the Sunglass Hut brand worldwide,the OPSM, Laubman & Pank and Budget Eyewear brands in Australia andNew Zealand, thereby encouraging customer loyalty and return purchases. Webelieve that the product quality and service provided by our Retail Divisioncontribute to our short- and long-term marketing objectives.

Aconsiderable amount of our Retail Division’s marketing budget is dedicated todirect marketing activities, such as communications with customers (*e.g.*, mailings and catalogues). Our direct marketingactivities benefit from our large database of customer information in theUnited States and in Australia. Another significant portion of the marketingbudget is allocated to broadcast and print media (*e.g.*,television, radio and magazines) designed to reach the broad markets in whichwe operate with image-building messages about our retail business.

**Trademarks,Trade Names and License Agreements**

***Trademarksand Trade Names***

As of December 31,2005, our principal trademarks or trade names included *Luxottica,Ray-Ban, Persol, Vogue, LensCrafters, Sunglass Hut, Pearle Vision*and *OPSM*. Our principal trademarks areregistered in several countries. Other than *Luxottica, Ray-Ban,LensCrafters, Sunglass Hut, Pearle Vision* and *OPSM*,we do not believe that any single trademark or trade name is material to ourbusiness or results of operations. *Ray-Ban*products accounted for approximately 12.2 percent of our net sales in 2005.Management believes that our trademarks have significant value in marketing ourproducts.

LensCraftershas introduced several trademarked lenses in recent years that containinnovative technology, such as FeatherWatesÔ(lightweight, thin and impact resistant lenses), FeatherWates Complete withScotchgardÔ (thin, light, scratch and impact resistant, anti-reflectiveand easy-to-clean lenses), DURALENSÔ (super scratch-resistantlenses), InvisiblesÔ (anti-reflectivelenses) and “MVP Maximum View Progressives” (multi-focal lenses without visiblelines). LensCrafters purchases these lenses under non-exclusive arrangementswith third parties. The names of the lenses used by LensCrafters are typicallytrademarked, and the trademarks are typically owned by us. OPSM has trademarkedseveral lenses in recent years that it uses in its advertising. They includeActiviseÔ for contact lenses, ActiveÔfor polycarbonate eyeglass lenses and InvisiblesÔfor multi-coated eyeglass lenses.

We donot have any patents that we believe are, individually or in the aggregate,material to our results of operations or financial condition.

SeeItem 3 —“Key Information—Risk Factors—If we are unable to protect ourproprietary rights, the loss of sales and the costs of defending such rightswill adversely affect our business and financial results.”

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***LicenseAgreements***

Wehave entered into certain license agreements to manufacture and distributeprescription frames and sunglasses with numerous designers. These licenseagreements have terms expiring through 2022. The table below summarizes theprincipal terms of our most significant license agreements as of June 15,2006.

| **Licensor**                                    | ** ** | **Licensed Marks**                                                                                                                                            | ** ** | **Territory**                                                                                         | ** ** | **Expiration**                                                   |
|-------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|
| Kasper ASL Ltd.                                 |       | Anne Klein                                                                                                                                                    |       | U.S. exclusive license                                                                                |       | December 31, 2006                                           |
| Bulgari S.p.A.                                  |       | Bulgari                                                                                                                                                       |       | Worldwide exclusive license                                                                           |       | December 31, 2010                                           |
| Byblos S.p.A.                                   |       | Byblos                                                                                                                                                        |       | Worldwide exclusive license                                                                           |       | December 31, 2006                                           |
| Genny S.p.A.                                    |       | Genny                                                                                                                                                         |       | Worldwide exclusive license                                                                           |       | December 31, 2006                                           |
| Moschino S.p.A.                                 |       | Moschino                                                                                                                                                      |       | Worldwide exclusive license to distribute to  authorized retailers and distributors (excluding Japan) |       | December 31, 2006                                           |
| Salvatore Ferragamo Italia S.p.A.               |       | Salvatore Ferragamo Ferragamo                                                                                                                                 |       | Worldwide exclusive license                                                                           |       | December 31, 2008 (Renewable until  December 31, 2013) |
| Retail Brand Alliance, Inc.*               |       | Brooks Brothers                                                                                                                                               |       | Worldwide exclusive license                                                                           |       | December 31, 2009                                           |
| Sergio Tacchini S.p.A.                          |       | Sergio Tacchini ST                                                                                                                                            |       | Worldwide exclusive license (excluding Japan)                                                         |       | April 1, 2007                                               |
| Prada S.A.                                      |       | Prada Miu Miu                                                                                                                                                 |       | Worldwide exclusive license                                                                           |       | December 31, 2013 (Renewable until  December 31, 2018) |
| Gianni Versace S.p.A.                           |       | Gianni Versace Versace Versace Sport Versus                                                                                                                   |       | Worldwide exclusive license                                                                           |       | December 31, 2012 (Renewable until  December 31, 2022) |
|                                            |       |                                                                                                                                                          |       |                                                                                                  |       |                                                             |
| Chanel SA, Chanel SAS, Chanel UK and Chanel USA |       | Chanel                                                                                                                                                        |       | Worldwide exclusive license                                                                           |       | March 31, 2008                                              |
| Donna Karan Studio LLC                          |       | Donna Karan DKNY                                                                                                                                              |       | Worldwide exclusive license                                                                           |       | December 31, 2009 (Renewable until  December 31, 2014) |
| Adrienne Vittadini LLC**                        |       | Adrienne Vittadini                                                                                                                                            |       | Worldwide exclusive license                                                                           |       | December 31, 2007                                           |
| Dolce & Gabbana S.r.l.                 |       | D&G Dolce & Gabbana Dolce &  Gabbana                                                                                                    |       | Worldwide exclusive license                                                                           |       | December 31, 2010 (Renewable until  December 31, 2015) |
| Burberry Group Plc                              |       | Burberry                                                                                                                                                      |       | Worldwide exclusive license                                                                           |       | December 31, 2015                                           |
| Polo Ralph Lauren Corp.                         |       | Polo Ralph Lauren  Ralph Lauren  Ralph (Polo Player  Design) Lauren  RLX  RL  Ralph  Ralph/Ralph Lauren  Lauren by Ralph Lauren  Polo Jeans Company  Chaps*** |       | Worldwide exclusive license                                                                           |       | March 31, 2017                                              |

 

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*             Retail Brand Alliance, Inc. isindirectly owned and controlled by one of our directors.

**           Adrienne Vittadini LLC is indirectlyowned and controlled by one of our directors.

***         U.S., Canada, Mexico and Japan only.

 

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Underthese license agreements, we are required to pay a royalty which generallyranges from five percent to twelve percent of net sales of the relevantcollection, which may be offset by any guaranteed minimum royalty payments. Thelicense agreements also provide for a mandatory marketing contribution thatgenerally amounts to five percent of net sales. The particular licensor isresponsible for the manner and form of advertising for its collection. Otherthan the license agreement for the *Moschino* line,which is terminable upon 12 months’ notice, these license agreements typicallyhave terms ranging from three to ten years, but may be terminated early byeither party for a variety of reasons, including non-payment of royalties,failure to meet minimum sales thresholds, product alteration and, under certainagreements, any change in the ownership of the ordinary shares resulting in achange in control of Luxottica Group S.p.A.

Nosingle designer line accounted for more than five percent of net sales for theyear ended December 31, 2005. Management believes that, while the earlytermination of one or a small number of the current license agreements may havean adverse effect on our results of operations in the short term, any suchtermination would not have a material adverse effect on our long-term resultsof operations or financial condition. Upon any early termination of an existinglicense agreement, we expect that we would seek to enter into alternativearrangements with other designers to reduce any negative impact of such atermination.

**RegulatoryMatters**

Ourproducts are subject to governmental health safety regulations in most of thecountries where they are sold, including the United States. We regularlyinspect our production techniques and standards to ensure compliance withapplicable requirements. Historically, compliance with such requirements hasnot had a material effect on our operations.

Inaddition, governments throughout the world impose import duties and tariffs onproducts being imported into their countries. Although in the past we have notexperienced situations in which the duties or tariffs imposed materiallyimpacted our operations, we can provide no assurances that this will be true inthe future.

Ourpast and present operations, including owned and leased real property, aresubject to extensive and changing environmental laws and regulations pertainingto the discharge of materials into the environment, the handling anddisposition of wastes or otherwise relating to the protection of theenvironment. We believe that we are in substantial compliance with theapplicable environmental laws and regulations. However, we cannot predict withany certainty that we will not in the future incur liability underenvironmental statutes and regulations with respect to contamination of sitesformerly or currently owned or operated by us (including contamination causedby prior owners and operators of such sites) and the off-site disposal ofhazardous substances.

Ourretail operations are also subject to various state or similar legalrequirements in the United States, Australia, Canada, New Zealand, Hong Kong,Singapore and Malaysia that regulate the permitted relationships betweenlicensed optometrists or ophthalmologists, who primarily perform eyeexaminations and prescribe corrective lenses, and opticians, who fill suchprescriptions and sell eyeglass frames.

**OrganizationalStructure**

We area holding company, and virtually all of our operations are conducted throughour wholly-owned subsidiaries. We operate in two industry segments: (i) manufacturingand wholesale distribution, and (ii) retail distribution. In the retailsegment, we primarily conduct our operations through LensCrafters, SunglassHut, Pearle Vision, Cole Licensed Brands and OPSM. In the manufacturing andwholesale distribution segment, we operate through approximately sixmanufacturing subsidiaries and 29 geographically oriented wholesaledistribution subsidiaries. See “—Distribution” for a breakdown of thegeographic areas.

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The significant subsidiaries controlled by LuxotticaGroup S.p.A., including holding companies, as of December 31, 2005, were:

 

| **Subsidiary**                         | ** ** | **Country of  Incorporation** | ** ** | **Percentage of  Ownership** | ** ** |
|----------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| **Manufacturing**                      | ** ** | ** **                         | ** ** | ** **                        | ** ** |
| Luxottica S.r.l.                       |       | Italy                              |       | 100                               | %          |
| Luxottica  Tristar Optical Ltd         |       | China                              |       | 100                               | %          |
| **Distribution**                       | ** ** | ** **                         | ** ** | ** **                        | ** ** |
| Avant-Garde  Optics, LLC               |       | U.S.A.                             |       | 100                               | %          |
| Cole Vision  Corp.                     |       | U.S.A.                             |       | 100                               | %          |
| LensCrafters  Inc.                     |       | U.S.A.                             |       | 100                               | %          |
| Sunglass Hut  Trading Corporation      |       | U.S.A.                             |       | 100                               | %          |
| Pearle  Vision, Inc.              |       | U.S.A.                             |       | 100                               | %          |
| OPSM Group  Limited                    |       | Australia                          |       | 100                               | %          |
| **Holding  companies**                 | ** ** | ** **                         | ** ** | ** **                        | ** ** |
| Luxottica U.S.  Holdings Corp.         |       | U.S.A.                             |       | 100                               | %          |
| Luxottica South  Pacific Pty Ltd       |       | Australia                          |       | 100                               | %          |
| Sunglass Hut  International, Inc. |       | U.S.A.                             |       | 100                               | %          |
| Cole National  Corporation             |       | U.S.A.                             |       | 100                               | %          |

 

**Property, Plants and Equipment**

Our corporate headquarters is located at Via Cantù 2, Milan, Italy.Information regarding the location, use and approximate size of our principaloffices and facilities as of December 31, 2005 is set forth below:

 

 

 

| **Location**                         | ** ** | **Use**                                             | ** ** | **Owned/Leased** | ** ** | **Approximate  Area in Square  Feet** |
|--------------------------------------|------------|-----------------------------------------------------|------------|------------------|------------|-------------------------------------------------|
| Milan, Italy                         |       | Corporate Headquarters                              |       | Owned            |       | 51,548                                          |
| Agordo, Italy                        |       | Administrative offices and manufacturing facility   |       | Owned            |       | 814,004                                         |
| Mason (Ohio),  United States         |       | North American retail division headquarters         |       | Owned            |       | 288,876                                         |
| Atlanta  (Georgia), United States    |       | North American retail division distribution center  |       | Owned            |       | 183,521                                         |
| Port Washington  (NY), United States |       | U.S. offices and U.S. wholesale distribution center |       | Owned            |       | 140,700                                         |
| Espoo, Finland                       |       | Offices, warehouse                                  |       | Leased           |       | 2,884                                           |
| Oulu, Finland                        |       | Offices                                             |       | Leased           |       | 484                                             |
| Goteborg, Sweden                     |       | Offices, warehouse                                  |       | Owned            |       | 6,942                                           |
| Stockholm,  Sweden                   |       | Offices                                             |       | Leased           |       | 258                                             |
| Kongsberg, Norway                    |       | Offices                                             |       | Leased           |       | 3,132                                           |
| Macquarie Park,  Australia           |       | Offices                                             |       | Leased           |       | 61,496                                          |
| Chipping Norton,  Australia          |       | Ophthalmic laboratory                               |       | Leased           |       | 60,172                                          |
| Revesby,  Australia                  |       | Distribution center                                 |       | Leased           |       | 61,054                                          |
| Auckland, New  Zealand               |       | Offices                                             |       | Leased           |       | 31,011                                          |
| Hong Kong                            |       | Offices, warehouse                                  |       | Leased           |       | 16,264                                          |
| Causeway Bay,  Hong Kong             |       | Offices                                             |       | Leased           |       | 980                                             |
| Heemstede,  Holland                  |       | Offices                                             |       | Leased           |       | 8,073                                           |
| São Paulo,  Brazil              |       | Offices, warehouse                                  |       | Leased           |       | 18,363                                          |
| Buenos Aires,  Argentina             |       | Offices, warehouse, showroom                        |       | Leased           |       | 5,119                                           |

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| Salonica -  Kountouriotou, Greece |   | Sales office                                         |   | Leased |   | 2,813     |
|-----------------------------------|--------|------------------------------------------------------|--------|--------|--------|-----------|
| Athens-Anthousa,  Greece          |   | Offices                                              |   | Leased |   | 40,137    |
| Deurne, Belgium                   |   | Offices, archive-small deposit                       |   | Leased |   | 4,560     |
| Barcelona, Spain                  |   | Offices, warehouse, showroom                         |   | Leased |   | 14,275    |
| Madrid, Spain                     |   | Showroom                                             |   | Leased |   | 1,729     |
| Hammersmith,  London, UK          |   | Offices                                              |   | Leased |   | 7,400     |
| Neasden, London,  UK              |   | Warehouse for storage                                |   | Leased |   | 3,000     |
| Guangzhou, China                  |   | Factory, warehouse                                   |   | Leased |   | 2,900     |
| Dongguan, China                   |   | Offices, factory, dormitory                          |   | Owned  |   | 884,810   |
| Dongguan, China                   |   | Land                                                 |   | Owned  |   | 1,607,500 |
| Klosterneuburg,  Austria          |   | Offices                                              |   | Leased |   | 3,767     |
| Prague, Czech  Republic           |   | Showroom                                             |   | Leased |   | 215       |
| Bratislava,  Slovak Republic      |   | Showroom                                             |   | Leased |   | 150       |
| Tokyo, Japan                      |   | Sales office                                         |   | Leased |   | 13,153    |
| Fukui, Japan                      |   | Offices, distribution center                         |   | Owned  |   | 45,209    |
| Osaka, Japan                      |   | Sales office                                         |   | Leased |   | 1,948     |
| Nagoya, Japan                     |   | Sales office                                         |   | Leased |   | 1,162     |
| Fukuoka, Japan                    |   | Sales office                                         |   | Leased |   | 785       |
| Shanghai, China                   |   | Sales office                                         |   | Leased |   | 1,356     |
| Schonbuhl,  Switzerland           |   | Offices                                              |   | Leased |   | 3,164     |
| Dubai, U.A.E.                     |   | Offices                                              |   | Leased |   | 1,645     |
| Krakow, Poland                    |   | Offices                                              |   | Leased |   | 1,615     |
| Lisbon, Portugal                  |   | Offices, warehouse                                   |   | Owned  |   | 64,583    |
| Munich, Germany                   |   | Offices, showroom                                    |   | Leased |   | 6,000     |
| Bhiwadi, India                    |   | Manufacturing facility, corporate offices            |   | Owned  |   | 343,474   |
| Johannesburg,  South Africa       |   | Offices, showroom                                    |   | Leased |   | 5,382     |
| Mexico City,  Mexico              |   | Offices, warehouse                                   |   | Leased |   | 17,222    |
| Valbonne, France(1)               |   | Offices                                              |   | Owned  |   | 14,240    |
| Seoul, Korea                      |   | Sales office                                         |   | Leased |   | 2,775     |
| Singapore                         |   | Sales office                                         |   | Leased |   | 1,604     |
| Mississauga,  Canada              |   | Offices                                              |   | Owned  |   | 21,000    |
| Hertzelya,  Israel                |   | Offices, warehouse                                   |   | Leased |   | 5,382     |
| Umurbey/ Izmir,  Turkey           |   | Offices, warehouse                                   |   | Leased |   | 5,810     |
| Rovereto, Italy                   |   | Frame manufacturing facility                         |   | Owned  |   | 215,026   |
| Sedico, Italy                     |   | Frame manufacturing facility and distribution center |   | Owned  |   | 392,312   |
| Cencenighe,  Italy                |   | Semi-finished product manufacturing facility         |   | Owned  |   | 59,892    |
| Lauriano, Italy                   |   | Frame and crystal lenses manufacturing facility      |   | Owned  |   | 174,176   |
| Pederobba, Italy                  |   | Frame manufacturing facility                         |   | Owned  |   | 84,111    |
| Sedico, Italy                     |   | distribution center                                  |   | Owned  |   | 288,473   |

 

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(1)                                  Theproperty located in Valbonne (France) is leased (with an option to purchase theunderlying property at the end of the lease term for a nominal price) by ourwholly-owned subsidiary in France.

As of December 31,2005, LensCrafters leased 893 retail stores, Sunglass Hut leased 1,849 retailkiosks or stores, 

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Cole Nationalleased 1,724 optical retail locations including licensed departments in hoststores and 664 Things Remembered retail locations, and OPSM leased 549 retailstores. Such leases expire between 2006 through 2025 and have terms that webelieve are generally reasonable and reflective of market conditions.

Webelieve that our current facilities (including our manufacturing capacity) areadequate to meet our present and reasonably foreseeable needs except for theNorth American Retail Division Headquarters located in Mason, Ohio which beganin early 2005 to undergo an expansion of approximately 127,000 square feet at aprojected cost of U.S. $13.5 million. This expansion is expected to becompleted in 2006 and is part our integration of Cole National operations intoour existing North American retail headquarters. Other than the capital leasefor our offices in Valbonne (France), there are no material encumbrances on anyowned properties.

Ourcapital expenditures were Euro 229.4 million for the year ended December 31,2005 and Euro 42.5 million for the three-month period ended March 31,2006. It is our expectation that 2006 annual capital expenditures will be approximatelyEuro 200 million, in addition to investment for any acquisitions. We willpay for these future capital expenditures with our current available borrowingcapacity and available cash. For a description of capital expenditures for theprevious three years, see Item 5—“Operating and Financial Review and Prospects—Liquidityand Financial Resources—Our Cash Flows—Investing Activities.”

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**ITEM 5. OPERATINGAND FINANCIAL REVIEW AND PROSPECTS**

**Overview**

We operate in two industrysegments: (i) manufacturing and wholesale distribution and (ii) retaildistribution. Through our manufacturing and wholesale distribution segment, weare engaged in the design, manufacture, wholesale distribution and marketing ofhouse brand and designer lines of mid- to premium-priced prescription framesand sunglasses. During the periods discussed below, we have operated in theretail segment through our Retail Division, comprised principally ofLensCrafters, Sunglass Hut, since August 2003, OPSM and since October 2004,Cole . As of December 31, 2005, the retail segment consisted of 5,679owned or leased department retail locations and 491 franchised locations asfollows:

 

|                              | ** ** | **North  America** | ** ** | **Europe** | ** ** | **Asia-  Pacific*** | ** ** | **Total** | ** ** |
|------------------------------|------------|--------------------|------------|------------|------------|---------------------|------------|-----------|------------|
| LensCrafters                 |       | 893                |       |       |       |                |       | 893       |       |
| Sunglass Hut                 |       | 1,557              |       | 110        |       | 182                 |       | 1,849     |       |
| OPSM Group                   |       |               |       |       |       | 549                 |       | 549       |       |
| Cole National Group  Optical |       | 1,724              |       |       |       |                |       | 1,724     |       |
| Things Remembered            |       | 664                |       |       |       |                |       | 664       |       |
| Franchised Locations         |       | 462                |       |       |       | 29                  |       | 491       |       |
|                         |       | 5,300              |       | 110        |       | 760                 |       | 6,170     |       |

 

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*Asia-Pacificfor our Retail Division consists of Australia, New Zealand, Malaysia, Singaporeand Hong Kong.

LensCraftersand Cole have retail distribution operations located throughout the UnitedStates, Canada and Puerto Rico, while OPSM operates retail outlets located inAustralia, New Zealand, Hong Kong, Singapore and Malaysia. Sunglass Hut is aleading retailer of sunglasses worldwide based on sales.

Ournet sales consist of direct sales of finished products that we manufacture toopticians and other independent retailers through our wholesale distributionchannel and sales directly to consumers through our Retail Division retailchannel. Our average retail unit selling price is significantly higher than ouraverage wholesale unit selling price, as our retail sales typically includelenses as well as frames.

Demandfor our products, particularly our higher-end designer lines, is largelydependent on the discretionary spending power of the consumers in the marketsin which we operate. See Item 3—“Key Information—Risk Factors—If we do notcorrectly predict future economic conditions and changes in consumerpreferences, our sales of premium products and profitability will suffer.” Wehave also historically experienced sales volume fluctuations by quarter due toseasonality associated with the sale of sunglasses. As a result, our net salesare typically higher in the second quarter and lower in the first quarter.

Ouracquisitions have affected our results of operations from year to year. Ourresults of operations for the year ended December 31, 2004 are notcomparable to the results of operations for the year ended December 31,2003 and prior years due to the inclusion of the operations of Cole beginningin October 2004.

As aresult of our acquisition of LensCrafters in May 1995 and the subsequentexpansion of our business activities in the United States through theacquisition of the Ray-Ban business, Sunglass Hut and Cole, our results of operations,which are reported in Euro, have been rendered more susceptible to currencyrate fluctuations between the Euro and the U.S. dollar. The U.S. dollar/Euroexchange rate has fluctuated from an average exchange rate of Euro 1.00 =U.S. $1.1307 in 2003 to Euro 1.00 = U.S. $1.2435 in 2004 to Euro1.00 = U.S. $1.2444 in 2005. Additionally, with the acquisition of OPSM,our results of operations have been rendered susceptible to currencyfluctuations between the Euro and the A$. Although we engage in certain foreigncurrency hedging activities to mitigate the impact of these fluctuations, theyhave impacted our reported revenues and expenses during the periods discussedherein. See Item 11—“Quantitative and Qualitative Disclosures About MarketRisk—Foreign Exchange Sensitivity” and Item 3—“Key Information—RiskFactors—If the Euro strengthens relative to certain other currencies, ourprofitability as a consolidated group will suffer.”

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On November 26,2004, we, through our wholly-owned subsidiary, Luxottica South Pacific Pty,Ltd., made an offer for all the remaining outstanding shares of OPSM  that we did not already own. The offer wasfor A$4.35 per share including a fully franked dividend of A$0.15 per sharethat was declared by OPSM (resulting in a net price of A$4.20 per share). On January 4,2005, we launched an off-market takeover offer for all the Australian StockExchange—listed OPSM shares we did not already own. At the close of the offeron February 7, 2005, we held 98.5 percent of OPSM  shares, which is in excess of the compulsoryacquisition threshold. On February 8, 2005, we announced the start of thecompulsory acquisition process for all remaining shares in OPSM not alreadyowned by us. On February 15, 2005, the Australian Stock Exchange suspendedtrading in OPSM shares and on February 18, 2005, it delisted OPSM sharesfrom the Australian Stock Exchange. The compulsory acquisition process wascompleted on March 24, 2005.

On October 4, 2004,we acquired all of the issued and outstanding shares of Cole through a merger. Theaggregate consideration paid by us to former shareholders, option holders andholders of restricted stock of Cole was $500.6 million. In connection with themerger, we assumed outstanding indebtedness with an approximate aggregate fairvalue of the principal balance of  $310.9million. We believe that our combination with Cole has:

·                  strengthenedour retail operations in the United States;

·                  strengthenedour managed vision care business by increasing the number of people for whom we  provide managed vision care benefits as wellas by adding well established retailers to its existing family of retailers;and

·                  providedus with the opportunity to increase our sales of frames manufactured by theCompany in Cole retail stores.

We have substantially completed our strategicintegration plan with respect to Cole. Since the consummation of theacquisition, we have consolidated Cole’s headquarters with our Luxottica Retailheadquarters in Mason, Ohio, and combined various general and administrativefunctions.

The integration of ourcorporate, financial and human resources systems is now complete.

Our integration plans also include combining Luxottica Retail’s andCole’s operating systems. We have integrated the inventory management andassortment planning systems. We plan to integrate the distribution centers bythe end of 2006.

In October 2005, weintegrated our Managed Vision Care system with Cole’s, resulting in a singlebrand (EyeMed) going forward. We have already begun to sell the new combinedproduct**.**

We expect that our NorthAmerican retail operating margin levels will return to 2004 pre-acquisitionoperating margin levels by the end of 2006.

Our integration with Colehas resulted in synergies in the following areas:

·                  generaland administrative; and

·                  saleof the Company’s manufactured products.

Wehave substantially executed our integration plans and have begun to realize theanticipated cost savings.

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**CriticalAccounting Policies**

Thepreparation of financial statements in conformity with U.S. GAAP requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesas of the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Our estimates are based on historicalexperience and currently available information. Our significant accountingpolicies are discussed in Note 1 to our Consolidated Financial Statementsincluded in Item 18 of this annual report. The following is a discussionof what management believes are our most critical accounting policies:

***RevenueRecognition***

Revenuesinclude sales of merchandise (both wholesale and retail), insurance and administrativefees associated with the Company’s managed vision care business, eye exams andrelated professional services and sales of merchandise to franchisees, alongwith other revenues from franchisees such as royalties based on sales andinitial franchise fee revenues.

Insome countries, the wholesale and retail divisions offer the customer the rightto return products for a limited period of time after the sale. However, suchright of return does not impact the timing of revenue recognition as all conditionsof SFAS No. 48, “Revenue Recognition When Right of Return Exists,” aresatisfied at the date of sale. We have estimated and accrued for  the amounts to be returned in the subsequentperiod. This estimate is based on our right of return policies and practicesalong with historical data, sales trends and the timing of returns from theoriginal transaction date when applicable. Changes to these policies andpractices or a change in the trend of returns could lead to actual returnsbeing different from the amounts estimated and accrued.

# Also included in Retail Division revenues are managedvision care revenues consisting of (i) insurance revenues which arerecognized when earned over the terms of the respective contractualrelationships and (ii) administrative services revenues which arerecognized when services are provided during the contract period. Accruals areestablished for amounts due under these relationships determined to beuncollectible. Our insurance contracts require us to estimate the potential costs and exposures over the lifeof the agreement such that the amount charged to the customers will cover thesecosts. To mitigate the exposure risk, these contracts are usually short-term innature. However, if we do not accurately estimate the future exposure and risksassociated with these contracts, we may suffer losses as we would not be ableto cover our costs incurred with revenues from the customer.

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***IncomeTaxes***

Incometaxes are recorded in accordance with SFAS No. 109, “Accounting for IncomeTaxes”, which requires recognition of deferred tax assets and liabilities forthe expected future tax consequences of events that have been included in ourconsolidated financial statements or tax returns. Under this method, deferredtax liabilities and assets are determined based on the difference between theconsolidated financial statement and tax basis of assets and liabilities usingenacted tax rates in effect for the year in which the differences are expectedto reverse. A valuation allowance is recorded for deferred tax assets if it isdetermined that it is more likely than not that the asset will not be realized.These estimated tax rates and the deferred tax assets, including valuationallowances placed upon those deferred tax assets, and liabilities recorded arebased on information available at the time of calculation. This information issubject to change due to subsequent tax audits performed by different taxingjurisdictions and changes in corporate structure not contemplated at the time ofcalculation, as well as various other factors.

***Inventories***

Ourmanufactured inventories were approximately 65.0 percent and 75.4 percentof total frame inventory for 2004 and 2005, respectively. All inventories at December 31,2005 were valued using the lower of cost (as determined under aweighted-average method which approximates the first in, first out method) ormarket. At December 31, 2004, certain retail inventory not manufactured byus was valued using the last in, first out method (“LIFO”). However, in orderto reduce the inventory methods among different companies in the retail groupand to simplify the process of valuing inventory, we changed the method ofacccounting for inventory valuation to the first in, first out method. Thischange had an immaterial effect on our consolidated financial statements. Inventoriesare recorded net of allowances for possible losses among other reserves. Thesereserves are calculated using various factors including quantity on hand, salesvolume, historical shrink results, changes in market conditions and currenttrends. In addition, production schedules are made on similar factors which, ifnot estimated correctly, could lead to the production of potentially obsoleteinventory. As such, actual results could differ significantly from theestimated amounts.

***Goodwilland Other Intangible Assets and Impairment of Long-Lived Assets***

Inconnection with various acquisitions, we have recorded as intangible assetscertain goodwill and trade names. At December 31, 2005, the aggregatecarrying value of intangibles, including goodwill, was approximately Euro 2.7billion or approximately 54 percent of total assets.

EffectiveJanuary 1, 2002, we adopted SFAS No. 142, “Goodwill and OtherIntangible Assets” (“SFAS No. 142”). Under SFAS No. 142, goodwill andintangible assets deemed to have an indefinite life are no longer amortized inthe same manner as under the previous standards, but rather are tested forimpairment annually and, under certain circumstances, between annual periods. Animpairment charge will be recorded if the fair value of goodwill and otherintangible assets is less than the carrying value. The calculation of fairvalue may be based on, among other items, estimated future cash flows if quotedmarket prices in active markets are not available. We test our goodwill forimpairment annually as of December 31 of each year and any other time acondition arises that may cause us to believe that an impairment has occurred. Sinceimpairment tests use estimates of the impact of future events, actual resultsmay differ and we may be required to record an impairment in future years.

Intangiblessubject to amortization based on a finite useful life continue to be amortizedon a straight-line basis over their useful lives. Our long-lived assets, otherthan goodwill, are tested for impairment whenever events or changes incircumstances indicate that the net carrying amount may not be recoverable.When such events occur, we measure impairment by comparing the carrying valueof the long-lived asset to the estimated undiscounted future cash flowsexpected to result from the use of the assets and their eventual disposition.If the sum of the expected undiscounted future cash flows were less than thecarrying amount of the assets, we would recognize an impairment loss, ifdetermined to be necessary. Actual results may differ from our currentestimates.

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**RecentAccounting Pronouncements**

In November 2004,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151,Inventory Costs — an amendment of ARB No. 43, Chapter 4, to clarify thatabnormal amounts of idle facility expense, freight, handling costs, and wastedmaterial should be recognized as period costs. In addition, this statementrequires that the allocation of fixed production costs of conversion be basedon the normal capacity of the production facilities. The adoption of suchstandard is required for fiscal years beginning after June 15, 2005. Webelieve that the adoption will not have a material effect on our consolidated financialstatements.

In December 2004,the FASB issued SFAS No. 123-R (revised 2004), Share-Based Payment (“SFAS123-R”) which replaces the existing SFAS 123 and supersedes APB 25. SFAS123-R requires companies to measure and record compensation expense forstock options and other share-based payment methods based on the instruments’fair value. SFAS 123-R is effective for us on January 1, 2006. Wehave evaluated the impact of the adoption of SFAS No. 123-R anddetermined that the additional compensation cost which would have been recordedin fiscal 2005 is not material.

In December 2004,the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets — anamendment of APB Opinion No. 29 (“SFAS 153”). SFAS 153 amends APB No. 29,Accounting for Nonmonetary Transactions, to eliminate the exception fornonmonetary exchanges of similar productive assets and replaces it with ageneral exception for exchanges of nonmonetary assets that do not havecommercial substance. A nonmonetary exchange has commercial substance if thefuture cash flows of the entity are expected to change significantly as aresult of the exchange. SFAS 153 is effective for reporting periods beginningafter June 15, 2005. The adoption of SFAS 153 is not expected to have amaterial effect on our consolidated financial statements.

In March 2005, the FASB issued Interpretation No. 47,Accounting for Conditional Asset Retirement Obligations—an Interpretation ofFASB Statement No. 143 (“FIN 47”), which clarifies the term “conditionalasset retirement obligation” as used in SFAS 143 and requires the recognitionof a liability for a “conditional asset retirement obligation” if the fairvalue of the liability can be reasonably estimated. FIN 47 is effective forreporting periods beginning after December 15, 2005. The adoption of FIN47 is not expected to have a material effect on our consolidated financialstatements.

In May 2005, the FASB issued SFAS No. 154,Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20and FASB Statement No. 3 (“SFAS 154”). SFAS 154 applies to all voluntarychanges in accounting principles and changes required by accountingpronouncements in instances where the pronouncement does not include specifictransition provisions. This Statement replaces APB No. 20, AccountingChanges, and SFAS No. 3, Reporting Accounting Changes in Interim FinancialStatements. SFAS 154 requires retroactive application to prior periods’financial statements of changes in accounting principles unless it isimpracticable to do so. SFAS 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 15,2005.

In June 2005, the Emerging Issues Task Force (“EITF”)reached a consensus on Issue No. 05-6, Determining the AmortizationPeriod for Leasehold Improvements (“EITF 05-6”), which requires thatleasehold improvements acquired in a business combination or purchasedsignificantly after, and not contemplated at the inception of the lease beamortized over the lesser of the useful life of the asset or a term thatincludes lease renewals that are reasonably assured. EITF 05-6 isapplicable for leasehold improvements acquired or purchased beginning after June 29,2005 and will be followed in future periods if and when necessary.

In October 2005, the FASB issued Staff Position No. 13-1,Accounting for Rental Costs Incurred During a Construction Period (“FSP 13-1”),that concluded rental costs associated with ground and building operatingleases that are incurred during the construction period should be recognized asrental expense in such period. This guidance is effective for reporting periodsbeginning after December 15, 2005. The adoption of FSP 13-1 is notexpected to have a material effect on our consolidated financial statements andwill be followed in future periods if and when necessary.

In February 2006,the FASB issued SFAS No. 155, Accounting for Certain Hybrid FinancialInstruments—an Amendment of FASB Statements No. 133 and 140 (“SFAS 155”),which amends SFAS 133, and SFAS 140, Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities. The statement:

·                  Permitsfair value remeasurement for any hybrid financial instrument that contains anembedded derivative that otherwise would require bifurcation;

·                  Clarifieswhich interest-only strips and principal-only strips are not subject to therequirements of Statement No. 133;

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·                  Establishesa requirement to evaluate interests in securitized financial assets to identifyinterests that are freestanding derivatives or that are hybrid financialinstruments that contain an embedded derivative requiring bifurcation;

·                  Clarifiesthat concentrations of credit risk in the form of subordination are notembedded derivatives; and

·                  AmendsStatement No. 140 to eliminate the prohibition on a qualifyingspecial-purpose entity from holding a derivative financial instrument thatpertains to a beneficial interest other than another derivative financialinstrument.

SFAS 155 is effective for all financial instrumentsacquired or issued after the beginning of an entity’s first fiscal year thatbegins after September 15, 2006. The adoption of SFAS 155 is notexpected to have a material effect on our consolidated financial statements.

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**Resultsof Operations**

Thefollowing table sets forth, for the periods indicated, the percentage of netsales represented by certain items included in our statements of consolidatedincome:

 
|                                                            | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                 | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| Net Sales                                                  |       | 100.0                                      | %          | 100.0 | % | 100.0 | % |
| Cost of Sales                                              |       | 31.7                                       |       | 32.0 |   | 31.6 |   |
| Gross Profit                                               |       | 68.3                                       |       | 68.0 |   | 68.4 |   |
| Operating Expenses:                                        |       |                                       |       |   |   |   |   |
| Selling and  Advertising                                   |       | 43.3                                       |       | 42.3 |   | 43.7 |   |
| General and  Administrative                                |       | 9.9                                        |       | 10.6 |   | 10.9 |   |
| Total                                                      |       | 53.2                                       |       | 52.9 |   | 54.6 |   |
| Income From Operations                                     |       | 15.1                                       |       | 15.1 |   | 13.8 |   |
| Other Income  (Expense)—Net                           |       | (1.5                                       | )          | (1.1 | ) | (1.0 | ) |
| Provision For Income  Taxes                                |       | (4.1                                       | )          | (5.0 | ) | (4.7 | ) |
| Minority Interests in  Income of Consolidated Subsidiaries |       | (0.2                                       | )          | (0.3 | ) | (0.2 | ) |
| Net Income                                                 |       | 9.4                                        |       | 8.8 |   | 7.8 |   |

 

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Foradditional financial information by operating segment and geographic region,see Note 12 to our Consolidated Financial Statements included inItem 18 of this annual report.

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**Comparisonof the year ended December 31, 2005 to the year ended December 31,2004**

*Net Sales.* Netsales increased 34.3 percent to Euro 4,370.7 million during 2005 as compared toEuro 3,255.3 million for 2004.Net sales in the retail segment, through LensCrafters,Sunglass Hut, OPSM and Cole, increased by 40.5 percent to Euro 3,298.2 millionfor 2005 from Euro 2,346.7 million for 2004. This increase was primarily due tothe inclusion of Cole sales from the date of acquisition on October 4,2004, which amounted to Euro 998.0 million for the full fiscal year 2005compared to Euro 240.5 million for the three-month period following theacquisition in 2004.

Netsales to third parties in the manufacturing and wholesale segment increased by18.3 percent to Euro 1,075.0 million for 2005 as compared to Euro 908.6 millionin 2004. This increase was mainly attributable to increased sales of ourRay-Ban brand, as well as Prada, Versace, Bulgari and Dolce & Gabbana(which we began distributing in October 2005). Wholesale sales were  strong in all geographic areas.

On ageographic basis net of intercompany transactions, operations in North Americaresulted in net sales of Euro 3,048.3 million during 2005, comprising 69.7percent of total net sales, an increase of Euro 964.8 million from 2004. Thisincrease was primarily due to the inclusion of Cole sales from the date ofacquisition on October 4, 2004, which amounted to Euro 998.0 million forthe full fiscal year 2005 compared to Euro 240.5 million for the three-monthperiod following the acquisition in 2004. This sales increase was mostly drivenby our focus on selling premium frames and products at both our Sunglass Hutand LensCrafters North American retail outlets. This focus included theremodeling, opening or relocation of over 250 Sunglass Hut outlets. Net salesfor operations in “Asia-Pacific,” which consists of Australia, New Zealand,Singapore, Malaysia, Hong Kong, Thailand, China, Japan and Taiwan, were Euro461.2 million during 2005, comprising 10.6 percent of total net sales, anincrease of Euro 26.2 million as compared to 2004. Net sales for the rest ofthe world accounted for the remaining Euro 861.2 million of net sales during2005, which represented a 16.9 percent increase as compared to 2004.

During2005, net sales in the retail segment accounted for approximately 75.4 percentof total net sales, as compared to approximately 72.1 percent of total netsales in 2004 due to the retail acquisition described above.

*Cost of Sales.*Costof sales increased by 32.7 percent to Euro 1,380.7 million in 2005 from Euro1,040.7 million in 2004. Cost of sales in the retail segment increased by Euro315.4 million, which increase is primarily attributable to the inclusion ofCole in our results of operations for three months in 2004 compared to a full12 months in 2005. Cost of sales in the manufacturing and wholesale segmentincreased by Euro 68.6 million due to the increase in net sales. As apercentage of net sales, cost of sales decreased to 31.6 percent from 32.0percent. This was mostly attributable to the placement of more Luxotticamanufactured products in our newly acquired Cole retail locations.Manufacturing labor costs increased by 17.3 percent to Euro 301.4 million in2005 from Euro 256.9 million in 2004. This increase is attributable to theincrease in net sales. As a percentage of net sales, cost of labor decreased to6.9 percent in 2005 from 7.9 percent in 2004, due to higher productivity in thewholesale division, as well as due to the inclusion of Cole results, since Cole’scost of labor as a percentage of sales is lower than that of the rest of theGroup. For 2005, the average number of frames produced daily in our facilities(including Tristar, our Chinese factory) was approximately 125,000, which wasin line with 2004 production.

*Gross Profit.*For the reasons outlined above, gross profit increased by 35.0 percent to Euro2,990.1 million in 2005, from Euro 2,214.6 million in 2004. As a percentage ofnet sales, gross profit increased to 68.4 percent in 2005 from 68.0 percent in2004.

*Operating Expenses.*Total operating expenses increased by 38.7 percent to Euro 2,387.5 million in2005 from Euro 1,721.8 million in 2004. As a percentage of net sales, operatingexpenses increased to 54.6 percent in 2005 from 52.9 percent in 2004.

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Sellingand advertising expenses, including royalty expenses, increased by 38.7 percentto Euro 1,909.7 million during 2005 from Euro 1,376.5 million in 2004. Euro399.3 million of this increase is attributable to the inclusion of Cole in ourresults of operations for the full fiscal year in 2005 compared to only thefourth quarter of 2004 (from the date of acquisition). As a percentage of netsales, selling and advertising expenses increased to 43.7 percent in 2005 from42.3 percent in 2004. This increase as a percentage of sales is primarilyattributable to the consolidation of Cole’s results in our results ofoperations.

Generaland administrative expenses, including intangible asset amortization, increasedby 38.4 percent to Euro 477.8 million in 2005 from Euro 345.2 million in 2004.Euro 90.1 million of this increase is attributable to the inclusion of Cole inour results of operations for the full fiscal year in 2005 compared to only thefourth quarter of 2004 (from the date of acquisition). As a percentage of netsales, general and administrative expenses increased to 10.9 percent in 2005from 10.6 percent in 2004. This increase was primarily due to the consolidationof Cole results in our results of operations. As we continue the integration ofCole, we expect its operating expenses as a percentage of sales to decrease dueto the expected higher efficiency in the fixed cost structure.

*Income from Operations.*For the reasons outlined above, income from operations for 2005 increased by22.3 percent to Euro 602.6 million from Euro 492.8 million in 2004. As apercentage of net sales, income from operations decreased to 13.8 percent in2005 compared to 15.1 percent for 2004.

Operatingmargin, calculated as income from operations divided by net sales, in themanufacturing and wholesale distribution segment increased to 23.2 percent in2005 from 21.3 percent in 2004. This increase in operating margin isattributable to higher efficiency in our fixed cost structure driven byincreases in net sales and lower sales commissions, partially offset by higheradvertising expenses.

Operatingmargin in the retail segment decreased to 11.5 percent in 2005 from 13.2percent in 2004, due to the inclusion of the results for Cole, whose operatingmargin is lower than that of our other retail chains. However, we believe thatwhen the final restructuring of the North American Retail Division is completedby the end of 2006, we will return to our historical operating margins.

*Other Income (Expense)-Net.*Other income (expense)-net was a net expense of Euro 45.0 million in 2005 ascompared to a net expense of Euro 35.7 million in 2004. This increase in otherincome (expense)-net is mainly attributable to an increase in interest expenseof Euro 11.2 million due to the debt incurred for the acquisition of Cole, aswell as rising interest rates. We expect an increase in interest expense for2006 due to the rising interest rate environment.

*Net Income.*Incomebefore taxes increased by 22.0 percent to Euro 557.6 million in 2005 from Euro457.2 million in 2004. As a percentage of net sales, income before taxesdecreased to 12.8 percent in 2005 from 14.0 percent in 2004, mainly due to theintegration of the Cole operations. Minority interest increased to Euro (9.3)million in 2005 from Euro (8.6) million in 2004. Our effective tax rate was37.0 percent in 2005, while it was 35.4 percent in 2004. Net income increasedby 19.3 percent to Euro 342.3 million in 2005 from Euro 286.9 million in 2004.Net income as a percentage of net sales decreased to 7.8 percent in 2005 from8.8 percent in 2004.

Basicearnings per share for 2005 were Euro 0.76, increasing from Euro 0.64 for 2004.Diluted earnings per share for 2005 were Euro 0.76, increasing from Euro 0.64for 2004.

***Non-GAAPFinancial Measures***

We use certainmeasures of financial performance that exclude the impact of fluctuations incurrency exchange rates in the translation of operating results into Euro, andinclude the results of operations of Cole for the full year 2004. We believethat these adjusted financial measures provide useful information to bothmanagement and investors by allowing a comparison of operating performance on aconsistent basis. In addition, since we have historically reported suchadjusted financial measures to the investment community, we believe that theirinclusion provides consistency in our financial reporting. Further, theseadjusted financial measures are one of the primary indicators management usesfor planning and forecasting in future periods. Operating measures that assumeconstant exchange rates between 2005 and 2004 are calculated using, for eachcurrency, the average exchange rate for the year ended December 31, 2004.

Operating measuresthat exclude the impact of fluctuation in currency exchange rates are notmeasures of performance under U.S. GAAP. These non-GAAP measures are not meantto be considered in isolation or as a substitute for results prepared inaccordance with U.S. GAAP. In addition, our method of calculating operatingperformance to exclude the

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impact of changes inexchange rates may differ from methods used by other companies. See the tablebelow for a reconciliation of the operating measures excluding the impact offluctuations in currency exchange rates to their most directly comparable U.S.GAAP financial measures. The adjusted financial measures should be used as asupplement to results reported under U.S. GAAP to assist the reader in betterunderstanding our operational performance.

 
| **(in millions of Euro)** | ** ** | ** ** | ** ** | **2004  U.S. GAAP  results** | ** ** | **2005  U.S. GAAP  results** | ** ** | **Adjustment  for constant  exchange rates** | ** ** | **2005  adjusted results** | ** ** |
|------------------------------------------|------------|------------|------------|-----------------------------------|------------|-----------------------------------|------------|--------------------------------------------------------|------------|---------------------------------|------------|
| Consolidated net  sales                  |       | 3,255.3    |       | 4,370.7                           |       | (16.9                             | )          | 4,353.8                                                |       |
| Intercompany  sales                      |       | (186.2     | )          | (237.8                            | )          | 0.9                               |       | (236.9                                                 | )          |
| Manufacturing  and wholesale net sales   |       | 1,094.8    |       | 1,310.3                           |       | (7.5                              | )          | 1,302.8                                                |       |
| Retail net sales                         |       | 2,346.7    |       | 3,298.2                           |       | (10.3                             | )          | 3,287.9                                                |       |

 

Wehave included the following table of consolidated adjusted sales and operatingincome for 2004. We believe that the adjusted amounts may be of assistance incomparing our operating performance between 2004 and 2005. However, adjustedfinancial information should not be viewed as a substitute for measures ofperformance calculated in accordance with U.S. GAAP. The consolidated adjustedamounts reflect the following adjustments:

1.               the inclusion in the adjusted amounts ofthe consolidated results of Cole for the full year 2004; and

2.               the elimination of wholesale sales toCole from Luxottica Group entities for the full year  2004.

This informationis being provided for comparison purposes only and does not purport to beindicative of the actual results that would have been achieved had the Coleacquisition been completed as of January 1, 2004.

The following table reflects the Company’sconsolidated net sales and income from operations for 2004 as reported and asadjusted:

 
| **(in millions of Euro)** | ** ** | ** ** | ** ** | **2004  U.S. GAAP  Results** | ** ** | **Adjustment  for Cole** | ** ** | **2004  adjusted results** | ** ** |
|------------------------------------------|------------|------------|------------|-----------------------------------|------------|-------------------------------|------------|---------------------------------|------------|
| Consolidated net  sales                  |       | 3,255.3    |       | 747.7                             |       | 4,003.0                       |       |
| Consolidated income  from operations     |       | 492.8      |       | (10.6                             | )          | 482.2                         |       |

 

The following table summarizes the combined effect onconsolidated net sales of exchange rates and the Cole acquisition, to allow acomparison of net sales  on a consistentbasis:

 
| ** **                               | ** ** | **Consolidated Net Sales** | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|
| **(in millions of Euro)** | ** ** | ** **                           | ** ** | **2004** | ** ** | **2005** | ** ** | **% change** | ** ** |
| U.S. GAAP results                        |       | 3,255.3                              |       | 4,370.7 |   | 34.3 | % |
| Exchange rate  effect                    |       |                                 |       | (16.9 | ) |   |   |
| Constant  exchange rate                  |       | 3,255.3                              |       | 4,353.8 |   | 33.7 | % |
| Cole results in  2004                    |       | 747.7                                |       |   |   |   |   |
| Consistent basis                         |       | 4,003.0                              |       | 4,353.8 |   | 8.8 | % |
|                                          |            |                                      |            |  |  |  |  |  |  |

 

The 8.8 percent increase in net sales on a consistentbasis in 2005 as compared to 2004, as adjusted, is mainly attributable to theadditional sales of our Ray-Ban product lines, as well as to the additionalsales of the Prada, Versace and Bulgari product lines and increased comp storesales (as previously defined) of our retail division.

The following table summarizes the effect onconsolidated income from operations of the Cole acquisition to allow acomparison of operating performance on a consistent basis:

 
| ** **                               | ** ** | **Consolidated Income from Operations** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------|------------|
| **(in millions of Euro)** | ** ** | ** **                                             | ** ** | **2004** | ** ** | **2005** | ** ** | **% change** | ** ** |
| U.S. GAAP  results                       |       | 492.8                                                  |       | 602.6 |   | 22.3 | % |
| % of net sales                           |       | 15.1                                                   | %          | 13.8 | % |   |   |
| Cole results in  2004                    |       | (10.6                                                  | )          |   |   |   |   |
| Consistent basis                         |       | 482.2                                                  |       | 602.6 |   | 25.0 | % |
|                                          |            |                                                        |            |  |  |  |  |  |  |

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| % of net sales |   | 12.0 | % | 13.8 | % |   |   |
|----------------|--------|------|---|------|---|--------|--------|

 

On a consolidatedadjusted basis, including Cole’s results for 2004, income from operations in2005 would have increased by 25.0 percent and operating margin would haveincreased to 13.8 percent from 12.0 percent as compared to 2004.

**Comparisonof the year ended December 31, 2004 to the year ended December 31,2003**

*Net Sales.* Netsales increased 14.1 percent to Euro 3,255.3 million during 2004 as compared toEuro 2,852.2 million for 2003.

Netsales in the retail segment, through LensCrafters, Sunglass Hut, OPSM and thenewly acquired Cole, increased by 15.7 percent to Euro 2,346.7 million for 2004from Euro 2,028.2 million for 2003. This increase was primarily due to theinclusion of Cole sales from the date of acquisition on October 4, 2004,which amounted to Euro 240.5 million, as well as the inclusion of OPSM salesfor an additional seven months in 2004, which amounted to Euro 172.5 million.In addition to such increases, retail sales in North America increased due to ahigher average sales price per customer transaction resulting from an increasein the sale of premium products, partially offset by the weakening of the U.S.dollar against the Euro. The effect of the weakening of the U.S. dollar on 2004retail sales in North America was approximately Euro 204.8 million. As the U.S.dollar continues to weaken in the period subsequent to the year ended December 31,2004 we will continue to suffer a negative effect on net sales.

Netsales to third parties in the manufacturing and wholesale segment increased by10.3 percent to Euro 908.6 million for 2004 as compared to Euro 824.0 millionin 2003. This increase was mainly attributable to increased sales of ourRay-Ban brand and the new Prada and Versace product lines, which sales beganafter the first quarter of 2003 and have almost completely offset the loss ofsales of Giorgio Armani licensed products due to the cancellation of thelicense agreement with Armani in 2003. Management believes that by 2005 the newlicenses will have more than offset the sales lost due to the cancellation ofthe Armani license agreement. We do not believe that the termination of thelicense agreement with Armani will have a material adverse effect on ourresults of operations for future periods. These increases were partially offsetby the weakening of the U.S. dollar which represents approximately 15% of thissegment’s net sales for fiscal 2004. The effect of the weakening of the U.S.dollar on wholesale and manufacturing sales to third parties in 2004 wasapproximately Euro 12.7 million.

On ageographic basis net of intercompany transactions, operations in North Americaresulted in net sales of Euro 2,083.5 million during 2004, comprising 64.0percent of total net sales, an increase of Euro 134.1 million from 2003. Thisincrease was primarily due to the inclusion of Cole sales from the date ofacquisition on October 4, 2004, which amounted to Euro 240.5 million,partially offset by the weakening of the U.S. dollar against the Euro. Netsales for operations in “Asia Pacific”, which consists of Australia, NewZealand, Singapore, Malaysia, Hong Kong, Thailand, China, Japan and Taiwan,were Euro 435.1 million during 2004, comprising 13.4 percent of total netsales, an increase of Euro 181.3 million as compared to 2003. This increase wasmainly attributable to the inclusion of OPSM sales for an additional sevenmonths in 2004. Net sales for the rest of the world accounted for the remainingEuro 736.7 million of net sales during 2004, which represented a 13.5 percentincrease as compared to 2003. The increase in the rest of the world is mostlyattributable to higher sales in the European and Latin American regions.

During2004, net sales in the retail segment accounted for approximately 72.1 percentof total net sales, as compared to approximately 71.1 percent of total netsales in 2003 due to the two retail acquisitions previously mentioned.

*Cost of Sales.*Costof sales increased by 15.2 percent to Euro 1,040.7 million in 2004 from Euro903.6 million in 2003. Cost of sales in the retail segment increased by Euro103.4 million, which increase is primarily attributable to the inclusion ofCole in our results of operations from the date of acquisition and to theinclusion of OPSM in our results of operations for an additional seven monthsin 2004. Cost of sales in the manufacturing and wholesale segment increased byEuro 32.5 million due to the increase in net sales. As a percentage of netsales, cost of sales increased to 32.0 percent from 31.7 percent. Manufacturinglabor costs increased by 6.6 percent to Euro 256.9 million in 2004 from Euro240.9 million in 2003. This increase is attributable to the increase in netsales. As a percentage of net sales, cost of labor decreased to 7.9 percent inthe year 2004 from 8.4 percent in 2003, due to the inclusion of Cole results,since Cole’s cost of labor as a percentage of sales is lower than the rest ofthe Group. For 2004, the average number of frames produced daily in ourfacilities (including Tristar, our Chinese factory) was approximately 123,000,which was in line with 2003 production.

*Gross Profit.*For the reasons outlined above, gross profit increased by 13.7 percent to Euro2,214.6 million in 2004, from Euro 1,948.6 million in 2003. As a percentage ofnet sales, gross profit decreased to 68.0 percent in 2004 from 68.3 percent in2003 for the reasons as previously discussed.

*Operating Expenses.*Total operating expenses increased by 13.5 percent to Euro 1,721.8 million in2004 from Euro 1,516.8 million in 2003. As a percentage of net sales, operatingexpenses decreased to 52.9 percent in 2004 from 53.2 percent in 2003.

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Sellingand advertising expenses, including royalty payments, increased by 11.4 percentto Euro 1,376.5 million during 2004 from Euro 1,235.8 million in 2003. Euro88.0 million of this increase is attributable to the inclusion of OPSM in ourresults of operations for the first seven months of 2004. Euro 110.2 million ofthis increase is attributable to the inclusion of Cole to our results ofoperations in the fourth quarter of 2004 (from the date of acquisition). Theseincreases were offset by the weakening of the U.S. dollar, which decreased U.S.selling and advertising expenses by Euro 97.9 million. As a percentage of netsales, selling and advertising expenses decreased to 42.3 percent in 2004 from43.3 percent in 2003. This decrease as a percentage of sales is primarilyattributable to the increase in sales in the North American retail divisionwithout a corresponding increase in these costs based on the fixed cost salesstructure of the retail operations.

Generaland administrative expenses, including intangible asset amortization, increasedby 22.8 percent to Euro 345.2 million in 2004 from Euro 281.0 million in 2003.Euro 28.4 million of this increase is attributable to the inclusion of OPSM andthe amortization of its trade names in our results of operations for the firstseven months of 2004, while Euro 24.9 million is attributable to the inclusionof Cole. This increase was offset by the weakening of the U.S. dollar, whichdecreased U.S. general and administrative expenses by Euro 17.6 million. As apercentage of net sales, general and administrative expenses increased to 10.6percent in 2004 from 9.8 percent in 2003. This increase was primarily due tothe consolidation of OPSM’s results in our results of operations. As wecontinue the integration of OPSM, we expect its operating expenses as apercentage of sales to decrease due to the expected higher efficiency in thefixed cost structure. In addition, the restructuring of the Cole operations isunderway and it is expected that the general and administrative costs of Colewill diminish during 2005.

*Income from Operations.*Income from operations for 2004 increased by 14.1 percent to Euro 492.8 millionfrom Euro 431.8 million in 2003. As a percentage of net sales, income fromoperations remained constant at 15.1 percent for both 2004 and 2003.

Operatingmargin, calculated as income from operations divided by net sales, in themanufacturing and wholesale distribution segment increased to 21.3 percent in2004 from 19.2 percent in 2003. This increase in operating margin isattributable to higher efficiency in our fixed cost structure driven byincreases in net sales.

Operatingmargin in the retail segment decreased to 13.2 percent in 2004 from 13.3percent in 2003. This is a result of the consolidation of Cole results, whoseoperating margin is lower than that of our other retail chains. However, webelieve that when the final restructuring of the North American Retail Divisionis completed, we will return to our historical operating margins by the end of2006.

*Other Income (Expense)-Net.*Other income (expense)-net was Euro 35.7 million in 2004 as compared to Euro42.0 million in 2003. This decrease in other income (expense)-net is mainlyattributable to an increase in other income-net of Euro 13.4 millionattributable to higher realized and unrealized foreign exchange gains oncertain transactions. With the acquisition of Cole, as discussed earlier, and atrend in rising interest rates, we expect a significant increase in interestexpense for 2005.

*Net Income.*Incomebefore taxes increased by 17.3 percent to Euro 457.2 million in 2004 from Euro389.8 million in 2003 due to our increase in sales, which includes Cole salesfor the last three months of 2004, while maintaining our gross profit marginsand keeping our operating expenses constant as a percentage of sales. As apercentage of net sales, income before taxes increased to 14.0 percent in 2004from 13.7 percent in 2003. Minority interest increased to Euro (8.6) million in2004 from Euro (5.1) million in 2003. With our previously announced acquisitionof the remaining shares of OPSM, we expect our minority interest to decrease infuture periods. Our effective tax rate was 35.4 percent in 2004, while it was30.1 percent in 2003. The effective tax rate is estimated to be between 37 to40 percent in 2005 as we ended our permanent benefits from subsidiaries’losses. Net income increased by 7.3 percent to Euro 286.9 million in 2004 fromEuro 267.3 million in 2003. Net income as a percentage of net sales decreasedto 8.8 percent in 2004 from 9.4 percent in 2003.

Basicearnings per share for 2004 were Euro 0.64, increasing from Euro 0.60 for 2003.Diluted earnings per share for 2004 were Euro 0.64, increasing from Euro 0.59for 2003.

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***Non-GAAPFinancial Measures***

We usecertain measures of financial performance that: (i) exclude the impact offluctuations in currency exchange rates in the translation of operating resultsinto Euro; (ii) include the results of operations of OPSM for the entireyear ended December 31, 2003; (iii) include the results of operationsof Cole for the three-month period ended December 31, 2003; and (iv) adjustfor the fact that the North American retail calendar in 2003 included 53 weekswhile fiscal 2004 was a 52-week year. We believe that these adjustedfinancial measures provide useful information to both management and investorsby allowing a comparison of operating performance on a consistent basis. Inaddition, since we have historically reported such adjusted financial measuresto the investment community, we believe that their inclusion providesconsistency in our financial reporting. Further, these adjusted financialmeasures are some of the primary indicators that management uses for planningand forecasting in future periods. Operating measures that assume constantexchange rates between 2004 and 2003 are calculated using, for each currency,the average exchange rate for the year ended December 31, 2003.

Operatingmeasures that exclude the impact of fluctuation in currency exchange rates arenot measures of performance under U.S. GAAP. These non-U.S. GAAP measures arenot meant to be considered in isolation or as a substitute for results preparedin accordance with U.S. GAAP. In addition, our method of calculating operatingperformance to exclude the impact of changes in exchange rates may differ frommethods used by other companies. See the table below for a reconciliation ofthe operating measures excluding the impact of fluctuations in currencyexchange rates to their most directly comparable U.S. GAAP financial measures.The adjusted financial measures should be used as a supplement to resultsreported under U.S. GAAP to assist the reader in better understanding ouroperational performance.

 

| (In millions of Euro)       | ** ** | ** ** | ** ** | **2003  U.S. GAAP  results** | ** ** | **2004  U.S. GAAP  results** | ** ** | **Adjustment  for constant  exchange  rates** | ** ** | **2004  adjusted  results** | ** ** |
|--------------------------------------------|------------|------------|------------|-----------------------------------|------------|-----------------------------------|------------|----------------------------------------------------|------------|-----------------------------|------------|
| **Consolidated  net sales**                |       | 2,852.2    |       | 3,255.3                           |       | 213.0                             |       | 3,468.3                                            |       |
| **Intercompany  sales**                    |       | (172.7     | )          | (186.2                            | )          | (14.3                             | )          | (200.5                                             | )          |
| **Manufacturing  and wholesale net sales** |       | 996.7      |       | 1,094.8                           |       | 33.1                              |       | 1,127.9                                            |       |
|                                       |       |       |       |                              |       |                              |       |                                               |       |
| **Retail net sales**                       |       | 2,028.2    |       | 2,346.7                           |       | 194.2                             |       | 2,540.9                                            |       |

 

We have included thefollowing table of consolidated adjusted sales and operating income for 2003.We believe that the adjusted amounts may be of assistance in comparing ouroperating performance between 2003 and 2004. However, adjusted financialinformation should not be viewed as a substitute for measures of performancecalculated in accordance with U.S. GAAP. The consolidated adjusted amountsreflect the following adjustments:

1.               the inclusion in the adjusted amounts ofthe consolidated results of OPSM for the seven-month period ended July 31,2003, prior to the acquisition;

2.               the elimination of wholesale sales toOPSM from Luxottica Group entities for the seven-month period ended July 31,2003;

3.               the inclusion in the adjusted amounts ofthe consolidated results of Cole for the last three months of 2003;

4.               the elimination of wholesale sales toCole from Luxottica Group entities for the last three months of 2003; and

5.               the elimination of the effect of the 53rd week on 2003.

Thisinformation is being provided for comparison purposes only and does not purportto be indicative of the actual results that would have been achieved had theOPSM acquisition been completed as of January 1, 2003 and the ColeNational acquisition been completed as of October 4, 2003.

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Thefollowing table reflects the Company’s consolidated net sales and income fromoperations for 2003 as reported and as adjusted:

 

| (In millions of Euro)     | ** ** | ** ** | ** ** | **2003 U.S.  GAAP results** | ** ** | **Adjustment  for OPSM  and Cole** | ** ** | **2003  adjusted  results** | ** ** |
|------------------------------------------|------------|------------|------------|---------------------------------------|------------|----------------------------------------------|------------|-----------------------------|------------|
| **Consolidated  net sales**              |       | 2,852.2    |       | 428.7                                 |       | 3,280.9                                      |       |
| **Consolidated income from  operations** |       | 431.8      |       | 15.2                                  |       | 447.0                                        |       |

 

Thefollowing table summarizes the combined effect on consolidated net sales ofexchange rates, the OPSM and Cole acquisitions and the elimination of theeffect of the 53rd week in 2003 to allow a comparison of netsales on a consistent basis:

 

|                                          | ** ** | **Consolidated Net Sales** | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|
| **(In millions of Euro)** | ** ** | ** **                           | ** ** | **2003** | ** ** | **2004** | ** ** | **% change** | ** ** |
| **U.S.  GAAP results**                   |       | 2,852.2                              |       | 3,255.3 |   | +14.1 | % |
| **Exchange  rate effect**                |       |                                 |       | 213.0 |   |   |   |
| **Constant  exchange rate**              |       | 2,852.2                              |       | 3,468.3 |   | +21.6 | % |
| **OPSM  and Cole results in 2003**       |       | 428.7                                |       |   |   |   |   |
| **w/o 53****rd week in 2003 (1)**   |       | (36.9                                | )          |   |   |   |   |
| **Consistent basis**                     |       | 3,244.0                              |       | 3,468.3 |   | +6.9 | % |
|                                          |            |                                      |            |  |  |  |  |  |  |

 

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(1)            U.S. $ 41.7 millionconverted in Euro at the fiscal year 2003 average exchange rate (calculatedusing the noon buying rates) of Euro 1.00=U.S. $1.1307.

Atconstant exchange rates between the periods, net sales would have increased by21.6 percent during 2004 as compared to 2003. The 6.9 percent increase in netsales on a consistent basis in 2004 as compared to 2003 is mainly attributableto the additional sales of our Ray-Ban brand and the new Prada and Versaceproduct lines, which sales began after the first quarter of 2003, and theincreased sales of our retail division, as previously discussed.

Thefollowing table summarizes the effect on consolidated income from operations ofthe OPSM acquisition, the Cole acquisition and the elimination of the effect ofthe 53rd week in 2003 to allow a comparison ofoperating performance on a consistent basis:

 

|                                          | ** ** | **Consolidated Income from Operations** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------|------------|
| **(In millions of Euro)** | ** ** | ** **                                             | ** ** | **2003** | ** ** | **2004** | ** ** | **% change** | ** ** |
| **U.S.  GAAP results**                   |       | 431.8                                                  |       | 492.8 |   | +14.1 | % |
| **% of  net sales**                      |       | 15.1                                                   | %          | 15.1 | % |   |   |
| **OPSM  and Cole results in 2003**       |       | 15.2                                                   |       |   |   |   |   |
| **w/o 53****rd week in 2003 (2)**   |       | (9.6                                                   | )          |   |   |   |   |
| **Consistent  basis**                    |       | 437.4                                                  |       | 492.8 |   | +12.7 | % |
| **% of net sales**                       |       | 13.5                                                   | %          | 14.2 | % |   |   |
|                                          |            |                                                        |            |  |  |  |  |  |  |

 

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(2)            U.S. $10.9 millionconverted at the fiscal year 2003 average exchange rate (calculated using thenoon buying rates) of Euro 1.00=U.S. $1.1307.

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On a consolidated adjusted basis, including OPSM’s andCole’s results for 2003 and eliminating the effect of the 53rd week in 2003, income from operations in 2004would have increased by 12.7 percent as compared to 2003. The 12.7 percentincrease is attributable to an increase in the U.S. retail business partiallyoffset by the weakening of the U.S. dollar, which was previously discussed.

**Taxes**

Oureffective tax rates for the years ended December 31, 2003, 2004 and 2005were approximately 30.1 percent, 35.4 percent and 37.0 percent,respectively. The 2003 and 2004 effective tax rates were less than thestatutory tax rate due to permanent differences between our income forfinancial reporting and tax purposes which reflect the net loss carryforwardcaused by the prior funding of subsidiary losses through capital contributionsthat are deductible for income tax purposes under Italian law, and thereduction in certain investments in subsidiaries. Such subsidiary losses wereprimarily attributable to the amortization of certain intangible assetsassociated with our acquisitions. This remaining net loss carryforward wascompletely utilized in 2004. For fiscal 2005 we received a net permanentbenefit caused by the Company complying with an Italian law that allows for thestep up in tax basis of certain intangible assets for which this benefit offsetthe aggregate effect of different rates in foreign jurisdictions.

 

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**Liquidityand Capital Resources**

***OurCash Flows***

*Operating Activities.* Our cashprovided by operating activities was Euro 623.5 million for 2005 as compared toEuro 528.7 million for 2004 and Euro 327.5 million for 2003. The Euro 94.8million increase in 2005 compared to 2004 is primarily attributable to anincrease in net income, as previously discussed, and an increase indepreciation and amortization for 2005 resulting from the additionaldepreciation and amortization of Cole including Euro 17.3 million relating tothe amortization of its intangible assets. The increase in cash provided byoperating activities of Euro 201.2 million from 2003 to 2004 is primarilyattributable an increase in net income, as previously discussed, and anincrease in depreciation and amortization for 2004 resulting from theadditional depreciation and amortization of the assets of OPSM, including Euro5.8 million relating to the amortization of its trade name, and theamortization and depreciation of the assets of Cole including Euro 4.3 millionrelating to the amortization of its intangible assets. Accounts receivable wasa use of cash in 2005 of Euro (33.3) million as compared to a use of cash in2004 of Euro 15.8 million. This increase in cash flows from accounts receivableis primarily due to the increase in sales and the corresponding increase in ourmanufacturing and wholesale segment outstanding receivable balances. Prepaidexpenses and other was a source of cash of Euro 21.1 million in 2004, ascompared to a use of cash in 2003 and 2005 of Euro 43.6 million and Euro 56.8million, respectively. This change was attributable to advance payments of Euro31.5 million made in 2003 and Euro 30.0 million made in 2005 by us to certainof our licensors and the timing of certain tax payments by foreignsubsidiaries. The amount of cash provided in 2004 by operating activities forinventory increased by Euro 20.5 million in 2005 compared to an increase ofEuro 27.0 million in 2004 compared to 2003. This change in cash flow frominventory is primarily due to an increase in the inventory turns. Accountspayable and accrued expenses were a net source of cash of Euro 38.2 million in2005 compared to a use of Euro 15.3 million in 2004 and a use of Euro 84.9million in 2003. These improvements in cash flows from accounts payable andaccrued expenses were caused by the timing of payments to certain vendors bythe manufacturing and wholesale segment and by the North American retaildivision as well as the settlement in 2003 of certain liabilities of businessesacquired. Income tax payable was a source of cash in 2005 of Euro 124.0 millionas compared to a use of cash in 2004 of Euro 0.8 million, mostly attributableto the adoption of the Italian tax law which allows for the step-up in taxbasis of certain intangible assets and requires the accrual of current taxes tobe paid in cash during fiscal 2006.

*Investing Activities.* Our cashused in investing activities was Euro 175.8 million in 2005. Cash used ininvesting activities consisted primarily of capital expenditures made topurchase fixed assets which included construction costs to expand our new NorthAmerican Retail headquarters in Mason, Ohio and the acquisition of theremaining minority stake in OPSM offset by the sale of our investment in PearleEurope. In 2004, our cash used in investing activities was Euro 480.5 millionprimarily attributable to the Cole National acquisition, for an aggregateamount, net of cash acquired and including direct acquisition-related expenses,of Euro 363.0 million. In 2003, our cash used in investing activities was Euro468.6 million, primarily due to the acquisitions of I.C. Optics, E.I.D. and82.57 percent of OPSM’s ordinary shares and all of OPSM’s options andperformance rights, for an aggregate amount of Euro 342.4 million. The Euro11.9 million increase is also attributable to an increase in fixed assetsrelating to the U.S. retail segment in 2004.

*Financing Activities.*Our cash provided by/(used in) financing activities for 2005, 2004 and 2003 wasEuro (358.3) million, Euro (82.6) million and Euro 304.7 million, respectively.Cash used in financing activities for 2005 consisted primarily of net long-termrepayments on maturing debt of approximately Euro 254.4 million and the paymentof the annual dividend of Euro 103.5 million. In 2004, our cash used infinancing activities consisted primarily of: (i) the net proceeds of Euro88.6 million from all the credit facilities and (ii) Euro 446.9 million of proceeds of Tranche B and Tranche C of the credit facility enteredinto in June 2004, used in connection with the acquisition of Coleincluding the repayment of Cole’s existing notes. We borrowed Euro 405.0million in June 2004 (consisting of the proceeds of Tranche A of thecredit facility entered into in June 2004) to repay Euro 400.0 million oflong-term debt. Additionally, we used cash provided by financing activities toreduce bank overdrafts and to pay Euro 94.1 million of dividends to ourshareholders. Cash provided by financing activities for 2003 consisted primarilyof: (i) the new Euro 200.0 million credit facility, the proceeds of whichwere used in connection with the acquisition of OPSM; (ii) the issuance inthe U.S. of $300.0 million of notes (Euro 257.5 million), the proceeds of whichwere partially used for the OPSM acquisition and to refinance U.S. $140 million(Euro 120.2 million) of long-term debt; and (iii) borrowing on bankoverdrafts to repay maturing long-term debt. These sources were offset by thepayment of Euro 95.4 million of dividends to our shareholders. Additionally, werepurchased treasury shares for Euro 45.4 million in 2003 and these repurchaseprograms expired during 2004 with no additional shares purchased during 2004.

Ourcapital expenditures were Euro 229.4 million for the year ended December 31,2005 and Euro 42.5 million for the three-month period ended March 31,2006. It is our expectation that 2006 annual capital expenditures will beapproximately Euro 200 million, in addition to investment for anyacquisitions. We will pay for these future capital expenditures with ourcurrent available borrowing capacity and available cash.

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***OurIndebtedness***

Ourdebt agreements contain certain covenants, including covenants that restrictour ability to incur additional indebtedness. We do not currently expect torequire any additional financing that would require us to obtain consents orwaivers of any existing restrictions on additional indebtedness set forth inour debt agreements.

TheCompany has relied primarily upon internally generated funds, trade credit andbank borrowings to finance its operations and expansion.

*BankOverdrafts*

Bank overdrafts represent negative cashbalances held in banks and amounts borrowed under various unsecured short-termlines of credit obtained by Luxottica Group S.p.A. and certain of oursubsidiaries through local financial institutions. These facilities are usuallyshort-term in nature or contain evergreen clauses with a cancellation noticeperiod. Certain subsidiaries’ agreements require a guarantee from LuxotticaGroup S.p.A. Interest rates on these lines vary based on the country ofborrowing among other factors. We use these short-term lines of credit tosatisfy our short-term cash needs.

*The U.S.$350 Million Credit Facility with UniCredito Italiano and the Convertible SwapStep-Up*

Torefinance previously issued Eurobonds, in June 2002, U.S. Holdings, a U.S.subsidiary, entered into a U.S. $350 million credit facility with a groupof four Italian banks led by UniCredito Italiano S.p.A. The term loan portionof the credit facility provided U.S. $200 million of borrowing andrequired equal quarterly principal installments beginning in March 2003.The revolving loan portion of the credit facility allowed for maximumborrowings of U.S. $150 million. Interest accrued under the creditfacility at LIBOR (as defined in the agreement) plus 0.5 percent and the creditfacility allowed U.S. Holdings to select interest periods of one, two or threemonths. The credit facility contained certain financial and operating covenants.The credit facility was guaranteed by Luxottica Group S.p.A. and matured in June 2005,and at such time we repaid in full all of the outstanding amounts under thiscredit facility.

In July 2002,U.S. Holdings entered into a Convertible Swap Step-Up (“2002 Swap”). Thebeginning and maximum notional amount of 2002 Swap was U.S. $275 million,which decreased by U.S. $20 million quarterly, beginning with the quartercommencing on March 17, 2003. The 2002 Swap was entered into to convertthe floating rate credit agreement referred to in the preceding paragraph to amixed position rate agreement by allowing U.S. Holdings to pay a fixed rate ofinterest if LIBOR remains under certain defined thresholds and for U.S.Holdings to receive an interest payment at the three-month LIBOR rate asdefined in the agreement. These amounts were settled net every three monthsuntil the final expiration of the 2002 Swap which occurred on June 17,2005. The 2002 Swap did not qualify for hedge accounting under SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities,” as amended,and, as such, was marked to market with the gains or losses from the change invalue reflected in current operations. These marked to market gains of Euro 635thousand and Euro 1,491 thousand are included in current operations in 2003 and2004, respectively, while in 2005 we recognized a loss of Euro 163 thousand incurrent operations.

*The Euro650 Million Credit Facility with Banca Intesa and the Intesa Swaps*

In December 2002,we entered into an unsecured credit facility with Banca Intesa S.p.A. Theunsecured credit facility provided borrowing availability of up to Euro 650million. The facility included a Euro 500 million term loan, which required aballoon payment of Euro 200 million in June 2004 and repayment of equalquarterly installments of principal of Euro 50 million subsequent to that date.The revolving portion provided borrowing availability of up to Euro 150 millionwhich could be  borrowed and repaid untilfinal maturity. Interest accrued on the both the term and revolving loan atEuribor as defined in the agreement plus 0.45 percent. The final maturity ofall outstanding principal amounts and interest was December 27, 2005 andat such time we repaid in full all of the outstanding amounts under this creditfacility.

In December 2002,we entered into two interest rate swap transactions (the “Intesa Swaps”)beginning with an aggregate maximum notional amount of Euro 250 million,which decreased by Euro 100 million on June 27, 2004 and by Euro25 million during each subsequent three-month period. These Intesa Swapsexpired on December 27, 2005. The Intesa Swaps were entered into as a cashflow hedge of a portion of the Banca Intesa Euro 650 million unsecuredcredit facility discussed above. The Intesa Swaps exchanged the floating ratebased on Euribor to a fixed rate of 2.985 percent.

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*The OPSMAcquisition and the Euro 200 Million Credit Facility with Banca Intesa andRelated Interest Rate Swaps*

In September 2003,we acquired 82.57 percent of the ordinary shares of OPSM and more than90 percent of performance rights and options of OPSM, which entitled us torequire the cancellation of all the performance rights and options stilloutstanding. The aggregate purchase price was AUD $442.7 million (Euro253.7 million), including acquisition-related expenses. The purchase pricewas paid for with the proceeds of a this credit facility with Banca IntesaS.p.A. of Euro 200 million, in addition to other short-term lines available.The credit facility includes a Euro 150 million term loan, which willrequire equal semiannual installments of principal repayments of Euro30 million starting September 30, 2006 until the final maturity date.Interest accrues on the term loan at Euribor (as defined in the agreement) plus0.55 percent (3.04 percent on December 31, 2005). The revolvingloan provides borrowing availability of up to Euro 50 million; amountsborrowed under the revolving portion can be borrowed and repaid until finalmaturity. At December 31, 2005, Euro 25 million had been drawn from therevolving portion. Interest accrues on the revolving loan at Euribor (asdefined in the agreement) plus 0.55 percent (2.76 percent on December 31,2005). The final maturity of the credit facility is September 30, 2008. Wecan select interest periods of one, two or three months. The credit facilitycontains certain financial and operating covenants. We were in compliance withthose covenants as of December 31, 2005.

In June 2005,the Company entered into four interest rate swap transactions with variousbanks with an aggregate initial notional amount of Euro 120 million which willdecrease by Euro 30 million every six months starting on March 30, 2007 (“IntesaOPSM Swaps”). These swaps will expire on September 30, 2008. The IntesaOPSM Swaps were entered into as a cash flow hedge on a portion of the BancaIntesa Euro 200 million unsecured credit facility discussed above. The IntesaOPSM Swaps exchange the floating rate of Euribor for an average fixed rate of2.38 percent per annum.

*The U.S.$300 Million Senior Unsecured Guaranteed Notes and the DB Swaps*

On September 3,2003, U.S. Holdings closed a private placement of U.S. $300 million (Euro238 million) of senior unsecured guaranteed notes (the “Notes”), issued inthree series (Series A, Series B and Series C). Interest on the Series ANotes accrues at 3.94 percent per annum and interest on Series B and Series CNotes accrues at 4.45 percent per annum. The Series A and Series BNotes mature on September 3, 2008 and the Series C Notes mature on September 3,2010. The Series A and Series C Notes require annual prepaymentsbeginning on September 3, 2006 through the applicable date of maturity.The Notes are guaranteed on a senior unsecured basis by Luxottica Group S.p.A.and Luxottica S.r.l., a wholly-owned subsidiary. The Notes can be prepaid atU.S. Holdings’ option under certain circumstances. The proceeds from the Noteswere used for the repayment of outstanding debt and for other working capitalneeds. The Notes contain certain financial and operating covenants. We were incompliance with those covenants as of December 31, 2005.

Inconnection with the issuance of the Notes, U.S. Holdings entered into threeinterest rate swap agreements with Deutsche Bank AG (the “DB Swap”). The threeseparate agreements’ notional amounts and interest payment dates coincide withthose of the Notes. The DB Swap exchanged the fixed rate of the Notes to afloating rate of the six-month LIBOR rate plus 0.6575 percent for the Series ANotes and to a floating rate of the six-month LIBOR rate plus 0.73 percentfor the Series B and Series C Notes. These swaps were treated as fairvalue hedges of the related debt and qualified for the shortcut method of hedgeaccounting (assuming no ineffectiveness in a hedge in an interest rate swap).Thus the interest income/expense on the swaps was recorded as an adjustment tothe interest expense on the debt effectively changing the debt from a fixedrate of interest to the swap rate. Due to the rising interest rate environment,we terminated all three agreements of the DB Swap in December 2005 for anaggregate amount paid to the bank of Euro 7.0 million ( U.S.$ 8.4 million),excluding interest.

*Amendedand Restated Euro 1,130 Million and U.S. $325 Million Credit Facility andRelated Interest Rate Swaps*

In March 2006,we amended and restated our credit facility with a group of banks to providefor loans in the aggregate principal of Euro 1,130 million and U.S. $325million. See Item 4—“Information on the Company—Business Overview—RecentDevelopments.” The  facility has amaturity date of five years from the date of the amendment,  or March 2011, and consists of threeTranches (Tranche A, Tranche B, Tranche C). Tranche A is a Euro 405 millionamortizing term loan requiring repayment of nine equal quarterly installmentsof principal of Euro 45 million beginning in June 2007, which is to beused for general corporate purposes, including the refinancing of existingLuxottica Group S.p.A. debt as it matures. Tranche B is a term loan of U.S,$325 million which was drawn upon on October 1, 2004 by U.S. Holdings tofinance the purchase price for the acquisition of Cole. Amounts borrowed underTranche B will mature in June 2009. Tranche C is a Revolving CreditFacility of Euro 725 million-equivalent multi-currency (€/U.S. $). Amountsborrowed under Tranche C may be repaid and reborrowed with all outstandingbalances maturing in March 2011. The Company can select interest periodsof one, two, three or six months with interest accruing on Euro-denominatedloans based on the corresponding Euribor rate and U.S. $ denominated loansbased on the corresponding LIBOR rate, both plus a margin between 0.20 percentand 0.40 percent, based on the “Net Debt/EBITDA” ratio, as defined in theagreement. The interest rate on December 31,

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2005 was 2.94percent for Tranche A, 4.56 percent for Tranche B and a weighted average rateof 4.49 percent on Tranche C. The credit facility contains certain financialand operating covenants. We were in compliance with those covenants as of December 31,2005. Under this credit facility, Euro 974.3 million was outstanding as of December 31,2005.

In June 2005, we entered into nine interest rate swap transactionswith various banks with an aggregate initial notional amount of Euro 405million which will decrease by Euro 45 million every three months starting on June 3,2007 (“Club Deal Swaps”). These swaps will expire on June 3, 2009. TheClub Deal Swaps were entered into as a cash flow hedge on Tranche A of thecredit facility discussed above. The Club Deal Swaps exchange the floating rateof Euribor for an average fixed rate of 2.40 percent per annum. The cash flowhedges are deemed to be highly effective and, as such, the change in the fairvalue of the swaps will be included on the balance sheets in othercomprehensive income (“OCI”). Any ineffectiveness and the amounts needed toproperly reflect interest expense will be amortized out of OCI and recorded inthe appropriate periods. As a result, approximately Euro 3.5 million is included in OCI as of December 31,2005. Based on current interest rates and market conditions, the estimatedaggregate amount to be recognized into earnings from OCI for these cash flowhedges in fiscal 2006 is approximately Euro 0.4 million, net of taxes.

*AustralianDollar 50 Million Credit Facility*

In August 2004,OPSM renegotiated the recently expired multicurrency (AUD $/ HK $) loanfacility with Westpac Banking Corporation. The credit facility has a maximumavailable line as of December 31, 2005 of AUD $50 million. For borrowingsdenominated in Australian Dollars, the interest accrues on the basis of BBR(Bank Bill Rate), and for borrowings denominated in Hong Kong Dollars the rateis based on HIBOR (HK Inter bank Rate) plus an overall 0.40 percent margin. At December 31,2005, the interest rates of BBR and HIBOR were 6.03 percent and 4.46 percent,respectively, and the facility was utilized for an amount of AUD 13.59 million.The final maturity of all outstanding principal amounts and interest is August 31,2006. OPSM has the option to choose weekly or monthly interest periods. Thecredit facility contains certain financial and operating covenants. We were incompliance with those covenants as of December 31, 2005.

*New Euro100 Million Credit Facility*

In December 2005,we entered into a new unsecured credit facility with Banco Popolare di Verona eNovara. The 18-month credit facility consists of a revolving loan thatprovides borrowing availability of up to Euro 100 million, and the amountsborrowed under the revolving portion can be borrowed and repaid until finalmaturity. At December 31, 2005, Euro 100 million had been drawn from therevolving portion. Interest accrues on the revolving loan at Euribor (asdefined in the agreement) plus 0.25 percent (2.73 percent on December 31,2005). The final maturity date of the credit facility is June 1, 2007. Wemay select interest periods of one, three or six months. Under this creditfacility, Euro 100 million was outstanding as of December 31, 2005.

***OurWorking Capital***

Setforth below is certain information regarding our Working Capital (total currentassets minus total current liabilities)

 

|                      | ** ** | **As of December 31,**    | ** ** |
|----------------------|------------|------------------------------------------|------------|
| ** **           | ** ** | **2003**                                 | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **           | ** ** | **(In millions of Euro)** | ** ** |
| Current Assets       |       | 1,267.1                                  |       | 1,447.3 |   | 1,481.7 |   |
| Current  Liabilities |       | (1,323.3                                 | )          | (1,316.8 | ) | (1,213.8 | )) |
| Working Capital      |       | (56.2                                    | )          | 130.6 |   | 267.9 |   |

 

Theincrease in working capital in 2004 is mainly attributable to the asset heldfor sale, Pearle Europe, acquired in connection with the acquisition of Cole inOctober 2004. See Note 4(d) to the Consolidated Financial Statementsfor further details. The continued increase in working capital in 2005 reflectsthe repayment of maturing debt and the refinancing of current debt maturitieswith long-term debt.

Webelieve that the financial resources available to us will be sufficient to meetour currently anticipated working capital and capital expenditure requirementsfor the next 12 months.

We donot believe that the relatively moderate rates of inflation which have beenexperienced in the geographic markets where we compete have had a significanteffect on our net sales or profitability. In the past, we have been able tooffset cost increases by increasing prices, although we can give no assurancethat we will be able to do so in the future.

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**Off-BalanceSheet Arrangements**

We have no materialoff-balance sheet arrangements that have or are reasonably likely to have acurrent or future effect on our financial condition, changes in financialcondition, revenue or expenses, results of operations, liquidity, capitalexpenditures or capital resources.

We use, from time totime, derivative financial instruments, principally interest rate and currencyswap agreements, as part of our risk management policy to reduce our exposure tomarket risks from changes in foreign exchange rates. Although we have not doneso in the past, we may enter into other derivative financial instruments whenwe assess that the risk can be hedged effectively.

**Contractual Obligations and Commercial Commitments**

We are party to numerouscontractual arrangements consisting of, among other things, royalty agreementswith designers, leases for retail store, plant, warehouse and officefacilities, as well as certain data processing and automotive equipment, and outstandingborrowings under credit agreements and facilities with financial institutionsto finance our operations. These contractual arrangements may contain minimumannual commitments. A more complete discussion of the obligations andcommitments is included in Notes 8 and 14 to our Consolidated FinancialStatements included in this annual report.

The following tablesummarizes the scheduled maturities of our long-term debt, minimum leasecommitments under noncancelable operating leases and minimum payments undernoncancelable royalty arrangements as of December 31, 2005. The table doesnot include pension liabilities. Our pension plans are discussed in Note 9to our Consolidated Financial Statements included in Item 18 of this annualreport.
| ** **                                                             | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **(in millions of Euro)  Contractual Obligations** | ** ** | ** **                                | ** ** | **1 Year** | ** ** | **1 to 3 Years** | ** ** | **3 to 5  Years** | ** ** | **After  5  Years** | ** ** | **Total** | ** ** |
| Long-Term Debt  and Current Maturities(1)                              |       | 111.3                                     |       | 740.0 |   | 679.6 |   | 0.5 |   | 1,531.4 |   |
| Interest  Payments(2)                                                  |       | 43.7                                      |       | 60.6 |   | 7.4 |   | 0.0 |   | 111.7 |   |
| Operating Leases                                                       |       | 209.9                                     |       | 310.9 |   | 183.7 |   | 186.2 |   | 890.7 |   |
| Minimum Royalty  Arrangements                                          |       | 47.7                                      |       | 88.9 |   | 81.9 |   | 153.3 |   | 371.8 |   |
| Total                                                                  |       | 412.6                                     |       | 1,200.4 |   | 952.6 |   | 340.0 |   | 2,905.6 |   |
|                                                                        |            |                                           |            |  |  |  |  |  |  |  |  |  |  |

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(1)            Asdescribed previously, our long-term debt has certain financial and operatingcovenants that may cause the acceleration of future maturities if we do notcomply with them. We were in compliance with these covenants as of December 31,2005. In addition, the above table does not take into account the March 2006amendment to a credit agreement as described above.

(2)           Theseamounts do not include interest payments due under our various revolving creditfacilities as the amounts to be borrowed in future years are uncertain at thistime. In addition, interest rates used to calculate the future interest due onour variable interest rate term loans were calculated based on the interestrate as of December 31, 2005 and assume that we make all scheduledprincipal payments as they mature.

At December 31,2005, we had available funds of approximately Euro 457.2 million under ourunused short-term lines of credit. Substantially all of these lines are forless than one year but they have been renewed annually in prior years. Inaddition, certain U.S. subsidiaries obtained various letters of credit frombanks outstanding of Euro 48.0 million as of December 31, 2005. Most ofthese letters of credit are used as security in risk management contracts orstore leases. Most contain annual evergreen clauses under which they areautomatically renewed unless the bank is notified of nonrenewal. There are nooutstanding letters of credit with an original maturity over one year as of December 31,2005. We do not have any other material commercial commitments.

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**ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES**

**Directorsand Senior Management**

TheBoard of Directors of Luxottica Group S.p.A. currently consists of 12 members.

Setforth below is certain information regarding the directors and seniormanagement of Luxottica Group S.p.A. as of December 31, 2005, except asotherwise specified:

 
| **Name**                   | ** ** | **Age(1)** | ** ** | **Officer or  Director  Since(2)** | ** ** | **Position(1)**                                   |
|----------------------------|------------|------------|------------|------------------------------------|------------|---------------------------------------------------|
| Leonardo Del  Vecchio      |       | 70         |       | 1961                               |       | Chairman of the Board of Directors                |
| Luigi  Francavilla         |       | 68         |       | 1968                               |       | Deputy Chairman                                   |
| Andrea Guerra              |       | 40         |       | 2004                               |       | Chief Executive Officer and Director              |
| Tancredi Bianchi           |       | 77         |       | 1990                               |       | Director                                          |
| Mario Cattaneo             |       | 75         |       | 2003                               |       | Director                                          |
| Enrico Cavatorta           |       | 44         |       | 1999/2003                          |       | Group Chief Financial Officer and Director        |
| Roberto Chemello           |       | 51         |       | 1979                               |       | Head of Group Operations and Director             |
| Claudio Del  Vecchio       |       | 48         |       | 1978                               |       | Director                                          |
| Sergio Erede               |       | 65         |       | 2004                               |       | Director                                          |
| Sabina Grossi              |       | 40         |       | 2003                               |       | Director                                          |
| Gianni Mion                |       | 60         |       | 2004                               |       | Director                                          |
| Lucio Rondelli             |       | 81         |       | 1990                               |       | Director                                          |
| Frank Baynham              |       | 52         |       | 1987                               |       | Executive Vice President—Stores, Retail N.A. |
| Chris Beer                 |       | 39         |       | 2003                               |       | Chief Operating Officer, Retail A.P.              |
| Luca Biondolillo           |       | 39         |       | 2004                               |       | Head of Group Communications                      |
| Michael Boxer              |       | 44         |       | 1993                               |       | Senior V.P. General Counsel N.A.                  |
| Kerry Bradley              |       | 49         |       | 1988                               |       | Chief Operating Officer of Retail N.A.            |
| Tom Coleman                |       | 57         |       | 1987                               |       | Executive V.P., Retail A.P.                       |
| Mildred Curtis             |       | 49         |       | 1988                               |       | Senior Vice President, Human Resources N.A.       |
| Fabio  D’Angelantonio |       | 36         |       | 2005                               |       | Head of Group Marketing                           |
| Jack Dennis                |       | 60         |       | 1982                               |       | C.F.O. and C.A.O. of Retail N.A.                  |
| Valerio Giacobbi           |       | 41         |       | 1991                               |       | E.V.P. Retail N. A.                               |
| Garland Gunter             |       | 55         |       | 1986                               |       | Chief Information Officer of Retail N.A.          |
| Giuseppe La  Boria         |       | 47         |       | 2001                               |       | Head of Wholesale Europe & South         |
| Mario Lugli                |       | 58         |       | 2005                               |       | Group General Counsel and Corporate Secretary     |
| Peter McClelland           |       | 37         |       | 2003                               |       | C.F.O. and C.A.O. of Retail A.P.                  |
| Seth McLaughlin            |       | 43         |       | 1994                               |       | S.V.P. Consumer Marketing of Retail N.A.          |
| Enrico Mistron             |       | 36         |       | 1995                               |       | Group Controller                                  |
| Antonio Miyakawa           |       | 39         |       | 1993                               |       | Head of Wholesale and Group Marketing             |
| Mario Pacifico             |       | 43         |       | 2003                               |       | Head of Group Internal Auditing                   |
| Nicola Pelà           |       | 43         |       | 2005                               |       | Head of Group Human Resources                     |
| Umberto Soccal             |       | 55         |       | 1988                               |       | Group Chief Information Technology Officer        |
| Marco Vendramini           |       | 35         |       | 1997                               |       | Group C.A.O.                                      |

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(1)                                  Exceptas otherwise specified, all ages and positions are as of December 31,2005.

(2)           Reflectsperiod of affiliation with Luxottica Group S.p.A. or any of our predecessorsand affiliates.

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Executiveofficers serve at the discretion of the Board of Directors. The independent andnon-executive directors are Messrs. Rondelli, Bianchi, Cattaneo and Mion. Mr. Eredeand Mrs. Grossi are also non-executive directors.

Pursuantto Italian law, we also maintain a Board of Statutory Auditors, elected at theshareholders’ meeting, composed of three experts in accounting matters who arerequired to have no other affiliation with Luxottica Group S.p.A. and who mustsatisfy certain professional and other standards. The Board of StatutoryAuditors is required to verify that we: (i) comply with applicable law andour bylaws; (ii) respect the principles of correct administration; (iii) maintainadequate organizational structure, internal controls and administrative andaccounting systems; and (iv) ensure that our accounting system representsthe facts in a fair and true manner. Although members of the Board of StatutoryAuditors are required to attend the meetings of the Board of Directors, theExecutive Committee and the shareholders, they do not vote on matters submittedto such meetings. Currently the members of the Board of Statutory Auditors areGiancarlo Tomasin, Chairman, Mario Medici and Walter Pison. A short biographyof each of our Directors and executive officers is set forth below:

**LeonardoDel Vecchio** is the founder of our operations and has beenChairman of the Board since the Group was formed in 1961. In 1986, the Presidentof the Republic of Italy conferred on Mr. Del Vecchio the honor ofCavaliere dell’Ordine al “Merito del Lavoro” (Knight of the Order for LaborMerit). In May 1995, he received an honorary degree in BusinessAdministration from the Venice Ca’ Foscari University. In 1999, he received aMaster “honoris causa” in International Business from MIB- Management School inTrieste, and in 2002, he received an honorary degree in Managerial Engineeringfrom the University of Udine. In March 2006, Mr. Del Vecchio receivedanother honorary degree in Materials Engineering from Politecnico of Milan.

**LuigiFrancavilla** joined the Group in 1968, has been DeputyChairman since 1981 and is Chairman of Luxottica S.r.l., our principaloperating subsidiary. From 1972 to 1977, Mr. Francavilla was GeneralManager of Luxottica S.r.l. and, from 1969 to 1971, he served as TechnicalGeneral Manager of Luxottica S.r.l. In April 2000, he received an honorarydegree in Business Administration from Constantinian University.

**AndreaGuerra** was appointed a Director and Chief Executive Officerof the Company on July 27, 2004. Prior to joining the Company, Mr. Guerrawas with Merloni Elettrodomestici since 1994, where from 2000, he was its ChiefExecutive Officer. Prior to being at Merloni, Mr. Guerra worked forMarriott Italia where he became Director of Marketing. Mr. Guerra is alsodirector of the new Parmalat S.p.A. and of Banca Nazionale del Lavoro S.p.A. Hereceived a degree in Business Administration from the “La Sapienza” Universityof Rome in 1989.

**TancrediBianchi** has been a Director since 1990 and is emeritusProfessor of Credit and Banking at the Bocconi University in Milan where he wasa professor from 1978 to 2003. In 1959, he qualified for University teachingand began teaching Banking Technique at the Venice University (“Ca’ Foscari”),as well as the Pisa and Rome (“La Sapienza”) Universities. He has been a memberof the Board of Directors of Montedison, Credito Bergamasco (where he wasExecutive Vice Chairman, Chief Executive Officer and Chairman from 1981 and1989), Credito Emiliano, Credito Romagnolo and Cassa di Risparmio di VeronaS.p.A. From 1982 until 2003, Mr. Bianchi was Chairman of the ItalianPrivate Banking Association, and from 1991 to 1998, he was Chairman of theItalian Banking Association, where he is now Honorary Chairman.

**MarioCattaneo** has been a Director of the Company since 2003. He isemeritus professor of Corporate Finance at the Catholic University of Milan. Hewas a director of Eni S.p.A. from 1998 until 2005 and of Unicredito from 1999until 2005 and Statutory Auditor of the Bank of Italy from 1991 until 1999. Heis a member of the Board of Directors of Banca Lombarda S.p.A., Bracco S.p.A.and Fin. Bansel S.p.A.and Chairman of CBI Factor S.p.A., and Chairman of theBoard of Statutory Auditors of Intesa Mediofactoring S.p.A., Sara AssicurazioniS.p.A., Italiana Assicurazioni S.p.A. and B.P.U. Assicurazioni S.p.A.

**EnricoCavatorta** has been a Director of the Company since 2003. Hehas been Chief Financial Officer since he joined the Group in 1999, and he is adirector of the principal subsidiaries of the Company. Prior to joiningLuxottica, Mr. Cavatorta was with Piaggio S.p.A., most recently as GroupController, responsible for planning and control. From 1993 to 1996, Mr. Cavatortawas a consultant with McKinsey & Co., having joined the firm fromProcter & Gamble Italy, where he worked from 1985 to 1993, mostrecently as Controller. Mr. Cavatorta graduated with the highest honorsfrom the LUISS University in Rome with a bachelor’s degree in BusinessAdministration.

**RobertoChemello** joined the Group in 1979. He is a Director of theCompany and Chief Executive Officer of Luxottica S.r.l., our principaloperating subsidiary. Prior to 1985, Mr. Chemello was Chief FinancialOfficer of the Company, 

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and until July 27,2004, he was Chief Executive Officer of the Company. Mr. Chemellograduated with a degree in Business Administration from the Ca’ FoscariUniversity in Venice.

**ClaudioDel Vecchio,** a son of Leonardo Del Vecchio, joined the Groupin 1978 and has been a Director since 1981. From 1979 to 1982, he managed ourItalian and German distribution operations. From 1982 until 1997, he wasresponsible for all business operations of the Group in North America. He alsoserves as a Director of U.S. Holdings, a key subsidiary in North America.Claudio Del Vecchio is Chairman and Chief Executive Officer of Retail BrandAlliance, the owner of Brooks Brothers Inc. and other clothing apparelcompanies.

**SergioErede** has been a Director of the Company since 2004. Mr. Eredegraduated magna cum laude from the University of Milan in 1962 with a degree injurisprudence and obtained an LL.M. from Harvard Law School in 1964. From 1965to 1969, he was head of the legal department of IBM Italia S.p.A. Prior to suchtime, Mr. Erede was an attorney at the law firm of Sullivan &Cromwell from 1964 to 1965, and the law firm of Hale & Dorr from 1963to 1964. In 1999, he founded the law firm of Bonelli, Erede &Pappalardo (which is the successor by merger to the firm of Erede e Associati),a leading firm in Italian financial transactions. Additionally, Mr. Eredeis Vice Chairman of Banca Nazionale del Lavoro S.p.A. and a member of the boardof directors of several Italian companies including Marzotto S.p.A., InterpumpS.p.A., Autogrill S.p.A., Carraro S.p.a, Valentino Fashion Group S.p.a. andGalbani S.p.a.

**SabinaGrossi** has been a Director of the Company since 2003. Shejoined Luxottica Group S.p.A. in 1996 and was Head of Investor Relations, aposition which she held from 1996 until 2004. Prior to joining Luxottica GroupS.p.A., she was a financial analyst with Caboto Sim S.p.A. from 1994 until 1996.From 1991 to 1993, Ms. Grossi was an associate professor in the school ofengineering of the La Sapienza University in Rome, where she taughtundergraduate courses as well as published papers on mathematics andstatistics. Ms. Grossi, who is a C.P.A. in Italy, graduated with thehighest honors from the LUISS University in Rome with a bachelor’s degree inBusiness Administration. Ms. Grossi is currently a member of the Board ofDirectors of Molecular Medicine S.p.A. and of the non-profit Foundation OliverTwist.

**GianniMion** has been a Director of the Company since 2004. He isChief Executive Officer of Edizione Holding S.p.A. (the investment company ofthe Benetton family), a position he has held since 1986. Prior to joiningEdizione Holding S.p.A., Mr. Mion was the Chief Financial Officer ofMarzotto S.p.A. from 1985 to 1986, Managing Director of Fintermica S.p.A. from1983 to 1985, Vice President of Gepi S.p.A. from 1974 to 1982, controller ofMcQuay Europa S.p.A. from 1972 to 1974 and an auditor at the accounting firm ofKPMG from 1967 to 1972. Mr. Mion is currently a member of the board ofdirectors of several public companies, including Benetton Group S.p.A.,Autogrill S.p.A., Autostrade S.p.A., Olimpia and Telecom Italia. Gianni Miongraduated from the Venice University Ca’ Foscari with a degree in BusinessAdministration and is a Certified Public Accountant.

**LucioRondelli** has been a Director of the Company since 1990.Mr. Rondelli was the Chairman of UniCredito Italiano S.p.A until 2001,having held various positions with the bank continuously from 1947. Mr. Rondelliis currently Chairman of Assiparos GPA and Banca Italease and a director ofSpafid. In 1976 he received the honor of Cavaliere di Gran Croce dell’Ordine(Knight of the Great Cross Order) for merit to the Republic of Italy and in1988 the President of the Republic of Italy conferred on him the honor ofCavaliere dell’Ordine al “Merito del Lavoro” (Knight of the Order for LaborMerit).

**FrankBaynham** has been Executive Vice President, Stores of RetailNorth America since 1999. Mr. Baynham is responsible for store operationsfor all LensCrafters,  Sunglass Hut andCole stores. Mr. Baynham has held various other senior executive rolessince joining LensCrafters in 1987. Prior to 1987, he worked in marketing forProcter and Gamble and was a captain in the U.S. Army. Mr. Baynhamgraduated with a degree in Finance from Murray State University.

**ChrisBeer**is Chief Operating Officer of Luxottica Retail - AsiaPacific. Mr. Beer has held this position since 2003, having had 22 yearsof experience with the OPSM Group (later acquired by Luxottica). He held seniorexecutive positions in sales and operations before being appointedInternational HR Manager for the OPSM Group in 1999 and General Manager Retailfor OPSM Australia in 2001. Mr. Beer oversees group operations, marketing,merchandise, distribution and manufacturing for the Asia Pacific Region.

**Luca Biondolillo**, head of communications, overseesmedia, corporate and investor relations for Luxottica Group. He joined theGroup in March 2004 from JPMorgan Chase in New York, where he was vicepresident responsible for US-based relationships with the Bank’s AmericanDepositary Receipts (ADR) clients in Europe and Asia. Mr. Biondolillopreviously served as a partner with Breakstone & Ruth, a NewYork-based financial and media communications specialist firm and as vicepresident within the financial communications and investor relations practiceof Golin/Harris, a leading public relations firm and a member of theInterpublic Group of Companies (IPG). He holds a bachelor’s degree in BusinessAdministration 

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from Bernard M.Baruch College, City University of New York, and he is a member of the U.S.National Investor Relations Institute (NIRI), the UK Investor Relations Society(IRS), the Public Relations Society of America (PRSA) and the Italianassociation of communications professionals, FERPI.

**Michael Boxer** has been theSenior Vice President, General Counsel — North America since September 2005.Mr. Boxer is responsible for overseeing all legal matters for the Company’sNorth American retail and wholesale operations. Mr. Boxer has held variousother executive roles since joining the Company in 1993. Prior to joiningLuxottica in 1993, Mr. Boxer served as a corporate attorney with the lawfirm of Winston & Strawn in New York. He received his undergraduatedegree from Columbia University and his law degree from the New York UniversitySchool of Law.

**KerryBradley** has been Chief Operating Officer of Retail NorthAmerica since 2002, prior to which he served as Executive Vice President ofLensCrafters since June of 1998. Mr. Bradley is responsible for allLensCrafters, Sunglass Hut, Cole and EyeMed sales, marketing and operations. Mr. Bradleyhas held various other senior executive roles since joining LensCrafters in1988. Mr. Bradley has a Master’s degree in Business from the University ofEdinburgh, Scotland and a B.S. degree in Business from Auburn University inAlabama.

**TomColeman** has been Executive Vice President Retail Asia Pacificsince 2003. Mr. Coleman is responsible for all activities of the  Group in the Asia Pacific Region, whichincludes Australia, New Zealand, Hong Kong, Singapore and Malaysia, and priorto this, he served as Executive Vice President of LensCrafters since 1997. Mr. Colemanhas held various other senior executive roles since joining LensCrafters in1987.

**MildredCurtis**has been Senior Vice President, Human Resources NorthAmerica since 2005. She was Senior Vice President, Legal and Human Resources ofLensCrafters from 2001 to 2005. She held other executive roles since joiningLensCrafters in 1988. Ms. Curtis has a J.D. from the University ofCincinnati and a bachelor’s degree from Chatham College.

 

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**Fabio D’Angelantonio**has been Head of Group Marketing since 2005. After experiencewith the European Union and in the Olivetti Marketing Department in Brusselsand Madrid, Mr. D’Angelantonio led the international department from 1995to 2000 for the Belgian publishing house Editions Hemma (part of theHavas-Vivendi group). At the beginning of 2000, Mr. D’Angelantonio joinedCiaoweb (Fiat-Ifil group) where he held the position of Channel Manager,eventually moving to Merloni Elettrodomestici, today Indesit Company, where heheld increasingly senior positions ending in Brand & AdvertisingManager, responsible for the management of the entire brand portfolio for thegroup. After receiving a degree in Business Administration in 1994 from theLUISS University in Rome, he completed an MBA in International Management atthe UBI in Brussels in 1999.

**JackDennis** has been Chief Financial Officer and ChiefAdministrative Officer of Retail North America since 2001, prior to which timehe served as Chief Financial Officer of LensCrafters since 1992 and ChiefAdministrative Officer since 1999. Prior to 1992, he was Controller ofLensCrafters, Vice President of Finance in several divisions of U.S. Shoe, anda Senior Audit Manager with Arthur Andersen & Co. Mr. Dennis graduatedwith a degree in Accounting from the University of Kentucky.

**ValerioGiacobbi** has been Executive Vice President Retail NorthAmerica since 2001. Prior to 2001, he was General Affairs Manager of LuxotticaGroup S.p.A. since 1991. Mr. Giacobbi graduated with a degree in BusinessAdministration from the Ca’ Foscari University in Venice.

**Garland Gunter** has been ChiefInformation Officer of Retail North America since 1992. Mr. Gunter isresponsible for all information technology supporting Retail and Managed VisionCare in North America. Prior to 1992, Mr. Gunter served as Director ofInformation Systems since joining LensCrafters in 1986. Prior to 1986, heworked in various IT management roles in retail and healthcare. Mr. Gunterhas a degree in Business Administration from Cleveland State University.

**GiuseppeLa Boria** joined Luxottica Group S.p.A. in 2001 as Head ofSales for the Wholesale Division. Prior to joining Luxottica Group S.p.A., Mr. LaBoria worked in Safilo S.p.A. as Sales Manager for Italy, during which periodhe was also responsible for all the commercial and marketing aspects of theDiesel Shades launch.

**Mario Lugli** has been General Counsel andSecretary to the Board of Directors of Luxottica Group S.p.A. since he joinedthe group in January 2005. He is an attorney at law. He served as head oflegal affairs from 1973 to 2004 in various groups of companies suchas Montedison, IRI-Italstat, Fiat, Rcs Media, and British Telecom Albacom.He is currently a member of the Board of Directors of various LuxotticaGroup companies. He is an auditor registered at the Ministry of Justice inItaly. He graduated cum laude from the University of Modena in 1969 andobtained an LL.M. from Oxford University.

**Peter McClelland** is ChiefFinance & Administration Officer of Luxottica Retail — Asia Pacific. AsCFAO, he has responsibility for shared support services, including finance, ITand HR, for Luxottica operations in Australia, New Zealand, Hong Kong andChina. Prior to joining OPSM Group, later acquired by Luxottica in 2003, heheld senior strategic and business planning roles in the retail sector inAustralia. He began his career with KPMG in audit supervisor risk management.

**Seth McLaughin** has been SeniorVice President, Consumer Marketing of Luxottica Retail North America since October 2004.He is responsible for overseeing marketing activities across all LuxotticaRetail brands. Prior to October 2004, he served as Vice President,Consumer Marketing since July 1998. Prior to joining the Luxottica Grouphe worked at Boston Consulting Group, from 1990 to 1994, and in strategicconsulting for Procter & Gamble, from 1984 to 1990. Mr. McLaughinhas a Bachelor of Science degree from Iowa State University.

**EnricoMistron**joined Luxottica Group S.p.A. in 1995 as FinancialAnalyst. Since joining us, he has handled various assignments in the FinanceDepartment including mergers and acquisitions. Mr. Mistron earned a degreewith honors in Business Administration from the Ca’ Foscari University inVenice. After graduation, Mr. Mistron was involved in some researchassignments for the Department of Economics at Ca’ Foscari University in Veniceand attended a course at SDA Bocconi in Corporate Finance. Mr. Mistron’sarea of expertise is Economics and Business Administration. Presently, he isGroup Controller of the Luxottica Group.

**AntonioMiyakawa** is currently the Head of Wholesale and GroupMarketing for Luxottica Group S.p.A., a position he held since 2003. Previouslyhe was head of our Asian wholesale operations, a position he has held since1999. Prior to this he served as Executive Vice President of Luxottica’sJapanese operations. Prior to joining Luxottica Group 

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S.p.A., Mr. Miyakawawas a junior consultant for Compact S.r.l. (an Italian consulting firm) workingon various Luxottica matters.

**MarioPacifico**  has been Head of Internal Auditing since he joined Luxottica Group S.p.Ain 2003. Prior to joining Luxottica Group S.p.A., he was VP of InternalAuditing of Prada Group. From 1990 to 2000, Mr. Pacifico was Controller ofEni’s upstream Italy Division, Chief Financial Officer of Agip Trading B.V. andan Audit Manager in Agip S.p.A. Mr. Pacifico graduated from Luigi BocconiUniversity in Milan with a degree in Business Administration.

**NicolaPelà** has been Head of Group Human Resources since 2005. Priorto joining the Company, he was Human Resources Director of Eli Lilly from 2001to 2003, first in Indianapolis and later in Brussels, and VP HR Director forItaly of SmithKline Beecham from 2000 to 2001. He was HR Manager in variousItalian companies such as OlivettiGroup, Fiat Group and Barilla Group from 1988 to 2000. Mr. Pelà has abachelor’s degree in Law with honours and a master’s degree in BusinessAdministration from CUOA.

**UmbertoSoccal** joined Luxottica Group S.p.A. in 1988 as ChiefInformation Technology Officer. As we expanded our distribution network, hebecame responsible for the computer systems of all of our Europeansubsidiaries. Mr. Soccal previously worked as a software programmer andchief of the data processing center for the Provincial Industry Association.

**MarcoVendramini** joined Luxottica Group S.p.A. in 1997 as afinancial analyst and was later appointed Corporate Forecasting and ReportingManager. Since February 2005, he has been Chief Administrative Officer ofLuxottica Group. Mr. Vendramini has a degree in Business Administrationfrom University of Udine. During and after graduation, he attended severalcourses at the European Business Management School of Swansea and in BusinessAdministration at the employers’ association of Treviso. Prior to joiningLuxottica, Mr. Vendramini worked in the accounting department of a textilecompany in Treviso.

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**Compensation**

Setforth below is information regarding total cash compensation paid to the membersof our Board of Directors and our Board of Statutory Auditors for servicesrendered to Luxottica Group S.p.A. and our subsidiaries during 2005:

 
| **Name**                                                       | ** ** | **Base  Compensation  (Euro)** | ** ** | **Other  Compensation  (Euro)** | ** ** | **Total Cash  Compensation  (Euro)** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------|------------|---------------------------------|------------|--------------------------------------|------------|
| Leonardo Del Vecchio*Chairman of the Board of Directors*       |       | 139,200                        |       | 1,021,872                       |       | 1,161,072                            |       |
| Luigi Francavilla*Deputy Chairman*                             |       | 139,200                        |       | 1,027,949                       |       | 1,167,149                            |       |
| Andrea Guerra*Chief Executive Officer*                         |       | 900,000                        |       | 608,980                         |       | 1,508,980                            |       |
| Tancredi Bianchi*Director*                                     |       | 91,194                         |       | —                          |       | 91,194                               |       |
| Mario Cattaneo*Director*                                       |       | 81,198                         |       | —                          |       | 81,198                               |       |
| Enrico Cavatorta*Director*                                     |       | 81,198                         |       | 526,104                         |       | 607,302                              |       |
| Roberto Chemello*Director*                                     |       | 81,198                         |       | 1,002,255                       |       | 1,083,453                            |       |
| Claudio Del Vecchio*Director*                                  |       | 81,198                         |       | 251,188                         |       | 332,386                              |       |
| Sergio Erede*Director*                                         |       | 81,198                         |       | —                          |       | 81,198                               |       |
| Sabina Grossi*Director*                                        |       | 81,198                         |       | 11,269                          |       | 92,467                               |       |
| Gianni Mion*Director*                                          |       | 81,198                         |       | —                          |       | 81,198                               |       |
| Lucio Rondelli*Director*                                       |       | 96,198                         |       | —                          |       | 96,198                               |       |
| Giancarlo Tomasin*Chairman of the Board of Statutory Auditors* |       | 93,549                         |       | —                          |       | 93,549                               |       |
| Mario Medici*Member of the Board of Statutory Auditors*        |       | 59,389                         |       | 13,192                          |       | 72,581                               |       |
| Walter Pison*Member of the Board of Statutory Auditors*        |       | 56,298                         |       | 53,677                          |       | 109,975                              |       |

 

Aggregatecompensation paid by us to our senior management (excluding directors) as agroup (21 people) was approximately Euro 10.2 million in 2005, of whichapproximately Euro 0.9 million represented provision for terminationindemnities and social security charges required by Italian law. Members ofthis group were also granted options to purchase an aggregate of 369,000 of ourordinary shares at an exercise price of Euro 16.89 per share in 2005. Theseoptions expire on January 31, 2014. The aggregate amount set aside oraccrued during the year ended December 31, 2005 to provide pension andretirement benefits for our directors who are also members of our managementwas Euro 643,000. Our directors who are not members of management do notreceive such benefits.

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**Employees**

As of December 31,2005, we employed approximately 55,000 employees worldwide, of whomapproximately 39,500 were employed in the United States and 6,200 were employedin Italy. As of such date, about 190 employees were in management positions,approximately 10,300 were employed in our manufacturing and wholesale segmentand approximately 44,400 were employed in our retail segment. Substantially allof our employees in Italy are covered by collective bargaining agreements.Other than those Pearle Vision employees subject to collective bargainingagreements described below, none of our employees in the United States arecovered by collective bargaining agreements. We have enjoyed generally goodrelations with our employees.

Employmentagreements in Italy are generally collectively negotiated between the nationalassociation of companies within a particular industry and the respectivenational unions. Individual companies must enter into contracts with theiremployees based on the relevant collective agreement. The agreement for opticalworkers, which is part of the national textile agreement, covers approximately5,300 of our employees. This agreement is scheduled to be renewed in 2006. Weexpect an average wage increase rate of three percent per year under the newagreements. The agreement for mechanical workers, which covers approximately586 of our employees, was renegotiated in 2006. In addition to the nationalcollective bargaining agreement for workers, we typically enter into separate,local contracts with labor unions representing our employees. In March 2006,we renewed a local agreement with optical workers, supplementing the terms ofthe national textile contract. This new agreement covers approximately 5,300employees and provides for a variable wage related to our financial results,instead of an increasing wage base.

Italianlaw provides that, upon termination of employment, employees are entitled toreceive certain compulsory separation payments based on their compensationlevels and length of employment. As of December 31, 2005, we had reservedEuro 56.6 million for such separation payments in our consolidatedfinancial statements.

Pearle Visioncurrently has two collective bargaining agreements in place. One collectivebargaining agreement, between Pearle Vision and the Local 888, United Food andCommercial Workers, is set to expire February 28, 2007 (the “888 CBA”).The 888 CBA covers approximately 16 Pearle Vision employees holding thepositions of Lab Associate, Lead Lab Associate, Sales Associate and Optician. Theother collective bargaining agreement, between Pearle Vision and the Local 108,Retail, Wholesale and Department Store Union, is set to expire December 31,2006 (the “103 CBA”). The 103 CBA covers approximately 79 Pearle Visionemployees holding the positions of Lab Associate, Lead Lab Associate, Sales Associateand Optician.

**ShareOwnership**

Set forth below iscertain information concerning the beneficial ownership of our ordinary sharesas of June 14, 2006, by each of our directors and executive officers whoown in excess of one percent of our outstanding ordinary shares.
| **Shareholder**       | ** ** | **Issuer**             | ** ** | **Shares owned as of  June 14, 2006** | ** ** | **Percentage  Ownership** | ** ** |
|-----------------------|------------|------------------------|------------|----------------------------------------------------------------|------------|---------------------------|------------|
| Leonardo Del  Vecchio |       | Luxottica Group S.p.A. |       | 314,803,339                                                    | (1)        | 68.52                     | %          |

 

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(1)                                  Shares held of record by Leoinvest S.r.l., an entity established and controlledby Mr. Del Vecchio. Mr. Del Vecchio holds voting and investment powerover the shares held by such entity.

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Exceptas otherwise indicated above, each of our directors and our executive officersowns less than one percent of our outstanding ordinary shares.

In March 1998,we adopted an employee stock option plan providing for the issuance of optionscovering up to 12,250,000 ordinary shares of nominal value Euro .06 each. As aresult of the change in the par value of our ordinary shares from Lire to Euro,which was approved by our shareholders at the annual meeting held on June 26,2001, the number of ordinary shares available for issuance under the plan wasreduced to 10,798,642. Our Board of Directors administers the stock optionplan. The purpose of the plan is to provide additional incentives to our keyemployees. Grants under the stock option plan may be of non-qualified optionsand/or incentive stock options. Under the plan, the Board of Directors may notgrant an option for a term of more than nine years from the date of grant, orfor a term that expires after March 31, 2011. The exercise price of theseoptions is equal to the market value of the underlying ordinary shares on thedate of grant, defined as the higher of (i) the closing market price ofour ADRs on the business day immediately preceding the date of the grant, and (ii) theaverage of the closing market prices for each business day during the 30-dayperiod ending on the date of the grant. Options granted under the plangenerally become exercisable in three equal installments beginning on January 31of the year after the date of grant and expire nine years after such date.

In September 2001,we adopted an additional employee stock option plan providing for the issuanceof options covering up to 11,000,000 ordinary shares of nominal value Euro 0.06each. The purpose and administration of the 2001 stock option plan are similarto those of the 1998 stock option plan, with the only significant differencebeing that the latest option termination date is March 31, 2017.

In June 2006,we adopted an additional employee stock option plan providing for the issuanceof options covering up to 20,000,000 ordinary shares of nominal value of Euro0.06 each. The purpose of the plan is to provide additional incentives to keyemployees of the Group.

As of December 31,2005, there had been 11 separate grants under the option plans described above,detailed as follows:

 
| ** **                  | ** ** | **Number of  ordinary shares  underlying  options granted(1)** | ** ** | **Exercise  Price(1)** | ** ** | **Expiration Date** | ** ** | **Options held  by officers  and directors  (1)(2)** | ** ** |
|-----------------------------|------------|----------------------------------------------------------------|------------|------------------------|------------|---------------------|------------|------------------------------------------------------|------------|
| **1998  Grant**             |       | 3,380,400                                                      |       | Euro                   |       | 7.38                |       | January 31, 2007                                | ** ** | 88,200 |   |
| **1999  Grant**             |       | 3,679,200                                                      |       | Euro                   |       | 4.38                |       | January 31, 2008                                |       | 113,400 |   |
| **2000  Grant**             |       | 2,142,200                                                      |       | Euro                   |       | 9.52                |       | January 31, 2009                                |       | 105,000 |   |
| **2001  Grant**             |       | 2,079,300                                                      |       | U.S. $                 |       | 15.20               |       | January 31, 2010                                |       | 176,400 |   |
| **2002  Grant**             |       | 2,348,400                                                      |       | U.S. $                 |       | 17.80               |       | January 31, 2011                                |       | 226,500 |   |
| **2003  Grant**             |       | 2,397,300                                                      |       | Euro                   |       | 10.51               |       | January 31, 2012                                |       | 225,900 |   |
| **2004  Grant**             |       | 2,035,500                                                      |       | Euro                   |       | 13.79               |       | January 31, 2013                                |       | 731,000 |   |
| **2004  Performance Grant** |       | 1,000,000                                                      |       | U.S. $                 |       | 18.59               |       | January 31, 2012                                |       | 920,000 |   |
| **2004 Shareholder  Grant** |       | 9,600,000                                                      |       | Euro                   |       | 13.67               |       | December 31, 2014                               |       | 9,600,000 |   |
| **2005  Grant**             |       | 1,512,000                                                      |       | Euro                   |       | 16.89               |       | January 31, 2014                                |       | 369,000 |   |

 

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(1)           As restated to reflect the June 2000two-for-one stock split.

(2)           As restated to reflect changes amongour officers and directors during 2005.

**Summaryof the Significant Differences Between Our Corporate Governance Practices andthe Corporate Governance Standards of the New York Stock Exchange**

*Overview*

On November 4,2003, the New York Stock Exchange (the “NYSE”), established new corporategovernance rules for listed companies. Under the new NYSE rules, we arepermitted, as a listed foreign private issuer, to adhere to the corporategovernance standards of our home country in lieu of certain NYSE corporategovernance rules so long as we disclose the significant ways in which ourcorporate governance practices differ from those followed by U.S. companies underthe NYSE listing standards.

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Ourcorporate governance practices are governed principally by the Italian Code ofCorporate Governance issued by Borsa Italiana and generally by the rules andregulations of CONSOB (Commissione Nazionale per le Società e la Borsa) forItalian companies (collectively, the “Italian Corporate Governance Policies”).

Thefollowing is a brief summary of the significant differences between ourcorporate governance practices in accordance with the Italian CorporateGovernance Policies and those followed by U.S. companies under the NYSE listingstandards.

*Compositionof Board of Directors; Independence*

TheNYSE listing standards provide that the board of directors of a U.S. listedcompany must consist of a majority of independent directors and that certaincommittees must consist solely of independent directors. A director qualifiesas independent only if the board affirmatively determines that the director hasno material relationship with the company, either directly or indirectly. Thelisting standards enumerate a number of relationships that precludeindependence. In addition, non-management directors of a U.S. listed companyare required to meet at regularly scheduled executive sessions withoutmanagement.

TheItalian Corporate Governance Policies recommend that an “adequate number” ofnon-executive directors serve on the board of directors of an Italian company,but do not require the board of directors to consist of a majority ofindependent directors. The standards for determining director independenceunder the Italian Corporate Governance Policies are substantially similar tothe NYSE listing standards for U.S. listed companies. The Italian CorporateGovernance Policies do not require our non-executive directors to meet at executivesessions without management.

Basedon standards under the Italian Corporate Policies, our Board of Directors hasdetermined that, among its 12 members, four directors are independent. Thisnumber of independent directors complies with the “adequate number” ofnon-management directors recommended by the Italian Corporate GovernancePolicies. Luxottica’s non-management directors do not have regularly scheduledexecutive sessions without management.

*BoardCommittees*

TheNYSE listing standards require a U.S. listed company to have an auditcommittee, a nominating/corporate governance committee and a compensationcommittee. Each of these committees must consist solely of independentdirectors and must have a written charter that addresses certain matters specifiedin the listing standards. The NYSE listing standards contain detailedrequirements for the audit committees of U.S. listed companies. Commencing on July 31,2005, some, but not all, of these requirements also apply to non-U.S. listed companies, such as us.

The Board ofDirectors has designated the Board of Statutory Auditors as the appropriatebody to act as the “Audit Committee,” as defined in the Sarbanes-Oxley Act, SECregulations and the NYSE listing standards. The Board of Statutory Auditors hasacted as the Audit Committee beginning with the annual meeting of shareholderson June 14, 2006. Beginning on July 31, 2005 and until the annualmeeting of shareholders on June 14, 2006, the functions of the Audit Committee were performed by the InternalControl Committee, as determined by the Board of Directors. Additionalinformation regarding our Internal Control Committee and Board of StatutoryAuditors is set forth below.

Italianlaw requires neither the establishment of board committees nor the adoption ofwritten committee charters. With respect to the nomination of directors, theItalian Corporate Governance Policies recommend that each Italian listedcompany file with its registered office, at least ten days before its annualmeeting of stockholders, a list of the personal and professional qualificationsof each proposed director nominee. The Italian Corporate Governance Policiesalso recommend that, if an Italian listed company appoints a committee toselect, or recommend the selection by the board of directors of, directornominees for the next annual meeting of stockholders, a majority of thiscommittee be comprised of non-executive directors. Our director nominees areselected by our entire Board of Directors, and we comply with the Italian CorporateGovernance Policies’ recommendation that we timely file with our registeredoffice a list of the personal and professional qualifications of each of ourproposed director nominees.

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The ItalianCorporate Governance Policies recommend, but do not require, that Italianlisted companies appoint a compensation committee and that a majority of thiscommittee be comprised of non-executive directors. In accordance with Italianlaw, our Human Resources Committee, which does not consist of a majority ofindependent directors, performs the functions of a compensation committee,including the review of our officers’ compensation and our stock option plans.The Italian Corporate Governance Policies also do not require Italian listedcompanies to have an audit committee, but do require companies to appoint aBoard of Statutory Auditors. Additional information regarding our Board ofStatutory Auditors is set forth below.

*InternalControl Committee*

Our InternalControl Committee consists of three independent directors. The committee hasinvestigative, advisory and proposal-making functions concentrating on, amongother matters, the internal control system and the proper use of accountingprinciples in conjunction with our administration managers and auditors. Thecommittee reports to the Board of Directors at least twice a year.

*Board ofStatutory Auditors*

OurBoard of Statutory Auditors is appointed by our stockholders and serves for aperiod of three years. Italian law establishes the qualifications of candidatesthat may be appointed as members of the Board of Statutory Auditors, includingthe requirement that members not concurrently serve on the listed company’sboard of directors. Our By-Laws are required to ensure that at least one memberof the Board of Statutory Auditors may be elected by our minority stockholders.Our By-laws comply with this provision providing that at least one effectiveand one alternate member may be elected by our stockholders holding at least3 percent of our outstanding shares.

TheBoard of Statutory Auditors oversees our compliance with our By-laws andapplicable laws and the adequacy of our internal control system and accountingand administrative system. The Board of Statutory Auditors is required toattend all meetings of our stockholders and the meetings of our Board ofDirectors. The Board of Statutory Auditors is also required to notify CONSOB ifwe fail to comply with our By-laws or any applicable laws.

*CorporateGovernance Guidelines; Certification*

TheNYSE listing standards require U.S. listed companies to adopt, and post ontheir websites, a set of corporate governance guidelines. The guidelines mustaddress, among other things, director qualification standards, directorresponsibilities, director access to management and independent advisers,director compensation, director orientation and continuing education,management succession, and an annual performance evaluation. In addition, thechief executive officer of a U.S. listed company must certify to the NYSEannually that he or she is not aware of any violations by the company of theNYSE’s corporate governance listing standards. The certification must bedisclosed in the company’s annual report to stockholders.

ItalianCorporate Governance Policies require that listed companies annually report totheir shareholders at the annual general meeting on their corporate governancesystem. Our Company complies with such requirement. You may find our corporategovernance report on our website at *www.luxottica.com*.

*Code ofBusiness Conduct and Ethics*

TheNYSE listing standards require each U.S. listed company to adopt, and post onits website, a code of business conduct and ethics for its directors, officersand employees. Under SEC rules, all companies required to submit periodicreports to the SEC, including us, must disclose in their annual reports whetherthey have adopted a code of ethics for their principal executive officer andsenior financial officers. In addition, they must file a copy of the codewith the SEC, post the text of the code on their website or undertake toprovide a copy upon request to any person without charge. There is significant,though not complete, overlap between the code of business conduct and ethicsrequired by the NYSE listing standards and the code of ethics for seniorfinancial officers required by the SEC’s rules.

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Inaccordance with SEC rules we have adopted a Code of Ethics, which containsprovisions in compliance with SEC requirements. Our Code of Ethics is availableon our website at *www.luxottica.com*.

*StockholderApproval of Equity Compensation Plans*

TheNYSE listing standards require U.S. listed companies to seek stockholderapproval for certain equity compensation plans. Italian law requires Italianlisted companies to submit any capital increases of shares reserved forissuance under their equity compensation plans to stockholders for theirapproval at the annual meeting of stockholders. In accordance with the ItalianCorporate Governance Policies, our stockholders approved capital increases ofshares reserved for issuance under our existing stock option plans in 1998,2001 and 2006.

**ITEM 7. MAJORSHAREHOLDERS AND RELATED PARTY TRANSACTIONS**

**MajorShareholders**

Thefollowing table sets forth, as of June 14, 2006, the beneficial ownershipof ordinary shares by (1) each person (or group within the meaning of Section 13(d)(3) ofthe Securities Exchange Act of 1934) known by us to own five percent or more ofthe outstanding ordinary shares (including ordinary shares represented byADSs); and (2) all directors and executive officers as a group.

 
| **Identity of  Person or Group** | ** ** | **Amount of  Shares Owned** | ** ** | **Percent of  Class** | ** ** |   |
|-------------------------------------------------|------------|---------------------------------------|------------|----------------------------|------------|--------|
| Leonardo Del  Vecchio                           |       | 314,803,339                           | (1)        | 68.52                      | %          |
| Directors and Executive  Officers as a Group    |       | 322,847,870                           | (2)        | 70.27                      | %          |
|                                                 |            |                                       |            |                            |            |        |  |  |

 

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(1)                                Includesordinary shares held by entities controlled by Mr. Leonardo Del Vecchioand ordinary shares represented by ADSs over which Mr. Del Vecchiocontrols the power to vote. See Item 6—“Directors, Senior Management andEmployees—Share Ownership.”

(2)                                Includesordinary shares represented by ADSs owned by directors and members of seniormanagement in addition to shares owned by Mr. Leonardo Del Vecchio.

Theordinary shares held by Mr. Del Vecchio and our other directors andexecutive officers have the same voting rights as the shares held by othershareholders.

Mr. DelVecchio beneficially owns approximately 68.52 percent of our outstandingordinary shares (including any shares represented by ADSs) and serves asChairman of our Board of Directors. We are not otherwise directly or indirectlyowned or controlled by another corporation or by any foreign government.

To thebest of our knowledge, to date there are no arrangements which may result in achange of control of Luxottica Group S.p.A.

**RelatedParty Transactions**

*Fixed Assets*

In January 2002,a subsidiary of ours acquired certain assets for Euro 28.5 million and assumeda bank loan from “Partimmo S.a.S.”, a company owned by our Chairman. The assetsacquired were a building, and all improvements thereto, for a total cost ofEuro 42.0 million. We recorded these assets at their historic cost. Ourheadquarters are located in this building. The bank loan acquired had anoutstanding balance of Euro 20.6 million on such date. In November 2004,the loan was fully repaid. In connection with the acquisition of this building,our subsidiary entered into an agreement leasing a portion of this building toour Chairman for Euro 0.5 million annually. The expiration date of this leaseis 2010.

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*License Agreements*

We have aworldwide exclusive license agreement to manufacture and distribute ophthalmicproducts under the Brooks Brothers name. The Brooks Brothers trade name isowned by Retail Brand Alliance, Inc. (“RBA”), which is controlled byClaudio Del Vecchio, one of our directors. The license agreement expired on March 31,2003 and was renewed in January 2005. The license agreement expires in 2009.For the fiscal year 2005 conditions were not changed and royalties paid to RBAfor such agreement were Euro 1.1 million, Euro 0.9 million and Euro 0.5 millionin the years ended December 31, 2003, 2004 and 2005, respectively.

In July 2004,we signed a worldwide exclusive license agreement to manufacture and distributeophthalmic products under the name of Adrienne Vittadini. The AdrienneVittadini trade name is owned by RBA, which is controlled by Claudio DelVecchio, one of our directors. The license agreement expires on December 31,2007. For the years ended December 31, 2004 and 2005, royalties paid toRBA for such agreement were Euro 0.9 million and Euro 0.9 million,respectively.

*ServiceRevenues*

During the yearsended December 31, 2004 and 2005, U.S. Holdings performed certain servicesfor RBA. Amounts received for the services provided were Euro 0.5 million, Euro0.7 million and Euro 0.6 million in fiscal 2003, 2004 and 2005, respectively.

*Shareholder Plan*

On September 14,2004, our Chairman and majority shareholder, Mr. Leonardo Del Vecchio, hadallocated shares held through La Leonardo Finanziaria S.r.l., an Italianholding company of the Del Vecchio family, representing 2.11 percent (or 9.6million shares) of the Company’s currently authorized and issued share capital,to a stock option plan for our top management at an exercise price of Euro13.67 per share (see Note 10 to the Consolidated Financial Statements).The stock options to be issued under the stock option plan vest upon meetingcertain economic objectives. During 2005, it became probable that the incentivetargets would be met and, as such, the Company recorded compensation expense ofapproximately Euro 19.9 million net of taxes and recorded future unearnedcompensation expense in equity of approximately Euro 45.8 million net of taxes,with an offsetting increase in additional paid-in capital for such amounts.

**ITEM 8. FINANCIALINFORMATION**

**FinancialStatements**

SeeItem 18—“Financial Statements.”

**LegalProceedings**

TheCompany and its subsidiaries are involved in the following legal and regulatoryproceedings of which the timing and outcomes are inherently uncertain, and suchoutcomes could have a material adverse effect on the Company’s business,financial position or operating results.

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*SunglassHut Shareholder Lawsuit*

In May andJune 2001, certain former stockholders of Sunglass Hut commenced actionsin the U.S. District Court for the Eastern District of New York againstLuxottica Group S.p.A., and  itsacquisition subsidiary formed to acquire Sunglass Hut on behalf of a purportedclass of former Sunglass Hut stockholders. These actions were subsequentlyconsolidated into a single amended consolidated class action complaint whichalleged, among other claims, that the defendants violated certain provisions ofU.S. securities laws and rules thereunder, in connection with theacquisition of Sunglass Hut in a tender offer and second-step merger. Theplaintiffs’ principal claim was that certain payments to James Hauslein, theformer chairman of Sunglass Hut, under a consulting, non-disclosure and non-competitionagreement (the “Agreement”) violated the “best price rule” promulgated by the SECby resulting in a payment for Mr. Hauslein’s Sunglass Hut shares and hissupport of the tender offer that was higher than that paid to Sunglass Hut’sstockholders in the tender offer. The plaintiffs also alleged that the Companyand Mr. Leonardo Del Vecchio, our Chairman, violated Section 10(b) ofthe Securities Exchange Act of 1934 and Rule 10b-5 promulgatedthereunder. The plaintiffs sought, among other remedies, the payment of suchhigher consideration to all tendering shareholders, other than Luxottica GroupS.p.A. and its affiliates.

LuxotticaGroup S.p.A. and the other defendants filed a motion to dismiss the complaintin its entirety which, on November 26, 2003, the Court granted in part anddenied in part. The Court granted Luxottica Group S.p.A.’s motion to dismissplaintiffs’ claim under Section 10(b)  and Rule 10b-5, butdenied our motion to dismiss plaintiffs’ best price rule claim, as well asthe claim that we aided and abetted Mr. Hauslein’s breaches of hisfiduciary duties. In so ruling the Court noted that it was obligated, for thepurpose of rendering its decision on the motion to dismiss, to treat all of theplaintiffs’ allegations in the complaint as true. On June 8, 2004, theconsolidated complaint was further amended to add Mr. Leonardo DelVecchio, our Chairman, as a defendant in respect of the two remaining claims.

On August 31,2005, we agreed with the plaintiffs to a full and final settlement and release(the “Settlement”) of all claims against the Company, our acquisitionsubsidiary and Mr. Del Vecchio. The Settlement, for a payment of Euro 11.6million (or US$ 14.5 million), was approved by the Court and final judgment hasbeen entered dismissing the case with prejudice.

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*CaliforniaVision Health Care Service Plan Lawsuit*

In March 2002, anindividual commenced an action in the California Superior Court for the Countyof San Francisco against Luxottica Group S.p.A. and certain of oursubsidiaries, including LensCrafters, Inc. and EYEXAM ofCalifornia, Inc. The plaintiff, along with a second plaintiff named in anamended complaint, seeks to certify this case as a class action.  The claims have been partiallydismissed.  The remaining claims, againstLensCrafters, EYEXAM and EyeMed Vision Care, LLC, allege various statutory violationsrelating to the confidentiality of medical information, the operation ofLensCrafters’ stores in California, including violations of California lawsgoverning relationships among opticians, optical retailers, manufacturers offrames and lenses and optometrists, false advertising and other unlawful orunfair business practices. The action seeks unspecified damages, disgorgementand restitution of allegedly unjustly obtained sums, statutory damages,punitive damages and injunctive relief, including an injunction that wouldprohibit defendants from providing eye examinations or other optometricservices at LensCrafters stores in California. In May 2004, the trialcourt stayed all proceedings in the case pending the California Supreme Court’sdecision in a case against Cole and its subsidiaries expected to addresscertain legal questions related to the issues presented in this case. On June12, 2006, the California Supreme Court rendered its decision in that case,ruling that optical stores such as those operated by Cole must comply withSections 655 and 2556 of the California Business and Professions Code.  It is expected that plaintiffs will now seekto resume their prosecution of this action. Although we believe that our operational practices in California complywith California law, an adverse decision in this action or the suit againstCole might cause LensCrafters, EYEXAM and EyeMed to modify or close certainactivities in California. Further, LensCrafters, EYEXAM and EyeMed might berequired to pay damages and/or restitution, the amount of which might have amaterial adverse effect on our operating results, financial condition and cashflow.

 

*People v.Cole*

In February 2002, the State of Californiacommenced an action in the California Superior Court for the County of SanDiego against Cole and certain of its subsidiaries, including PearleVision, Inc. and Pearle Vision Care, Inc. The claims allege variousstatutory violations related to the operation of Pearle Vision Centers inCalifornia including violations of California laws governing relationshipsamong opticians, optical retailers, manufacturers of frames and lenses andoptometrists, false advertising and other unlawful or unfair businesspractices. The action seeks disgorgement and restitution of allegedly unjustlyobtained sums, civil penalties and injunctive relief, including an injunctionthat would prohibit defendants from providing eye examinations or otheroptometric services at Pearle Vision Centers in California. In July 2002,the trial court entered a preliminary injunction to enjoin defendants fromcertain business and advertising practices. Both Cole and the State ofCalifornia appealed that decision. On November 26, 2003, the Court ofAppeal issued an opinion in which it stated that because California lawprohibited Pearle Vision from providing eye examinations and other optometricservices at Pearle Vision Centers, the trial court should have enjoined PearleVision from advertising the availability of eye examinations at Pearle Vision Centers.** **Theappellate court also ruled in Cole’s favor with respect to charging dilationfees, which ruling partially lifted the preliminary injunction with respect tothese fees that had been imposed in July 2002.** **On March 3, 2004, theCalifornia Supreme Court granted Cole’s petition for review of the portion ofthe appellate court’s decision stating that California law prohibiteddefendants from providing eye examinations and other optometric services atPearle Vision Centers.  The appellatecourt’s decision directing the trial court to enjoin Pearle Vision fromadvertising these activities was stayed pending the Supreme Court’s resolutionof the issue.  On June 12, 2006, theCalifornia Supreme Court affirmed the Court of Appeal’s prior decision, and heldthat optical stores such as those operated by Cole must comply with Sections655 and 2556 of the California Business and Professions Code.  The matter will now be remanded to the trialcourt for further proceedings to determine if, in fact, Cole’s operationscomply with those laws.  In addition, thepreliminary injunction previously issued to enjoin advertising of theavailability of eye examinations at Pearle Vision Centers, may soon becomeoperative.  Although we believe thatCole’s operational practices in California comply with California law, anadverse decision in this action may compel Cole and its subsidiaries to modifyor close certain activities in California. Further, Cole and its subsidiariesmight be required to pay civil penalties and/or restitution, the amount ofwhich might have a material adverse effect on our operating results, financialcondition and cash flow.

*Cole SECInvestigation*

Following Cole’s announcement in November 2002 ofthe restatement of its financial statements, the SEC began an investigationinto Cole’s previous accounting. The SEC subpoenaed various documents from Coleand deposed numerous former officers, directors and employees of Cole. Duringthe course of this investigation, the SEC staff had indicated that it intendedto recommend that a civil enforcement action be commenced against certainofficers and directors of Cole but not against Cole. Cole was obligated toadvance reasonable attorneys’ fees incurred by current and former officers anddirectors who are involved in the SEC investigation subject to undertakingsprovided by such individuals. Cole has insurance available with respect to aportion of these indemnification obligations. In March 2006, the SEC staffindicated that it had concluded its investigation and that, contrary to itsearlier indication, it would not be recommending that an enforcement action becommenced against anyone in connection with the investigation.

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*Review bythe Supreme Court of India regarding Ray Ban Sun Optics India Ltd.*

On August 29,2003, the Securities Appellate Tribunal, or SAT, in India upheld the order ofthe Securities Exchange Board of India to require our subsidiary Ray Ban IndianHoldings Inc. to make a public offer in India to acquire up to anadditional 20 percent of the outstanding shares of Ray Ban Sun OpticsIndia Ltd. On October 30, 2003, we announced that we intended tocomply with the SAT’s decision and that we, through our subsidiary, Ray BanIndian Holdings Inc., would launch a public offer to purchase anadditional 20 percent of the outstanding shares of Ray Ban Sun OpticsIndia Ltd. In accordance with applicable Indian regulation, our subsidiaryplaced in escrow Rs 226 million (Euro 4.2 million) with the Managerof the public offer. On November 17, 2003, the Supreme Court of Indiastayed the SAT’s order and directed that the matter be further reviewed at theend of January 2004, provided that our subsidiary issue a letter of creditfor Rs 630.6 million (Euro 11.9 million) in favor of the Indiansecurities regulatory agency within the following four-week period. Oursubsidiary complied with such requirement, and the appeal is pending before theSupreme Court of India. If we are ultimately required to make the public offer,the aggregate cost of the offer could be approximately Euro 16 million,including stipulated interest increments.

*ColeNational Shareholder Class Action*

On July 14,2004, a shareholder of Cole filed a shareholders’ class action complaintagainst Cole, its directors and the Company in the Delaware Chancery Court,known as Pfeiffer v. Cole National Corp., et al., Civil Action No. 569-N.The complaint alleged, among other things, that the individual defendantsbreached their fiduciary duties as directors and/or officers to Cole by causingCole to enter into an agreement to be acquired by the Company for $22.50 pershare “without having exposed the company to the marketplace through fair andopen negotiations with all potential bidders and/or an active market check oropen auction for sale of the company.” The complaint sought preliminary andpermanent injunctive relief against the merger, rescission of the merger if itis consummated, and/or damages and other associated relief. No answer wasserved to this complaint. The Company believed the action to be without merit. InJanuary 2006, the plaintiff voluntarily dismissed this action withoutprejudice.

It isthe opinion of management that the outcome of existing claims against us willnot have a material adverse effect on our consolidated financial position orresults of operations. However, the outcome of these litigation claims isinherently uncertain, and there can be no assurance that one or more of theseactions, if adversely determined, will not have a material adverse effect onour business, results of operations and financial condition. In addition, wemay be subject to material claims, judgments or proceedings in the futurewhich, if adversely determined, may have a material adverse effect on ourbusiness, results of operations and financial condition. See Item 3—“KeyInformation—Risk Factors—Our business could be adversely affected by legalproceedings to which we are, or may become, a party.”

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**DividendDistributions**

SeeItem 3—“Key Information—Dividends” and Item 10—“Additional Information.”

**SignificantChanges**

Exceptas otherwise indicated above, no significant changes have occurred since thedate of our annual financial statements included in this Form 20-F.

**ITEM 9. THEOFFER AND LISTING**

Ourordinary shares were approved for trading on the Italian Stock Exchange on December 4,2000. Our ADSs were admitted for trading on the NYSE on January 24, 1990.Our ADSs are evidenced by ADRs issuable by Deutsche Bank Trust CompanyAmericas, as depositary, pursuant to a Deposit Agreement.

Thetable below sets forth, for the periods indicated, high and low closing pricesof the ADSs on the NYSE (in U.S. dollars) and ordinary shares on the ItalianStock Exchange (in Euro).

 
| ** **         | ** ** | **New York Stock Exchange** | ** ** | **Italian Stock Exchange** | ** ** |
|--------------------|------------|--------------------------------------------|------------|--------------------------------------|------------|
| ** **         | ** ** | **(in U.S. $)**                  | ** ** | **(in Euro)**                   | ** ** |
| ** **         | ** ** | **High**                                   | ** ** | **Low**                              | ** ** | **High** | ** ** | **Low** | ** ** |
|               |       |                                       |       |                                 |       |   |   |   |   |
| **2001**           |       | 17.99                                      |       | 12.15                                |       | 20.62 |   | 13.41 |   |
| **2002**           |       | 20.85                                      |       | 11.82                                |       | 22.95 |   | 11.75 |   |
| **2003**           |       | 18.15                                      |       | 10.23                                |       | 14.82 |   | 9.25 |   |
| **2004**           |       |                                       |       |                                 |       |   |   |   |   |
| First Quarter      |       | 17.85                                      |       | 15.18                                |       | 14.09 |   | 12.43 |   |
| Second Quarter     |       | 16.90                                      |       | 15.18                                |       | 13.99 |   | 12.82 |   |
| Third Quarter      |       | 17.85                                      |       | 16.30                                |       | 14.54 |   | 13.31 |   |
| Fourth Quarter     |       | 20.39                                      |       | 17.99                                |       | 15.51 |   | 14.31 |   |
| **2005**           |       |                                       |       |                                 |       |   |   |   |   |
| First Quarter      |       | 21.99                                      |       | 20.06                                |       | 17.02 |   | 15.11 |   |
| Second Quarter     |       | 21.32                                      |       | 19.69                                |       | 17.55 |   | 15.31 |   |
| Third Quarter      |       | 25.35                                      |       | 20.61                                |       | 21.00 |   | 17.21 |   |
| Fourth Quarter     |       | 25.83                                      |       | 23.75                                |       | 21.94 |   | 19.62 |   |
| December 2005 |       | 25.74                                      |       | 24.68                                |       | 21.94 |   | 20.82 |   |
| **2006**           |       |                                       |       |                                 |       |   |   |   |   |
| January 2006  |       | 26.86                                      |       | 24.90                                |       | 22.21 |   | 20.37 |   |
| February 2006 |       | 28.30                                      |       | 25.94                                |       | 23.86 |   | 21.49 |   |
| March 2006    |       | 29.05                                      |       | 27.25                                |       | 24.12 |   | 22.74 |   |
| April 2006    |       | 30.25                                      |       | 27.78                                |       | 24.19 |   | 22.80 |   |
| May 2006      |       | 30.54                                      |       | 26.51                                |       | 23.93 |   | 21.27 |   |

 

Thehigh and low closing prices of the ADSs on the NYSE for the first quarter of2006 were U.S. $29.05 and U.S. $24.90, respectively. The high and low closingprices of the ordinary shares on the Italian Stock Exchange for the firstquarter of 2006 were Euro 24.12 and Euro 20.37, respectively.

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**ITEM 10. ADDITIONALINFORMATION**

**Memorandumand Articles of Association as of December 31, 2005**

*OurObjectives*

OurArticles of Association provide that Luxottica Group S.p.A.’s principalobjectives are, among other things, (i) the ownership and management ofother companies or entities both in Italy and abroad, (ii) financing andmanagerial coordination of the owned companies and entities and (iii) providingcredit support for our subsidiaries. The Legislative Decree No. 58 of February 24,1998 regulating the Italian financial markets (“Decree No. 58”) and ourArticles of Association contain, among other things, provisions to thefollowing effect:

*Directors*

TheBoard of Directors is invested with the fullest powers for ordinary andextraordinary management of the company, except for the acts that the lawreserves for shareholders’ meetings. Compensation of the directors is approvedby the ordinary shareholders at the annual meeting of shareholders. Thecompensation of Directors who also serve as executive officers is determined bythe Board of Directors with the favorable opinion of the Board of StatutoryAuditors.

Directors are notrequired to hold ordinary shares of Luxottica Group S.p.A. as a qualificationfor office.

# **Summary of Changes Occurring After December 31,2005**

On March 27,2006, pursuant to the Italian Corporate Governance Policies, the Board ofDirectors of Luxottica Group S.p.A.:

(i)            adopted new Guidelines ConcerningTransactions with Related Parties;

(ii)           adopted a new Procedure Concerning InternalDealing;

(iii)          adopted a new Procedure for HandlingInsider Information; and

(iv)          updatedthe Code of Ethics.

Theabove documents are available on the Company’s website, www.luxottica.com.

On June 14,2006, at an extraordinary and ordinary meeting of shareholders, the Company’sBy-laws were amended to implement the Italian Corporate Governance Policies.The principal amendments are as follows:

·                  requirementsin order to attend a meeting of shareholders: those shareholders who have sentthe Company a notice through the intermediary keeping the relevant accounts nolater than two working days before the date scheduled for each meeting shall beentitled to attend the meeting, and the shares for which notice of attendanceof the meeting was given may not be transferred before the meeting takes place;

·                  appointmentof the Directors pursuant to lists submitted by the shareholders: only shareholderswho individually or collectively with other shareholders represent at least2.5% of the subscribed share capital at the time of submission of the list areentitled to submit a list. Such appointments shall be resolved by secret ballotif required by law. Such lists, together with the professional CVs of the candidates,shall be filed at the registered office of the Company at least 15 days priorto the first meeting of shareholders. At least one director shall be appointedfrom among the members included in the list that has obtained the second mostvotes;

·                  theappointment of the executive in charge of corporate accounting records will besubject to the non-binding opinion of the Board of Statutory Auditors;

·                  ameeting of the Board of Directors may be called by one member of the Board ofStatutory Auditors;

·                  appointmentof the Board of Statutory Auditors pursuant to lists submitted by the shareholders:only shareholders who individually or collectively with other shareholdersrepresent at least 2.5% of the subscribed share capital at the

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time of submissionof the list are entitled to submit a list. Such appointments shall be resolvedby secret ballot if required by law. Such lists, together with the professionalCVs of the candidates, shall be filed at the registered office of the Company atleast 15 days prior to the first meeting of shareholders. The first candidateon the list which has obtained the second most votes shall be appointed asChairman of the Board of Statutory Auditors; and

·                  theterm of the appointment of the independent auditor is fixed at 6 financialyears and shall end on the date of the shareholders’ meeting called to approvethe financial statements for the sixth financial year following theappointment.

For more details, see the amended and restated by-lawsof the Company, which are filed as an exhibit to this report.

**RightsAttaching to Ordinary Shares**

*Dividends*

We arerequired to pay an annual dividend on the ordinary shares if approved by amajority of shareholders at the annual general meeting that must be held within180 days after the end of each year. Before dividends may be paid with respectto the results of any year, an amount equal to five percent of our net incomefor such year must be set aside to the legal reserve until the reserve,including amounts set aside during prior years, is equal to at least one-fifthof the nominal value of our issued share capital. See Item 3—“KeyInformation—Dividends.”

Futuredeterminations as to dividends will depend upon, among other things, ourearnings, financial position and capital requirements, applicable legalrestrictions and such other factors as the Board of Directors and shareholdersmay determine. Dividends are usually paid in accordance with the dates setannually by Borsa Italiana S.p.A. Dividends which are not collected within fiveyears of the date on which they become payable are forfeited. Dividends arepaid to those persons who hold the ordinary shares through an intermediary on adividend payment date declared at the shareholders’ meeting. The intermediary,upon request by the shareholder, issues a certified statement of accountallowing the shareholder to collect the dividends.

Ifdividends are not distributed and an appropriate reserve is created, theshareholders can adopt a resolution, at an extraordinary meeting, to convertsuch reserve into capital. In this case, the shares resulting from the increaseare attributable to the shareholders in proportion to their ownership beforethe increase.

*Notification of the Acquisitionof Shares and Voting Rights*

Pursuantto Italian securities laws and CONSOB (the Italian securities regulatoryauthority) implementing regulations thereof, any person acquiring any interestin excess of two percent in the voting shares of a listed company mustgive notice to CONSOB and the company whose shares are acquired. The votingrights attributable to the shares in respect of which such notification has notbeen made may not be exercised. Any resolution taken in violation of theforegoing may be annulled if the resolution would not have been passed in theabsence of such votes.

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Inaddition, any person whose aggregate shareholding in a listed company exceedsor falls below two percent, five percent, 7.5 percent, ten percentand successive percentage multiples of five, respectively, of the listedcompany’s voting share capital is obligated to notify CONSOB and the listedcompany whose shares are acquired or disposed. For the purpose of calculatingthese ownership thresholds, shares owned by any person, irrespective of whetherthe relative voting rights are exercisable by such person or by a third party,are taken into consideration and, except in certain circumstances, accountshould also be taken of shares held through, or shares the voting rights of whichare exercisable by, subsidiaries, fiduciaries or intermediaries. For thepurpose of calculating the ownership thresholds of five percent, ten percent,25 percent, 50 percent and 75 percent, shares which: (i) aperson may, directly or indirectly, acquire or sell; and (ii) a person mayacquire pursuant to the exercise of a warrant or conversion right which isexercisable within 60 days, should also be taken into account. Thenotification obligation is to be repeated when such person, upon the exerciseof the right referred to in (i) or (ii) above, acquires or disposesof shares which causes his aggregate ownership in the listed company to exceedor fall below the relevant thresholds. Notification should be made (except incertain circumstances) within five trading days of the event that gives rise tothe notification obligation.

Cross ownershipbetween listed companies may not exceed two percent of their respective votingshares and cross ownership between a listed company and an unlisted company maynot exceed two percent of the voting shares of the listed company and tenpercent of the voting shares of the unlisted company. If the relevant thresholdis exceeded, the company which is the latter to exceed such threshold may notexercise the voting rights attributable to the shares in excess of thethreshold and must sell the excess shares within a period of twelve months. Ifthe company does not sell the excess shares within twelve months, it may notexercise the voting rights in respect of its entire shareholding. If it is notpossible to ascertain which is the later company to exceed the threshold,subject to any different agreement between the two companies, the limitation onvoting rights and the obligation to sell the excess shares will apply to bothof the companies concerned. The two percent limit for cross ownership isincreased to five percent on the condition that such limit is only exceeded bythe two companies concerned following an agreement authorized in advance by anordinary shareholders’ meeting of each of the two companies. Furthermore, if aparty holds an interest in excess of two percent of a listed company’s sharecapital, such listed company or the party which controls the listed company maynot purchase an interest above two percent in a listed company controlled bythe first party. In case of non-compliance, voting rights attributable to theshares held in excess may not be exercised. If it is not possible to ascertainwhich is the later party to exceed the limit, the limitation on voting rightswill, subject to different agreement between the two parties, apply to both.Any shareholders’ resolution taken in violation of the limitation on votingrights may be annulled by the relevant court if the resolution would not havebeen passed in the absence of such votes. The foregoing provisions in relationto cross ownership do not apply when the thresholds are exceeded following apublic tender offer aimed at acquiring at least 60 percent of the company’sshares.

Thevalidity of any agreement which governs the voting rights of the shares of alisted company or of its parent company is subject to the notification of suchagreement to CONSOB, the publication of a summary of such agreement in thepress and the filing of the agreement with the Register of Enterprises, in eachcase, within five days, ten days and 15 days, respectively, of the date ofthe agreement. Failure to comply with the foregoing requirements will renderthe agreement null and void and the voting rights of the relative shares cannotbe exercised.

Theagreements subject to the above include those which: (i) regulate theexercise of, or prior consultation for the exercise of voting rights in, alisted company or its controlling company; (ii) contain limitations on thetransfer of shares or securities which grant the right to purchase or subscribefor shares; (iii) provide for the purchase of shares or securitiesmentioned in (ii); or (iv) have as their object or effect the exercise(including joint exercise) of a dominant influence over the company.

Anyagreement of the nature described above can have a legal maximum term of threeyears (and may be renewed for an additional three-year term at its expiration),and if executed for an unlimited term shall otherwise expire three years afterits execution. Any such agreement executed for an unlimited term can beterminated by a party upon six months’ prior notice. In the case of a publictender offer, shareholders who intend to participate in the tender offer maywithdraw from the agreement without notice. CONSOB Regulation 11971/99contains provisions which govern the method and content of the notification andpublication of the agreements as well as any subsequent amendments thereto.

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*GeneralMeetings*

Meetingsof the shareholders may be held at our executive offices in Italy, in anycountry in the European Union and in the U.S., following publication of noticeof the meeting including the agenda in the “Gazzetta Ufficiale” at least30 days before the date fixed for the meeting. Deutsche Bank Trust CompanyAmericas  will mail to all record holdersof ADRs a notice containing a summary of the information contained in anynotice of a shareholders’ meeting received by Deutsche Bank Trust CompanyAmericas.  See “—Documents on Display.”

Meetingsof shareholders may be either ordinary meetings or extraordinary meetings.Shareholders’ meetings may be called by the Board of Directors or the Board ofStatutory Auditors. In the case of a listed company in Italy,Decree n. 58/98 provides that shareholders’ meetings must be convenedupon the request of holders of ten percent of the issued and outstanding sharecapital within 30 days following receipt of such a request, provided thatthe request contains a summary of the matters to be discussed. The Board of Directorsmay, however, resolve not to convene a meeting if the interest of Luxottica sorequires. In this case, the Court of Milan, on appeal by the shareholders whohave asked for such meeting, can order by decree, after having conferred withthe Board of Directors and the Board of Statutory Auditors, that such meetingbe convened.

Holdersof ordinary shares are entitled to attend and vote at ordinary andextraordinary shareholders’ meetings. Each holder is entitled to cast one votefor each ordinary share held. Votes may be cast personally or by proxy, inaccordance with applicable Italian regulation. However, the voting rights ofordinary shares held in breach of applicable law may in some cases not beexercised.

Ordinaryshareholders’ meetings must be convened at least once a year to approve theannual financial statements of Luxottica Group S.p.A., which meeting mustbe convened within four months (or, under certain circumstances, six months)after the end of the financial year to which such financial statements relate.At ordinary shareholders’ meetings, shareholders resolve upon dividenddistribution, if any, appoint the Directors, Statutory Auditors and externalauditors, determine their remuneration and vote on business matters submittedby the Directors.

Thequorum required, in person or by proxy, for an ordinary meeting, upon firstnotice is at least 50 percent of the total number of issued andoutstanding ordinary shares, while on second call there is no quorumrequirement. Resolutions at ordinary meetings may be adopted, in first andsecond calls, by a simple majority of ordinary shares represented at suchmeeting.

Extraordinarymeetings of shareholders may be called to vote upon, among other things,proposed amendments to the by-laws, capital increases, mergers, spin-offs,issuance of debentures, appointment of receivers and similar extraordinaryactions. Pursuant to Decree n. 58/98, extraordinary shareholders’meetings shall be properly convened when, in the case of the first meeting,shareholders representing more than one-half of our share capital are presentat the meeting, and in the case of the second and third meetings, shareholdersrepresenting, respectively, more than one-third and one-fifth of our sharecapital are present at the meeting. Resolutions are adopted on first, secondand third calls of extraordinary shareholders meetings with the affirmativevote of holders of at least two-thirds of the shares represented at themeeting.

Themeeting notice period of 30 days is reduced to, respectively, 20 dayswith respect to meetings convened at the request of minority shareholders andmeetings convened to resolve upon Luxottica Group S.p.A.’s dissolution,and 15 days for meetings convened pending a public tender offer launchedwith respect to our ordinary shares. The notice may specify a date for a secondmeeting in the event that a quorum is not obtained at the first meeting. Noticeof any meeting on third notice, which must be held within 30 days from thepreviously adjourned meeting, must be published at least eight days prior tothe date of the meeting. In addition, a meeting will be deemed duly convened ifshareholders representing 100 percent of Luxottica Group S.p.A.’sshare capital, together with all members of the Board of Directors and theBoard of Statutory Auditors, are present at the meeting.

Toattend any shareholders’ meeting, a holder of ordinary shares must, at leasttwo days prior to the date fixed for the meeting, deposit a certified statementof account which evidences its ownership of the ordinary shares at our officesor with such agent banks as may be specified in the notice of meeting inexchange for an admission ticket and proxy form for the meeting. Suchstatements may be obtained by beneficial owners of the ordinary shares throughthe intermediaries associated with Monte Titoli (or such authorized centralizedsecurities custody and administration system with which their accounts areheld). Alternatively, beneficial owners may instruct the relevant intermediaryto procure the admission tickets and proxy forms.

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Shareholdersmay appoint proxies by completing the form attached to the admission ticket.Directors, Statutory Auditors, external auditors or our employees as well asemployees of companies controlled by us may not vote as proxies forshareholders and any one proxy cannot represent more than 200 shareholders ofLuxottica Group S.p.A.

Pursuantto Decree n. 58/98, proxies may be solicited by an intermediary (forexample, banks or investment firms) on behalf of a qualified solicitingstakeholder (generally, one or more shareholders who own, and have owned formore than six months, at least one percent (or such lesser percentagedetermined by CONSOB) of our voting capital and who has been registered in ourshareholders’ register as a holder of such shares for at least six months).

Proxiesmay be collected by a shareholders’ association provided that such associationhas been formed by certified private agreement, does not carry out businessactivities and is made up of at least 50 individuals each of whom owns nomore than 0.1 percent of our voting capital. Members of the shareholders’association may, but are not obliged to, grant proxies to the legalrepresentative of the association and proxies may be granted in respect of onlycertain of the matters to be discussed at the relevant shareholders’ meeting.The association may vote in different ways in compliance with the instructionsexpressed by each member who has granted a proxy to the association. CONSOB hasestablished by implementing regulations provisions that govern the transparencyand the proper performance of the solicitation and collection of proxies.

Our By-lawsdo not contain any limitations on the voting rights in respect of ordinaryshares held by any shareholder. Resolutions adopted at a shareholders’ meetingare binding on all shareholders. However, each absent or dissenting shareholder(as well as any Director or Statutory Auditor) has the right, under Italianlaw, to ask a court to annul resolutions taken in violation of applicable lawsor the by-laws. In addition, in a limited number of cases (including the mergerof a listed company with, and its incorporation into, an unlisted company)applicable law grants dissenting and absent shareholders the right to obtainthe redemption of their shares by the issuer at the average market price of theshares during the previous six-month period. A redemption can be effectedeither by utilizing the available reserves of the issuer (in which case theshares may be held and registered in the name of the issuer) or alternativelyby a reduction of share capital of the issuer.

*PreemptiveRights*

Pursuantto Italian law, holders of ordinary shares are entitled to subscribe forissuances of shares, debentures convertible into shares and rights to subscribefor shares in proportion to their holdings, unless such preemptive rights arewaived or limited by a shareholders’ resolution adopted by the affirmative voteof holders of more than 50 percent of the ordinary shares and such waiveror limitation is in the interest of Luxottica Group S.p.A. It is likelythat the preemptive rights generally available to holders of ordinary sharesmay not be fully available to holders of ADRs. See “ —Description of AmericanDepositary Receipts—Share Dividends and Other Distributions.”

Pursuantto Decree n. 58/98, in the event that: (i) the newly issued shares areoffered for subscription to our employees or employees of our subsidiaries; and(ii) the new shares to be issued by us for subscription by theaforementioned parties do not exceed one percent of our share capital, theresolution excluding preemptive rights is to be approved by shareholdersrepresenting the majority required for extraordinary meetings. If theaforementioned conditions are not satisfied, the resolution excluding thepreemptive rights must be approved by shareholders representing more than50 percent of our share capital, even if the resolution is taken at ameeting held on second or third notice.

*Preferential Shares*

UnderItalian law, a company such as ours may issue shares that have a preferenceover ordinary shares with respect to the distribution of dividends or surplusassets. At present, we have no such preferential shares outstanding and anyissuance of such shares would be subject to approval by a majority ofshareholders.

*Rights onLiquidation*

On aliquidation or winding-up of the company, subject to the preferential rights ofholders of any outstanding preferential shares, holders of ordinary shares willbe entitled to participate in any surplus assets remaining after payment of thecreditors. Shares rank *pari passu*among themselves in liquidation.

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*Purchaseof Shares by Luxottica Group S.p.A.*

We maypurchase up to ten percent of our ordinary shares, subject to certain conditionsand limitations provided by Italian law, including that the purchase beapproved by shareholders. Shares may only be purchased out of profits availablefor dividends or out of distributable reserves in each case as appearing in thelatest shareholder-approved unconsolidated financial statements. Further, wemay only repurchase fully paid shares. As long as such shares are owned by us,they would not be entitled to dividends nor to subscribe for new ordinaryshares in the case of capital increases, and their voting rights would besuspended. A corresponding reserve must be created in our balance sheet whichis not available for distribution.

Decreen. 58/98 provides that the purchase by a listed company of its own shares andthe purchase of shares of a listed company by its subsidiary must take place byway of a public offer or on the market in a manner agreed with BorsaItaliana S.p.A. which must ensure the equality of treatment amongshareholders, subject to certain limitations. The foregoing does not apply toshares being purchased by a listed company from its employees or employees ofits parent company or subsidiaries.

*MinorityShareholders’ Rights*

Eachabsent or dissenting shareholder may, within three months, ask a court to annulshareholders’ resolutions taken in violation of applicable laws or our by-laws.Each shareholder may bring to the attention of the Board of Statutory Auditorsfacts or acts which are deemed wrongful. Pursuant to Decree n. 58/98,if such shareholders represent more than two percent of our share capital, theBoard of Statutory Auditors must investigate without delay and report itsfindings and recommendations at the shareholders’ meeting.

Shareholdersrepresenting more than five percent of our share capital have the right toreport major irregularities to the relevant court. In addition, shareholdersrepresenting at least five percent of our share capital who have beenregistered as shareholders for at least six months may initiate a liabilitysuit against the Directors, Statutory Auditors and general managers ofLuxottica Group S.p.A. We may waive or settle the suit only if less thanfive percent of the shareholders vote against such waiver or settlement. Wewill reimburse the legal costs of such action in the event that the claim ofsuch shareholders is successful and (i) the court does not award suchcosts against the relevant Directors, Statutory Auditors or general managers,or (ii) such costs cannot be recovered from such Directors, StatutoryAuditors or general managers. In compliance with decree n. 58/98, ourby-laws give minority shareholders the right to appoint one Statutory Auditorand one Alternate Auditor to the Board of Statutory Auditors. See Item 6—“Directors,Senior Management and Employees—Directors and Senior Management.”

*Italian Tender Offer Rules*

UnderDecree n. 58/98, a public tender offer is required to be made by any personthat through share purchases holds more than 30 percent of the votingstock of an Italian listed company. The public tender offer must cover thewhole voting stock of the company. Similarly, under CONSOB rules, a publictender for the entire voting stock of a listed company must be made by anyperson who currently owns more than 30 percent of the voting stock of acompany (but does not exercise majority voting rights at an ordinaryshareholders’ meeting) and purchases or acquires through the exercise ofsubscription or conversion rights during a 12-month period more thanthree percent of the ordinary capital. The offer must be launched within30 days from the date on which the relevant threshold was exceeded, andmust be made at a price not lower than the average of the weighted average ofthe market price for the shares in the previous 12 months, and the highestprice paid for the shares by the offeror during the same period.

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CONSOBregulates these provisions in greater detail through a number of exemptionsfrom the duty to launch a tender offer. Such exemptions include, among others: (i) whenanother person or persons jointly control the company; (ii) when a partyexceeds the threshold as a result of shares transferred to it by a relatedparty; and (iii) when the threshold is exceeded by a party following theexercise of pre-emption or conversion rights to which such party was entitled. Article 107of the Testo Unico provides, however, that the acquisition of an interest above30 percent of the voting stock of a company does not trigger theobligation to launch a 100 percent tender offer if the person concernedhas exceeded the threshold as a result of a public tender offer launched on60 percent or more of the voting stock of the company. This provision isavailable only (i) if the tender offer is conditional on the acceptance bya majority of the shareholders of the company (excluding, for the purpose ofcalculating such majority, the offeror or any shareholder that holds anabsolute or relative majority shareholding exceeding ten percent as well as theofferor’s subsidiaries, controlling persons, related companies and otherpersons connected to it by virtue, among other things, of a shareholders’agreement (together, “persons or entities acting in concert with the offeror”)),(ii) if the offeror (including the persons or entities acting in concertwith the offeror) has not acquired more than one percent of the voting stock ofthe company in the preceding 12 months and during the offer period and (iii) uponreceipt of satisfactory evidence that the terms of (i) and (ii) havecomplied with CONSOB rules that a mandatory bid need not be made. However,after the offer has been completed the offeror nevertheless becomes subject tothe duty to launch an offer for 100 percent of the voting stock if, in thecourse of the subsequent 12 months, (i) it (including the persons orentities acting in concert with the offeror) has purchased more than onepercent of the voting stock of the company, or (ii) the company hasapproved a merger or spin-off. Finally, anyone holding 90 percent or moreof the voting stock of a company must launch an offer for the remaining shares,unless an adequate distribution of the shares is resumed so as to ensure propertrading within a period of four months. Any person who, following a tenderoffer for 100 percent of the voting stock, holds more than 98 percentof such voting stock is entitled to acquire the residual shareholding during aperiod of four months upon conclusion of the tender offer, if it has declaredin the offering documentation its intention to make such acquisition. Sharesheld in breach of these rules cannot be voted and must be sold within12 months.

*DerivativeSuits*

UnderItalian law, action against members of the Board of Directors, members of theBoard of Statutory Auditors and General Managers of a company may be brought onbehalf of the company if authorized by a resolution adopted at an ordinarymeeting of shareholders. In respect of listed companies, the Testo Unicoprovides for a new form of shareholders’ action against members of a board ofdirectors, which may be brought by holders of at least five percent of theoutstanding shares who have been registered in the shareholders’ register forat least six months. We are allowed to not commence, or to settle, the suitprovided that shareholders representing at least five percent of the issued andoutstanding shares do not vote against a resolution to this effect. We willreimburse the legal costs of such action in the event that the claim of suchshareholders is successful and (i) the court does not award these costs aspart of the judgment against the relevant Directors, Statutory Auditors orgeneral managers or (ii) these costs cannot be recovered from suchDirectors, Statutory Auditors or general managers. In addition, Italian lawpermits a shareholder acting alone to bring an action against members of a boardor directors in the event that such shareholder has suffered damages directlyrelated to negligence or willful misconduct.

*NoLimitation of Ownership*

NeitherItalian law nor any of our constituent documents impose any limitations on theright of non-resident or foreign shareholders to hold or exercise voting rightson our ordinary shares or the ADSs.

**Descriptionof American Depositary Receipts**

Thefollowing is a summary of certain provisions of the Amended and RestatedDeposit Agreement (the “Deposit Agreement”), dated as of March 28, 2006,among Deutsche Bank Trust Company Americas, as depositary, the holders fromtime to time of ADRs issued thereunder and us. The Deposit Agreement supersedesour earlier deposit agreement with The Bank of New York. This summary does notpurport to be complete and is qualified in its entirety by reference to theDeposit Agreement, a copy of which has been filed as an exhibit to this annualreport. For more complete information, the entire agreement should be read. Copiesof the Deposit Agreement are available for inspection at the principalCorporate Trust Office of Deutsche Bank Trust Company Americas at 60 WallStreet, New York, New York 10005.

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ADRsare issued by Deutsche Bank Trust Company Americas. Each ADR evidences anownership interest in a number of American Depositary Shares, each of whichrepresents one ordinary share that we deposit with Deutsche Bank Milan, ascustodian under the Deposit Agreement. Each ADR will also represent securities,cash or other property deposited with Deutsche Bank Trust Company Americas butnot distributed to ADR holders. Deutsche Bank Trust Company Americas’ CorporateTrust Office is located at 60 Wall Street, New York, New York 10005,and its principal executive office is located at 60 Wall Street, New York,New York 10005.

*ShareDividends and Other Distributions*

DeutscheBank Trust Company Americas has agreed to pay to ADR holders the cash dividendsor other distributions it or the custodian receives on ordinary shares or otherdeposited securities, after deducting its fees and expenses.

*Cash*

DeutscheBank Trust Company Americas converts any cash dividend or other cashdistribution we pay on the ordinary shares into U.S. dollars, if it can do soon a reasonable basis and can transfer the U.S. dollars to the United States.If it is not possible for Deutsche Bank Trust Company Americas to convertforeign currency in whole or in part into U.S. dollars, or if any approval orlicense of any government is needed and cannot be obtained, Deutsche Bank TrustCompany Americas may distribute the foreign currency to, or in its discretionmay hold the foreign currency uninvested and without liability for interest forthe accounts of, ADR holders entitled to receive the same.

*Shares*

DeutscheBank Trust Company Americas will, unless otherwise requested by us, distributenew ADRs representing any shares we may distribute as a dividend or freedistribution. Deutsche Bank Trust Company Americas will only distribute wholeADRs. It will sell shares which would require it to issue a fractional ADR anddistribute the net proceeds in the same way as it does with dividends ordistributions of cash. If Deutsche Bank Trust Company Americas does not distributeadditional ADRs, each ADR will also represent the additional deposited shares.

*Rights toReceive Additional Shares*

If weoffer holders of our ordinary shares any rights to subscribe for additionalordinary shares or any other rights, Deutsche Bank Trust Company Americas maymake these rights available to ADR holders. We must first instruct DeutscheBank Trust Company Americas to do so and furnish it with satisfactory evidencethat it is legal to do so. If we do not furnish this evidence and/or give theseinstructions, or if Deutsche Bank Trust Company Americas determines in itsreasonable discretion that it is not lawful and feasible to make such rightsavailable to all or certain owners, Deutsche Bank Trust Company Americas maysell the rights and allocate the net proceeds to holders’ accounts. DeutscheBank Trust Company Americas may allow rights that are not distributed or soldto lapse. In that case, ADR holders will receive no value for them.

IfDeutsche Bank Trust Company Americas makes rights available to ADR holders,upon instruction from such holders it will exercise the rights and purchase theshares on behalf of the ADR holders.

*Deposit,Withdrawal and Cancellation*

ADRsmay be turned in at the Corporate Trust Office of Deutsche Bank Trust CompanyAmericas. Upon payment of its fees and expenses and of any taxes or charges,such as stamp taxes or stock transfer taxes or fees, Deutsche Bank TrustCompany Americas will deliver the deposited securities underlying the ADRs atthe office of the custodian, except that Deutsche Bank Trust Company Americasmay deliver at its Corporate Trust Office any dividends or distributions withrespect to the deposited securities represented by the ADRs, or any proceedsfrom the sale of any dividends, distributions or rights, which may be held byDeutsche Bank Trust Company Americas. Alternatively, at the request, risk andexpense of the applicable ADR holder, Deutsche Bank Trust Company Americas willdeliver the deposited securities at its Corporate Trust Office.

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*VotingRights*

ADRholders may instruct Deutsche Bank Trust Company Americas to vote the sharesunderlying ADRs but only if we ask Deutsche Bank Trust Company Americas to askfor such instructions. Otherwise, ADR holders will not be able to exercisetheir right to vote unless such holders withdraw the ordinary shares underlyingthe ADRs. However, an ADR holder may not know about a meeting at which suchholder may be entitled to vote enough in advance to withdraw the shares.

If weask for instructions of an ADR holder, Deutsche Bank Trust Company Americaswill notify the ADR holder of the upcoming vote and arrange to deliver votingmaterials. The materials will (1) describe the matters to be voted on and (2) explainhow ADR holders, on a certain date, may instruct Deutsche Bank Trust CompanyAmericas to vote the shares or other deposited securities underlying the ADRsas directed. For instructions to be valid, Deutsche Bank Trust Company Americasmust receive them on or before the date specified. Deutsche Bank Trust CompanyAmericas will try, as far as practical, subject to Italian law and theprovisions of our articles of association, to vote or to have its agents votethe shares or other deposited securities as instructed by the ADR holder.Deutsche Bank Trust Company Americas will only vote or attempt to vote asinstructed by the ADR holder and will not vote any of such holder’s shares orother deposited securities except in accordance with such instructions.

DeutscheBank Trust Company Americas shall fix a record date whenever:

·                  any cash dividend or distribution shall becomepayable;

·                  any distribution other than cash shall be made;

·                  rights shall be issued with respect to the depositedsecurities;

·                  Deutsche BankTrust Company Americas, for any reason, causesa change in the number of ordinary shares that are represented by each ADS; or

·                  Deutsche BankTrust Company Americas receives notice of anymeeting of holders of ordinary shares or other deposited securities.

The purpose of fixing a record date is to determinewhich ADR holders are:

·                  entitled to receive such dividend, distribution orrights;

·                  entitled to receive the net proceeds from the saleof such dividend, distribution or rights; and

·                  entitled to give instructions for the exercise ofvoting rights at any such meeting.

**MaterialContracts**

Thecontracts described below have been entered into by Luxottica Group S.p.A.and/or its subsidiaries since January 1, 2004 and, as of the date of thisannual report, contain provisions under which we or one or more of oursubsidiaries has an obligation or entitlement which is or may be material tous. This discussion is not complete and should be read in conjunction with theagreements described below, each of which has been filed with the SEC as anexhibit to this annual report.

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*CreditAgreements and Other Financing Agreements*

*Amended Euro1,130 Million and U.S. $325 Million Credit Facility and Related Interest RateSwaps*

In March 2006,we amended our credit facility with a group of banks to provide for borrowingsof an aggregate of Euro 1,130 million and an aggregate of U.S.$325 million in favor of Luxottica Group S.p.A. and our subsidiary U.S.Holdings. The credit facility consists of three tranches: Tranche A is anamortizing term loan of Euro 405 million that is to be used to refinanceLuxottica Group S.p.A.’s existing debt as it matures and for other generalcorporate purposes and will require nine equal quarterly installments of Euro45 million beginning in June 2007; Tranche B is a term loan of U.S.$325 million that was used by U.S. Holdings to finance the acquisition ofCole and will mature in March 2011; and Tranche C is a revolvingcredit facility equivalent to Euro 725 million, available in Euro orU.S.$, in favor of both Luxottica Group S.p.A. and U.S. Holdings, that is to beused for general corporate purposes and all outstanding borrowings, if any,will mature in March 2011. At December 31, 2005, Euro 294.9 millionhad been drawn from Tranche C. We may select interest periods of one, two,three or six months with interest accruing on Euro-denominated loans based onthe corresponding EURIBOR rate, plus a margin, and U.S. dollar-denominatedloans based on the corresponding LIBOR rate, plus a margin of between 0.20percent and 0.40 percent based on the “Net Debt/EBITDA” ratio, as defined inthe agreement. The interest rates on December 31, 2005 was 2.94 percentfor Tranche A, 4.56 percent for Tranche B and a 4.49 percent weighted averagerate on Tranche C. The credit facility also contains certain financial andoperating covenants. We were in compliance with those covenants as of December 31,2005. Under this credit facility, Euro 974.3 million was outstanding as of December 31,2005.

In June 2005, we enteredinto nine interest rate swap transactions with various banks with an aggregateinitial notional amount of Euro 405 million which will decrease by Euro 45million every three months starting on June 3, 2007 (“Club Deal Swaps”).These swaps will expire on June 3, 2009. The Club Deal Swaps were enteredinto as a cash flow hedge on Tranche A of the credit facility discussed above.The Club Deal Swaps exchange the floating rate of Euribor for an average fixedrate of 2.40 percent per annum. The cash flow hedges are deemed to be highlyeffective and as such the change in the fair value of the swaps will beincluded on the balance sheets in other comprehensive income. Anyineffectiveness and the amounts needed to properly reflect interest expensewill be amortized out of OCI and recorded in the appropriate periods. As aresult, approximately Euro 3.5 million is included in OCI as of December 31,2005. Based on current interest rates and market conditions, the estimatedaggregate amount to be recognized into earnings from OCI for these cash flowhedges in fiscal 2006 is approximately Euro 0.4 million, net of taxes.

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**ItalianExchange Controls**

Thefollowing is a summary of relevant Italian laws in force as at the date of thisannual report but does not purport to be a comprehensive description of allexchange control considerations that may be relevant.

Thereare no exchange controls in Italy. Residents and non-residents of Italy mayeffect any investments, disinvestments and other transactions that entail atransfer of assets to or from Italy, subject only to the reporting,record-keeping and disclosure requirements described below. In particular,residents of Italy may hold foreign currency and foreign securities of anykind, within and outside Italy, while non-residents may invest in Italiansecurities without restriction and may export from Italy cash, instruments ofcredit or payment and securities, whether in foreign currency or Euro,representing interest, dividends, other asset distributions and the proceeds ofdispositions.

Updatedreporting and record-keeping requirements are contained in recent Italianlegislation which implements a European Union directive regarding the freemovement of capital. Such legislation requires that transfers into or out ofItaly of cash or securities in excess of Euro 12,500 be reported in writing tothe *Ufficio Italiano Cambi* (the ItalianExchange Office) by residents or non-residents that effect such transfersdirectly, or by banks, securities dealers or “*PosteItaliane S.p.A.*” (ItalianMail) or other intermediaries that effect such transactions on their behalf. Inaddition, banks, securities dealers or “*Poste Italiane S.p.A.*” (Italian Mail) or otherintermediaries effecting such transactions on behalf of residents ornon-residents of Italy are required to maintain records of such transactionsfor five years, which may be inspected at any time by Italian tax and judicialauthorities. Non-compliance with these reporting and record-keepingrequirements may result in administrative fines or, in the case of falsereporting and in certain cases of incomplete reporting, criminal penalties. The*Ufficio Italiano Cambi* will maintainreports for a period of ten years and may use them, directly or through othergovernment offices, to police money laundering, tax evasion and any other crimeor violation.

Individuals,non-profit entities and certain partnerships that are resident in Italy mustdisclose on their annual tax declarations all investments held outside Italyand financial assets held at the end of a taxable period, as well as the totalamount of transfers effected during a taxable period to, from, within and betweencountries other than Italy relating to such foreign investments or financialassets, even if at the end of the taxable period such persons no longer ownedsuch foreign investments or financial assets. No such disclosure is required ifthe total value of the investments and assets at the end of a taxable period,or the total amount of the transfers effected during the year, is not greaterthan Euro 12,500. Corporations and partnerships resident in Italy are exemptfrom such disclosure requirements with respect to their annual tax declarationsbecause this information is required to be disclosed in their financialstatements.

Therecan be no assurance that the present regulatory environment in or outside Italywill continue or that particular policies presently in effect will bemaintained, although Italy is required to maintain certain regulations andpolicies by virtue of its membership in the European Union and otherinternational organizations and its adherence to various bilateral andmultilateral international agreements.

**Taxation**

Thefollowing summary contains a description of the principal United States federaland Italian income tax consequences of the ownership and disposition of ADSs orordinary shares by U.S. holders (as defined below) resident in the UnitedStates for tax purposes. The following description does not purport to be acomplete analysis of all possible tax considerations that may be relevant to aU.S. tax resident holder of ADSs or ordinary shares, and U.S. tax residentholders are advised to consult their advisors as to the overall consequences oftheir individual circumstances. In particular, this discussion does not addressall material tax consequences of owning ordinary shares or ADSs that may applyto special classes of holders, some of whom may be subject to different rules,including:

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·                  partnershipsand other pass-through entities;

·                  tax-exempt entities;

·                  certain banks, financial institutions and insurancecompanies;

·                  broker-dealers;

·                  traders in securities that elect to mark to market;

·                  investors liable for alternative minimum tax;

·                  investors that actually or constructively own tenpercent or more of the voting stock of Luxottica Group S.p.A.;

·                  investors that hold ordinary shares or ADSs as partof a straddle or a hedging or conversion transaction;

·                  investors whose functional currency is not the U.S.dollar; or

·                  investors who do not hold the ordinary shares orADSs as capital assets within the meaning of the Internal Revenue Code of 1986,as amended (the “Code”).

Inaddition, the following summary does not discuss the tax treatment of ordinaryshares or ADSs that are held in connection with a permanent establishment orfixed base through which a U.S. holder carries on business or performs personalservices in Italy.

Furthermore,certain persons that may not be U.S. holders but who may otherwise be subjectto United States federal income tax liability will also be subject to UnitedStates federal as well as Italian tax consequences due to their ownership anddisposition of ADSs or ordinary shares. Such investors should consult withtheir own advisors as to the particular consequences associated with theirinvestment.

Thisdiscussion is based on the tax laws of Italy and of the United States,including the Code, its legislative history, existing and proposed regulations,and published rulings and court decisions, as currently in effect, as well ason the currently applicable Convention Between the United States of America andItaly for the Avoidance of Double Taxation with respect to Taxes on Income andthe Prevention of Fraud or Fiscal Evasion (the “Treaty”) and the ConventionBetween the United States of America and the Italian Republic for the Avoidanceof Double Taxation and the Prevention of Fiscal Evasion with respect to Taxeson Estates and Inheritances (the “Estate Tax Convention”). These laws aresubject to change, possibly on a retroactive basis and could affect the taxconsequences described below. A new tax treaty and protocol between Italy andthe United States (collectively, the “New Treaty”) to replace the currentTreaty was signed on August 25, 1999, but is not yet in effect. The NewTreaty would include an anti-abuse provision and a provision limiting treatybenefits to individuals, qualified governmental entities, companies that arepublicly traded or that satisfy certain share ownership requirements, certainpension plans and other tax-exempt entities, and certain other persons meetingprescribed anti-treaty shopping requirements. The New Treaty also would clarifythe availability of treaty benefits to entities that are treated as fiscallytransparent under United States or Italian law.

Inaddition, this section is based in part upon the representations of thedepositary and the assumption that each obligation in the Deposit Agreement andany related agreement will be performed in accordance with its terms.

Thisdiscussion addresses only Italian income taxation, gift and inheritancetaxation and capital gains taxation and United States federal income and estatetaxation.

Forpurposes of the current Treaty, the Estate Tax Convention and the Code, U.S.holders of ADSs will be treated as the owners of the underlying ordinary sharesrepresented by such ADSs. Exchanges of ordinary shares for ADSs and ADSs forordinary shares generally will not be subject to Italian tax or United Statesfederal income tax.

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*ItalianTax Law*

*Withholdingor Substitute Tax on Dividends.*In general, dividends paid byItalian corporations to non-Italian resident beneficial owners without apermanent establishment in Italy to which ordinary shares or ADSs areeffectively connected, are subject to final Italian withholding tax at the rateof 27 percent, unless reduced by an applicable double taxation treaty.Reduced rates (normally 15 percent) of withholding tax on dividends applyto non-resident beneficial owners of ordinary shares or ADSs who are entitledto and timely comply with procedures for claiming benefits under an applicableincome tax treaty entered into by Italy. Italy has concluded income taxtreaties with over 60 foreign countries, including all European Union memberstates, Argentina, Australia, Brazil, Canada, Japan, New Zealand, Norway,Switzerland, the United States and some countries in Africa, the Middle Eastand East Asia. It should be noted that in general the income tax treaties arenot applicable if the beneficial owner is a tax-exempt entity or, with a fewexceptions, a partnership or a trust.

Under the Treaty,Italian withholding tax at a reduced rate of 15 percent will generallyapply to dividends paid by an Italian corporation to a U.S. resident entitledto Treaty benefits who timely complies with the procedures for claiming suchbenefits, provided the dividends are not effectively connected with a permanentestablishment in Italy through which the U.S. resident carries on a business orwith a fixed base in Italy through which the U.S. resident performs independentpersonal services. The foregoing treatment will not be changed by the dividendarticle of the New Treaty.

UnderItalian law, in general, shares of Italian companies listed on the ItalianStock Exchange have to be registered in the centralized deposit system managedby *Monte Titoli*. With respect to dividendspaid by Italian corporations listed in Italy (such as Luxottica Group S.p.A.)to non-Italian resident beneficial owners, without a permanent establishment inItaly to which ADSs or ordinary shares are effectively connected, on sharesheld in the *Monte Titoli* system (including ourshares), instead of the 27 percent final withholding tax mentioned above,a substitute tax will apply at the same rate (which rate may, however, bereduced under an applicable double tax treaty) and conditions as theabove-mentioned withholding taxes. This substitute tax will be levied by theItalian authorized intermediary that participates in the *Monte Titoli*system and with which the securities are deposited, as well as by non-Italianauthorized intermediaries participating in the *Monte Titoli*system (directly or through a non-Italian centralized deposit systemparticipating in the *Monte Titoli*system), through a fiscal representative to be appointed in Italy.

Sincethe ordinary shares are registered in the centralized deposit system managed by*Monte Titoli*, the substitute tax regimewill apply to dividends paid by Luxottica Group S.p.A., instead of thewithholding tax regime.

For anon-Italian resident beneficial owner of the ordinary shares or ADSs to obtaina reduced rate of substitute tax on dividends pursuant to an applicable incometax treaty entered into by Italy, including the Treaty, the following proceduremust be followed. The intermediary with which the shares are deposited musttimely receive:

·                  a declaration by the beneficial owner of ordinaryshares or ADSs that contains all the data identifying this person as thebeneficial owner and indicates the existence of all the conditions necessaryfor the application of the relevant income tax treaty, as well as the elementsthat are necessary to determine the applicable treaty substitute tax rate; and

·                  a certification by the tax authorities of thebeneficial owner’s country of residence that the beneficial owner of theordinary shares or ADSs is a resident of that country for the purposes of theapplicable income tax treaty that is valid until March 31 of the yearfollowing submission. The time for processing requests for certification by theapplicable authorities will vary. The time normally required by the U.S.Internal Revenue Service (the “IRS”) is six to eight weeks.

Theintermediary must keep the foregoing documentation for the entire period inwhich the Italian tax authorities are entitled to issue an assessment withrespect to the tax year in which the dividends are paid and, if an assessmentis issued, until the assessment is settled. If the intermediary with which theshares are deposited is not resident in Italy, the aforesaid duties andobligations must be carried out by (i) a bank or an investment servicescompany that is a resident in Italy or (ii) a permanent establishment inItaly of a non-resident bank or investment services company, appointed by theforeign intermediary as its fiscal representative in Italy.

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As analternative to the application of the more favorable treaty rate of substitutetax on dividends or where an income tax treaty does not apply, under domesticItalian law non-resident shareholders can claim a refund of an amount up tofour-ninths of the 27 percent substitute tax on dividend income fromItalian tax authorities provided that (i) they implement an *ad hoc* refund procedure in accordance with the terms andconditions established by law, and (ii) they provide evidence that thisdividend income was subject to income tax in their country of residence in anamount at least equal to the total refund claimed. Beneficial owners ofordinary shares or ADSs should contact their tax advisors concerning thepossible availability of these refunds, the payment of which is normallysubject to extensive delays.

Distributionsof newly issued ordinary shares to beneficial owners with respect to theirshares or ADSs that are made as part of a pro rata distribution to allshareholders based on a gratuitous increase of the share capital throughtransfer of reserves or other provisions to share capital generally will not besubject to Italian tax. However, distributions of dividends in kind will besubject to withholding tax.

*Tax onCapital Gains.*Upon disposal of ordinary shares or ADSs of anItalian resident corporation, capital gains realized by non-residentindividuals and foreign corporations without a permanent establishment in Italyto which the ordinary shares or ADSs are effectively connected are subject totaxation in Italy. However, the tax regime depends on whether the interest(ordinary shares, ADS and/or rights) disposed of is “qualified” or “non-qualified.”The disposal of a “qualified” shareholding in a corporation the stock of whichis listed on a regulated market (such as Luxottica Group S.p.A.) is defined tooccur when a shareholder (i) owns shares, ADSs and/or rights through whichshares may be acquired representing in the aggregate more than five percent ofthe share capital or two percent of the shares with voting rights at anordinary shareholders’ meeting of the corporation and (ii) in anytwelve-month period following the date the ownership test under (i) ismet, such shareholder engages in the disposal of shares, ADSs and/or of rightsthrough which shares may be acquired that individually or in the aggregateexceed the percentages indicated under (i) above. Capital gains realizedby non-resident shareholders upon disposal of a “non-qualified” shareholding,are in principle subject in Italy to a capital gain tax (“CGT”) at 12.5%.However, an exemption from CGT is provided for gains realized by non-resident shareholderswithout a permanent establishment in Italy to which the ordinary shares or ADSsare effectively connected on the disposal of “non-qualified” shareholdings inItalian resident corporations the stock of which is listed on a regulatedmarket (such as Luxottica Group S.p.A.) even when such shareholdings are heldin Italy. Non-Italian residents who dispose of shares or ADSs may be requiredto timely provide a self-declaration not to be resident in Italy for taxpurposes, in order to benefit from this exemption. Upon disposal of a “qualified”shareholding, non-resident shareholders are in principle subject to Italianordinary taxation on 40% of the capital gain realized.

Theabove is subject to any provisions of an income tax treaty entered into by theRepublic of Italy, if the income tax treaty provisions are more favorable. Themajority of double tax treaties entered into by Italy, in accordance with theOECD Model tax convention, provide that capital gains realized from thedisposition of Italian securities are subject to CGT only in the country ofresidence of the seller. Therefore, the capital gains realized by a non-Italianresident entitled to the benefits of a treaty entered into by Italy inaccordance with the OECD Model in respect of taxation of capital gains from thedisposition of Italian securities will not be subject to Italian CGT,regardless of whether the shareholding disposed of is qualified ornon-qualified. Non-Italian residents who dispose of shares or ADSs may berequired to timely provide appropriate documentation establishing that theconditions of non-taxability of capital gains realized pursuant to theapplicable income tax treaties have been satisfied.

Underthe Treaty, a person who is considered a U.S. resident for purposes of theTreaty and is fully entitled to benefits under the Treaty will not incurItalian capital gains tax on disposal of ordinary shares or ADSs, unless theordinary shares or ADSs form part of a business property of a permanentestablishment of the holder in Italy or pertain to a fixed base available to aholder in Italy for the purpose of performing independent personal services.U.S. residents who sell ordinary shares or ADSs may be required to timelyproduce appropriate documentation establishing that the above-mentionedconditions for non-taxability of capital gains under the Treaty have beensatisfied. Such treatment will not be changed by the capital gains provisionsof the New Treaty.

*TransferTax.*An Italian transfer tax is normally payable on the transferof shares in an Italian company by and/or to Italian residents; no generalexception is provided from the transfer tax for transfers made by non-residentsof Italy. Sales of securities on a stock exchange are exempt, however, from theItalian transfer tax.

*Inheritanceand Gift Tax.*According to Law No. 383 of 18 October 2001(“Law No. 383”), starting from 25 October 2001, Italian inheritanceand gift tax, previously payable on the transfer of the Shares as a result ofdeath or donation, has been abolished.

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However,according to the current literal interpretation of Law No. 383, fordonations to donees other than spouses, direct descendants or ancestors andother relatives within the fourth degree, if and to the extent that the valueof gift attributable to each such donee exceeds Euro 180,759.91, the gift ofShares may be subject to the ordinary transfer taxes provided for the transferthereof for consideration.

Moreover,an anti-avoidance rule is provided by Law No. 383 for any gift ofassets (such as the Shares) which, if sold for consideration, would give riseto capital gains subject to the *imposta sostitutiva*(CGT) provided for by Italian Legislative Decree No. 461 of 21 November 1997.In particular, if the donee sells the Shares for consideration withinfive years from the receipt thereof as gift, the donee is required to paythe relevant *imposta sostitutiva* on capitalgains as if the gift has never taken place.

*UnitedStates Federal Taxation*

Forpurposes of this section, a U.S. holder is an individual or entity which is abeneficial owner of shares or ADSs and is:

•                    a citizen or resident of the United States;

•                    a corporation or other entity taxable as acorporation organized under the laws of the United States or any state thereof;

•                    an estate whose income is subject to United Statesfederal income tax regardless of its source; or

•                    a trust if a United States court can exerciseprimary supervision over the trust’s administration and one or more UnitedStates persons are authorized to control all substantial decisions of thetrust.

If apartnership, or an entity treated for U.S. tax purposes as a partnership, holdsordinary shares or ADSs, the tax treatment of a partner will generally dependupon the status of the partner and the activities of the partnership. Personswho are partners in partnerships holding ordinary shares or ADSs should consulttheir tax advisors.

*Taxationof Dividends.*Under the United States federal income taxlaws, a U.S. holder must include as gross income the gross amount of any dividendpaid by Luxottica Group S.p.A. out of its current or accumulated earnings andprofits, as determined for United States federal income tax purposes. Suchholder must also include any Italian tax withheld from the dividend payment inthis gross amount even though the holder does not in fact receive such amountswithheld. The dividend is ordinary income that must be included in income whenthe U.S. holder, in the case of ordinary shares, or the depositary, in the caseof ADSs, receives the dividend, actually or constructively. The dividend willnot be eligible for the dividends received deduction generally allowed toUnited States corporations in respect of dividends received from other UnitedStates corporations. The amount of the dividend distribution that must beincluded in income for a U.S. holder will be the U.S. dollar value of the Europayments made, determined at the spot Euro/U.S. dollar rate on the date thedividend distribution is includible in income, regardless of whether thepayment is in fact converted into U.S. dollars. Generally, any gain or lossresulting from currency exchange fluctuations during the period from the datethe U.S. holder includes the dividend payment in income to the date he convertsthe payment into U.S. dollars will be treated as ordinary income or loss. Thegain or loss generally will be income from sources within the United States forforeign tax credit limitation purposes. Distributions in excess of current andaccumulated earnings and profits, as determined for United States federalincome tax purposes, will be treated as a return of capital to the extent ofthe U.S. holder’s basis in the shares or ADSs and thereafter as capital gain.

Subjectto certain generally applicable limitations, the Italian withholding or substitutetax imposed on dividends in accordance with the Treaty and paid over to Italywill be creditable against a U.S. holder’s United States federal income taxliability. To the extent a refund of the tax withheld is available to the U.S.holder under Italian law or under the Treaty, the amount of tax withheld thatis refundable will not be eligible for credit against such holder’s UnitedStates federal income tax liability. See “—Italian Tax Law—Withholding orSubstitute Tax on Dividends” for the procedures for obtaining a tax refund.

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Dividendspaid by foreign corporations generally constitute income from sources outsidethe United States, but generally will be “passive income”  which is treated separately from other typesof income for purposes of computing the foreign tax credit allowable. The rules governingthe foreign tax credit are complex. U.S. holders should consult their taxadvisors regarding the availability of a foreign tax credit for Italianwithholding taxes imposed on dividends paid on ordinary shares or ADSs.

Certaindividends received by non-corporate U.S. holders in taxable years beginningbefore January 1, 2011 in respect of ordinary shares or ADSs will be taxedat the rate applicable to long-term capital gains (generally at a maximum incometax rate of 15%) if the dividends are “qualified dividends.” This reducedincome tax rate is only applicable to dividends paid by U.S. corporations and “qualifiedforeign corporations” and only with respect to shares held by a qualified U.S.holder (i.e., a non-corporate shareholder such as an individual) for a minimumholding period (generally, more than 60 days during the 120-dayperiod beginning 60 days before the ex-dividend date). We believe that weare a “qualified foreign corporation” and that dividends paid by us toindividual U.S. holders of ordinary shares held for the minimum holding periodshould thus be eligible for the reduced income tax rate. See “—Passive ForeignInvestment Company Considerations” for a discussion of certain restrictions on “qualifiedforeign corporation” status. *Non-corporate U.S. holdersare urged to consult their own tax advisors to determine whether they aresubject to any special rules that limit their ability to be taxed at thisfavorable rate.*

*Taxationof Capital Gains.*If a U.S. holder sells or otherwisedisposes of ordinary shares or ADSs and such shares constitute a capital assetin the hands of the U.S. holder, such holder will recognize capital gain orloss for United States federal income tax purposes equal to the differencebetween the U.S. dollar value of the amount realized and the tax basis,determined in U.S. dollars, in the ordinary shares or ADSs. Capital gain of anon-corporate U.S. holder, recognized in taxable years which begin before January 1,2011, is generally taxed at a maximum rate of 15 percent for property heldmore than one year. Additionally, gain or loss will generally be from sourceswithin the United States for foreign tax credit limitation purposes.

*PassiveForeign Investment Company Considerations.* A corporationorganized outside the U.S. generally will be classified as a passive foreigninvestment company (a “PFIC”) for U.S. federal income tax purposes in anytaxable year in which either: (a) at least 75% of its gross income is “passiveincome”, or (b) the average percentage of the gross value of its assetsthat produce “passive income” or are held for the production of passive incomeis at least 50%. Passive income for this purpose generally includes dividends,interest, royalties, rents and gains from commodities and securitiestransactions. Under a special “look-through” rule, in determining whether it isa PFIC, a foreign corporation is required to take into account a pro rataportion of the income and assets of each corporation in which it owns, directlyor indirectly, at least a 25% interest. Where the “look-through” rule applies,there is eliminated from the determination of the status of the foreigncorporation as a PFIC stock and debt instruments issued by such a 25%-ownedsubsidiary as well as dividends and interest received from such a 25%-ownedsubsidiary. Based on our audited financial statements, we strongly believe thatwe are not a PFIC for U.S. federal income tax purposes for 2005. Based on ouraudited financial statements and our current expectations regarding the valueand nature of our assets and the sources and nature of our income, we do notexpect to become a PFIC for U.S. federal income tax purposes for future years.Nonetheless, given that our PFIC status will be determined by reference to theassets and income tests applied annually, with the assets test being applied byreference to the average of the fair market value of our assets at the end ofeach quarter, and the income test being applied by reference to our income atthe end of the taxable year, we cannot provide complete assurance that we willnot be a PFIC for either the current taxable year or for any subsequent taxableyear. If we are classified as a PFIC in any year that a U.S. holder is ashareholder, we generally will continue to be treated as a PFIC for that U.S.holder in all succeeding years, regardless of whether we continue to meet theincome or asset test described above. If we are classified as a PFIC in anyyear, certain materially adverse consequences could result for U.S. holders ofordinary shares or ADSs. Such adverse consequences could, however, bematerially lessened if the U.S. holders timely file either a qualified electingfund or a mark-to-market election. In addition, if we were classified as aPFIC, in a taxable year in which we pay a dividend or the prior taxable year,we would not be a qualified foreign corporation (as described in “—Taxation ofDividends”), and our dividends would not be eligible for the reduced 15% U.S.income tax rate.

*Although,as stated above, we strongly believe that we are not, and we do not expect tobecome, a PFIC, we suggest that all existing and potential U.S. holders consulttheir own tax advisors regarding the potential tax impact if we were determinedto be a PFIC.*

*BackupWithholding and Information Reporting.*In general, dividendpayments or other taxable distributions made within the United States to a U.S.holder will be subject to information reporting requirements and backupwithholding tax (currently at the rate of 28 percent) if such U.S. holderis a non-corporate United States person and such holder:

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·                  fails to provide an accurate taxpayer identificationnumber;

·                  is notified by the IRS that he has failed to reportall interest or dividends required to be shown on his federal income taxreturns and the payor of the interest or dividends is notified by the IRS ofthe underreporting; or

·                  in certain circumstances, fails to comply withapplicable certification requirements.

A U.S. holdergenerally may obtain a refund of any amounts withheld under the backupwithholding rules that exceed his, her or its income tax liability byfiling a refund claim with the Internal Revenue Service.

After December 31,2010, the backup withholding rate will increase to 31% under the sunsetprovisions of currently applicable U.S. tax law.

Personswho are not United States persons may be required to establish their exemptionfrom information reporting and backup withholding by certifying their status onInternal Revenue Service Form W-8BEN, W-8ECI or W-8IMY.

Thepayment of proceeds from the sale of ordinary shares or ADSs to or through aUnited States office of a broker is also subject to these United States backupwithholding and information reporting rules unless the seller certifies,under penalties of perjury, that such seller is a non-U.S. person (or otherwiseestablishes an exemption). Special rules apply where ordinary shares orADSs are sold through a non-U.S. office of a non-U.S. broker and the saleproceeds are paid outside the United States.

U.S. holdersgenerally may obtain a refund of any amounts withheld under the backupwithholding rules that exceed such holder’s income tax liability by filinga timely refund claim with the IRS.

*EstateTax Convention.*Under the Estate Tax Convention between theUnited States and Italy, the ordinary shares or ADSs will be deemed situated inItaly. Subject to certain limitations, the Estate Tax Convention affords acredit for estate or inheritance tax imposed by Italy on ordinary shares orADSs that is applicable against United States federal estate tax imposed onordinary shares or ADSs. This credit is available only to the estate of adeceased person who, at the time of death, was a national of or domiciled inthe United States.

**Documentson Display**

We aresubject to the informational requirements of the Securities Exchange Act of1934, applicable to foreign private issuers, and in accordance therewith wefile reports and other information with the SEC. Reports and other information filedby us are available for inspection and copying, upon payment of fees prescribedby the SEC, at the public reference facilities maintained by the SEC at 100 FStreet, N.E., Washington, DC 20549. Copies of such material are also availableby mail from the Public Reference Branch of the SEC at 100 F Street, N.E.,Washington, DC 20549 at prescribed rates. Please call the SEC at 1-800-SEC-0330for more information on the public reference rooms. In addition, such materialmay also be inspected and copied at the offices of the New York Stock Exchange, Inc.,20 Broad Street, New York, New York 10005. The public may also view our annualreports and other documents filed with the SEC on the Internet at www.sec.gov.

Wefurnish Deutsche Bank Trust Company Americas, as depositary with respect to theADSs, with annual reports in English (or a translation or summary in English ofthe Italian reports), which include a review of operations and annual auditedconsolidated financial statements prepared in conformity with U.S. GAAP. Wealso furnish Deutsche Bank Trust Company Americas with quarterly reports inEnglish (or a translation or summary in English of the Italian reports) thatinclude unaudited interim financial information prepared in conformity withU.S. GAAP. If requested by us, Deutsche Bank Trust Company Americas arrangesfor the mailing of such reports to registered holders of ADRs. We also furnishto Deutsche Bank Trust Company Americas, in English, all notices ofshareholders’ meetings and other reports and communications that are madegenerally available to our shareholders. To the extent permitted by law,Deutsche Bank Trust Company Americas makes such notices, reports andcommunications available to holders of ADRs in such manner as we request andmails to holders of ADRs a notice containing the information (or a summarythereof in a form provided by us) contained in any notice of a shareholders’meeting received by Deutsche Bank Trust Company Americas. As a foreign privateissuer, we are exempt from the rules under the Securities Exchange Act of1934 prescribing the furnishing and content of proxy statements.

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**ITEM 11.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

**InterestRate Sensitivity**

At December 31,2005, our interest rate sensitivity was limited to our unhedged variable rateoutstanding debt under our credit facilities and bank overdraft facilities.Included in this amount are the following credit agreements:  (i) Tranche B and Tranche C borrowingson our subsequently amended credit facility with a group of banks of Euro 740million (Euro 1,130 million starting as of March 10, 2006) and U.S. $325million (of which Euro 294.9 million was outstanding under Tranche C and U.S.$325 million was outstanding under Tranche B), (ii) our AUD $50 millionmulti currency loan of which AUD $21.88 million (Euro 13.59 million) wasoutstanding and (iii) our new Euro 100 million 18-month creditfacility of which Euro 100 million was outstanding. As of such date, debt underour credit facility with a group of banks bore interest at the rate of Euribor,on Euro-denominated loans, and LIBOR, on U.S. $ denominated loans, plus amargin between 0.40 percent and 0.60 percent (which margins were subsequentlyamended in 2006 to 0.20 percent to 0.40 percent) based on the “Net Debt/EBITDA”ratio as defined in the agreement (4.56 percent for the Tranche B loandenominated in U.S. $ and 4.49 percent for the weighted average Tranche C loanfor the relevant interest period at December 31, 2005). Debt under the AUD$50 million and new Euro 100 million credit facility accrue interest at BBR orHIBOR plus 0.40 percent and EURIBOR plus 0.25 percent, respectively. BBR, HIBORand EURIBOR as defined in the agreements were 6.03 percent, 4.46 percent and2.73 percent , respectively, at December 31, 2005.

Additionally,in 2003 we issued U.S. $300 million of fixed rate senior unsecuredguaranteed notes in three series (series A, B and C). We immediately enteredinto three interest rate swaps to hedge such series of notes, thereby effectivelychanging the fixed rate to a variable rate of six-month LIBOR plus a spread of0.6575 percent or 0.73 percent depending on the series. These Swapswere terminated by a payment to the bank in December 2005, and we willamortize the final fair value adjustment to the debt as an adjustment to thefixed-rate yield over the remaining life of the debt. This has effectivelyincreased our fixed rate on such series A, B and C notes to 5.64 percent, 5.99percent, and 5.44 percent, respectively.

However,the effect of a ten percent change in interest rates (upward or downward) at December 31,2005 would not have had a material effect on our future annual pretax earningsand cash flows. This was calculated by us, based on our expected future pretaxearning and cash flows with an interest rate adjustment of ten percent aboveand below the rates in effect as of December 31, 2005. We calculated thiseffect both on a single year basis and an accumulated basis using a presentvalue calculation for all variable-rate debt instruments. For U.S.$-denominatedactivities, we used an exchange rate of Euro 1.00 = U.S. $1.2444.

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Wemonitor our exposure to interest rate fluctuations and may enter into hedgingarrangements to mitigate our exposure to increases in interest rates if webelieve it is prudent to do so. We have 13 interest rate derivativesoutstanding as of December 31, 2005:

·                  In June 2005, the Company entered intonine interest rate swap transactions with various banks with an aggregateinitial notional amount of Euro 405 million, which will decrease by Euro 45million every three months starting on June 3, 2007 (“Club Deal Swaps”).These swaps will expire on June 3, 2009. The Club Deal Swaps were enteredinto as a cash flow hedge on Tranche A of the credit facility discussed above.The Club Deal Swaps exchange the floating rate of Euribor for an average fixedrate of 2.40 percent per annum.

·                  InJune 2005, the Company entered into four interest rate swap transactionswith various banks with an aggregate initial notional amount of Euro 120million, which will decrease by Euro 30 million every six months starting on March 30,2007 (“Intesa OPSM Swaps”). These swaps will expire on September 30, 2008.The Intesa OPSM Swaps were entered into as a cash flow hedge on a portion ofthe Banca Intesa Euro 200 million unsecured credit facility discussed above.The Intesa OPSM Swaps exchange the floating rate of Euribor for an averagefixed rate of 2.38 percent per annum.

**ForeignExchange Sensitivity**

Ourmanufacturing subsidiaries are mainly located in Italy and our sales anddistribution facilities are maintained worldwide. As such, we are vulnerable toforeign currency exchange rate fluctuations in two principal areas:

1.                                            Weincur most of our manufacturing costs in Euro and receive a significant portionof our revenues in other currencies (which we refer to as Economic Risk); and

2.                                            Differencesbetween the functional currency of certain subsidiaries and the Euro as thereporting currency (which we refer to as Translation Risk).

*EconomicRisk*:  A strengtheningof the Euro relative to other currencies in which we receive revenues couldnegatively impact the demand for our products and/or reduce our gross margins.In addition, to the extent that our receivables and payables are denominated indifferent currencies, exchange rate fluctuations could further impact ourreported results of operations. However, our production cycles are relativelyshort and our receivables and payables are generally short-term in nature. As aresult, we do not believe that we currently have significant exposure in thisarea. We will, if we believe it is necessary, enter into foreign exchangecontracts to hedge certain of these transactions, which could include sales,receivables and/or payables balances.

Effective January 1,2001, we adopted SFAS 133. SFAS 133, as amended and interpreted, establishesaccounting and reporting standards for derivative instruments, includingcertain derivative instruments embedded in other contracts, and for hedgingactivities.

SFAS133 requires that all derivatives, whether designed in hedging relationship ornot, be recorded on the balance sheet at fair value regardless of the purposeor intent for holding them. If a derivative is designated as a fair-valuehedge, changes in the fair value of the derivative and the related change inthe hedge item are recognized in operations. If a derivative is designated ascash-flow hedge, changes in the fair value of the derivative are recorded inother comprehensive income (“OCI”) in the consolidated statement ofshareholders’ equity and are recognized in the consolidated statements ofincome when the hedged item affects operations. For a derivative that does notqualify as hedge, changes in fair value are recognized in operations.

Fromtime to time, we use derivative financial instruments, principally currencyforward swap agreements, as part of our risk management policy to reduce ourexposure to market risks from changes in foreign exchange rates. As of December 31,2005, we had a short-term (less than ninety days to maturity) simple forwardEuro/AUD contract for AUD 67 million maturing on March 16, 2006. We mayenter into other foreign exchange derivative financial instruments when weassess that the risk can be hedged effectively.

*TranslationRisk:*A substantial portion of revenues and costs aredenominated in various currencies other than Euro. The following table providesinformation about our revenues and costs denominated in various currencies forthe year ended December 31, 2005 and is not meant to be a tabulardisclosure of market risk:

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| ** **         | ** ** | **U.S. Dollars** | ** ** | **Euro** | ** ** | **Other** | ** ** | **Total** | ** ** |
|--------------------|------------|-----------------------|------------|----------|------------|-----------|------------|-----------|------------|
| Revenues           |       | 69.20                 | %          | 15.60    | %          | 15.20     | %          | 100       | %          |
| Operating expenses |       | 69.90                 | %          | 16.50    | %          | 13.60     | %          | 100       | %          |

 

Becausea large portion of our revenues and expenses are denominated in U.S. dollars,fluctuations in the exchange rate between the U.S. dollar and the Euro, ourreporting currency, could have a material effect on our reported financialposition and results of operations. The effect of a 10 percent weakening of theU.S.$ against the Euro as compared to the actual 2005 average exchange rate between the U.S.$ and Euro wouldhave been a decrease in income before taxes of Euro 47.8 million.   In addition, a significant change in the mixof revenues or expenses between or among geographic or operating segments couldincrease or decrease our exposure to other currency exchange rate fluctuations.We will continue to monitor our exposure to exchange rate fluctuations andenter into hedging arrangements if and to the extent we believe it to beappropriate.

Theacquisitions of Sunglass Hut in 2001, OPSM in 2003 and Cole in 2004 havefurther increased our exposure to fluctuations in currency exchange rates. Themajority of the operations, assets and liabilities of Sunglass Hut and Cole aredenominated in U.S. dollars while for OPSM the operations, assets andliabilities are mostly denominated in Australian dollars.

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**ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES**

None.

**PART II**

**ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES**

None.

**ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS**

None.

**ITEM 15.CONTROLS AND PROCEDURES**

(a)*           Disclosure Controls and Procedures*

As of the end of the periodcovered by this annual report (the “Evaluation Date”) we performed anevaluation, under the supervision and with the participation of our managementpursuant to Rule 13a-15 of the Securities Exchange Act of 1934, asamended (the “Exchange Act”), of the effectiveness of our disclosure controlsand procedures. Based upon this evaluation, our Chief Executive Officer andChief Financial Officer concluded that, as of the Evaluation Date, ourdisclosure controls and procedures were effective at the reasonable assurancelevel.

(b)           Not applicable.

(c)           Not applicable.

(d)*           Changes in InternalControl over Financial Reporting*

During the period coveredby this annual report, there were no changes in our internal control overfinancial reporting that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

**ITEM 16. [RESERVED]**

**Item 16A.Audit Committee Financial Expert**

 Our Board of Directors has determined that amember of our Board of Statutory Auditors, Mario Cattaneo, qualifies as an “auditcommittee financial expert,” as defined in the SEC rules. The Board ofStatutory Auditors has been designated by our Board of Directors as theappropriate body to act as our “Audit Committee,” as defined in theSarbanes-Oxley Act, SEC regulations and the NYSE listing standards. See Item 6—“Directors,Senior Management and Employees—Summary of the Significant Differences BetweenOur Corporate Governance Practices and the Corporate Governance Standards ofthe New York Stock Exchange—Board Committees.”

**Item 16B.Code of Ethics**

TheBoard of Directors adopted a Code of Ethics applicable, as may be amended fromtime to time, to our chief executive officer, chief financial officer and allof our directors, auditors and any other management employees. We will providea copy of our Code of Ethics upon request and without charge. You may alsoobtain a copy of our Code of Ethics on our website at www.luxottica.com.

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**Item 16C.Principal Accountant Fees and Services**

Deloitte &Touche S.p.A., or Deloitte & Touche, was engaged as our independentregistered accounting firm to audit our consolidated financial statements forthe years ended December 31, 2004 and 2005. Due to the nature of ouroperations, numerous Deloitte & Touche entities and affiliates performnumerous other accounting, tax and consulting tasks for us around the world.The Board of Directors is the corporate body competent to pre-approve, with thefavorable opinion of the Internal Control Committee, all audit services for theannual audit of Luxottica Group S.p.A.’s own financial statements and for theaudit of the consolidated financial statements of Luxottica Group S.p.A. andits subsidiaries, and to pre-approve all permissible non-audit servicespermissible for all entities in the group, although pre-approval of suchservices may not always be possible based on the nature of the service. Eachpre-approval is typically given for a one-year period and is detailed bycategory and budgeted cost. Updates on audit and non-audit services to beprovided by Deloitte & Touche are provided to the Board quarterly.

Thefollowing table sets forth the aggregate fees paid by the Company to Deloitte &Touche for 2004 and 2005:

 
| **Thousands of  Euro**                                                            | ** ** | ** ** | ** ** | **2004  Fees** | ** ** | **2005  Fees** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|
| Audit fees (including  annual audit and semi-annual reviews)                      |       | 2,294      |       | 2,516          |       |
| Audit related fees  (including benefit plan audits and acquisition due diligence) |       | 697        |       | 67             |       |
| Tax fees (including  compliance and planning)                                     |       | 2,877      |       | 2,136          |       |
| All other fees  (including royalty audits)                                        |       | 148        |       | 387            |       |
| Total fees                                                                        |       | 6,016      |       | 5,106          |       |

 

OurBoard of Directors has approved all of the audit and non-audit fees of Deloitte &Touche for the year 2005 in accordance with the pre-approval policy set forthabove. The percentage of audit work performed by persons other than full-timepermanent employees of Deloitte & Touche is less than 50%.

**Item 16D.Exemptions from the Listing Standards for Audit Committees**

Werely on the exemption from the listing standards for audit committees set forthin Exchange Act Rule 10A-3(c) (3). We believe that suchreliance will not materially adversely affect the ability of our Board ofStatutory Auditors to act independently and to satisfy the other requirementsof the SEC rules.

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

Notapplicable.

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**PART III**

**ITEM 17.**               **FINANCIALSTATEMENTS**

Notapplicable.

**ITEM 18.**               **FINANCIALSTATEMENTS**
| **Index  to Consolidated Financial Statements**                                                                 |   |   |   |
|-----------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| Report of Independent Registered Public Accountants                                                             |   |   |   |
| Consolidated Balance Sheets, December 31, 2004  and 2005                                                   |   |   |   |
| Statements of Consolidated Income for the Years Ended  December 31, 2003, 2004 and 2005                    |   |   |   |
| Statements of Consolidated Shareholders’ Equity for  the Years Ended December 31, 2003, 2004 and 2005 |   |   |   |
| Statements of  Consolidated Cash Flows for the Years Ended December 31, 2003, 2004 and  2005               |   |   |   |
| Notes to Consolidated Financial Statements                                                                      |   |   |   |
| **Consolidated  Financial Statement Schedules**                                                                 |   |   |   |
| Schedule II-Valuation  and Qualifying Accounts/Allowance for Doubtful Accounts                             |   |   |   |

 

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|        | Deloitte & Touche S.p.A.  Via Fratelli Bandiera, 3  31100 Treviso  Italia |
|--------|-----------------------------------------------------------------------------------------|
|   | Tel: +39 0422 5875  Fax: +39 0422 587812www.deloitte.it                                 |

 

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

**LUXOTTICA GROUP S.p.A.**

We have audited the accompanying consolidated balancesheets of Luxottica Group S.p.A. (an Italian corporation) and Subsidiaries(collectively, “the Company”) as of December 31, 2004 and 2005 and therelated statements of consolidated income, shareholders’ equity and cash flowsfor each of the three years in the period ended December 31, 2005 and theconsolidated financial statement schedule listed in the Index at Item 18. Thesefinancial statements and financial statement schedule are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on thesefinancial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States of America). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. The Companyis not required to have, nor were we engaged to perform, an audit of itsinternal control over financial reporting. Our audits included consideration ofinternal control over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the Company’s internal controlover financial reporting. Accordingly, we express no such opinion. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly,in all material respects, the financial position of Luxottica Group S.p.A. andsubsidiaries as of December 31, 2004 and 2005 and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2005, in conformity with accounting principles generallyaccepted in the United States of America. Also, in our opinion, suchconsolidated financial statement schedule, when considered in relation to thebasic consolidated financial statements taken as a whole, presents fairly inall material respects the information set forth therein.

Our audits also comprehended the translation of Euro amounts into U.S.dollar amounts and, in our opinion, such translation has been made inconformity with the basis stated in Note 1. Such U.S. dollar amounts arepresented solely for the convenience of readers in the United States ofAmerica.

/s/DELOITTE & TOUCHE S.p.A.

Treviso, ItalyApril 3, 2006

 
| Ancona Bari Bergamo Bologna Brescia  Cagliari Firenze Genova Milano  Napoli Padova Parma Roma Torino Treviso Verona                                                                                                                                           | Member of**Deloitte Touche Tohmatsu** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------|
| Sede Legale: Via Tortona 25 - 20144 Milano  Capital Sociale: sottoscritto e versato Euro 10.327.940.00 × deliberato Euro 10.850.000.00  Partita IVA/Codice Fiscale/Registro delle Imprese Milano n. 03049560166 × R.E.A. Milano n 1720239 |                                  |

 

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**LUXOTTICA GROUPS.p.A. and SubsidiariesCONSOLIDATED BALANCE SHEETSDECEMBER 31, 2004 AND 2005(*)**

**ASSETS**
| ** **                                                                                                                     | ** ** | **2004**       | ** ** | **2005**               | ** ** | **2005**      | ** **    |
|--------------------------------------------------------------------------------------------------------------------------------|------------|----------------|------------|------------------------|------------|---------------|---------------|
| ** **                                                                                                                     | ** ** | **(Euro/000)** | ** ** | **(US $/000)**(1) | ** ** |
| **CURRENT ASSETS:**                                                                                                            | ** ** | ** **     | ** ** | ** **             | ** ** | ** **    | ** **    |
| Cash and cash  equivalents                                                                                                     |       | 257,349        |       | 372,256                |       | $             | 440,826       |   |
| Accounts receivable                                                                                                            |       |           |       |                   |       |          |          |
| (Less allowance  for doubtful accounts,€ 23.4 million in 2004 and € 27.6 million in 2005, US  $32.6 million in 2005) |       | 406,437        |       | 461,682                |       | 546,724       |          |
| Sales and income taxes  receivable                                                                                             |       | 33,120         |       | 45,823                 |       | 54,264        |          |
| Inventories                                                                                                                    |       | 433,158        |       | 404,331                |       | 478,809       |          |
| Prepaid expenses and  other                                                                                                    |       | 69,151         |       | 93,140                 |       | 110,296       |          |
| Asset held for sale                                                                                                            |       | 143,617        |       | 10,847                 |       | 12,845        |          |
| Deferred tax assets                                                                                                            |       | 104,508        |       | 93,600                 |       | 110,841       |          |
| **Total current assets**                                                                                                       | ** ** | **1,447,340**  | ** ** | **1,481,679**          | ** ** | **1,754,604** | ** **    |
| **PROPERTY, PLANT AND  EQUIPMENT—net**                                                                                    | ** ** | **599,245**    | ** ** | **735,115**            | ** ** | **870,523**   | ** **    |
| **OTHER ASSETS:**                                                                                                              |       |           |       |                   |       |          |          |
| Goodwill                                                                                                                       |       | 1,500,962      |       | 1,700,383              |       | 2,013,594     |          |
| Intangible assets—net                                                                                                     |       | 972,091        |       | 994,803                |       | 1,178,046     |          |
| Investments                                                                                                                    |       | 13,371         |       | 15,832                 |       | 18,748        |          |
| Other assets                                                                                                                   |       | 23,049         |       | 45,710                 |       | 54,130        |          |
| **Total other assets**                                                                                                         | ** ** | **2,509,473**  | ** ** | **2,756,728**          | ** ** | **3,264,517** | ** **    |
| **TOTAL**                                                                                                                      | ** ** | **4,556,058**  | ** ** | **4,973,522**          | ** ** | **$**         | **5,889,645** | ** ** |

 

----

See notes to ConsolidatedFinancial Statements

(*)           In accordance with U.S. GAAP

(1)           Translated for convenience at the New York City NoonBuying Rate as determined in Note 1

95

----

**LUXOTTICA GROUP S.p.A. andSubsidiariesCONSOLIDATED BALANCE SHEETS (Continued)DECEMBER 31, 2003 AND 2004(*)LIABILITIESAND SHAREHOLDERS’ EQUITY**
| ** **                                                                                                                                                                                                                                                      | ** ** | **2004**       | ** ** | **2005**               | ** ** | **2005**      | ** **    |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|------------|------------------------|------------|---------------|---------------|
| ** **                                                                                                                                                                                                                                                      | ** ** | **(Euro/000)** | ** ** | **(US $/000)**(1) | ** ** |
| **CURRENT  LIABILITIES:**                                                                                                                                                                                                                                       |       |           |       |                   |       |          |          |
| Bank overdrafts                                                                                                                                                                                                                                                 |       | 290,531        |       | 276,122                |       | $             | 326,984       |   |
| Current portion  of long-term debt                                                                                                                                                                                                                              |       | 405,369        |       | 111,323                |       | 131,829       |          |
| Accounts payable                                                                                                                                                                                                                                                |       | 222,550        |       | 291,734                |       | 345,471       |          |
| Accrued expenses                                                                                                                                                                                                                                                |       |           |       |                   |       |          |          |
| Payroll and  related                                                                                                                                                                                                                                            |       | 137,947        |       | 136,143                |       | 161,221       |          |
| Customers’ right  of return                                                                                                                                                                                                                                |       | 8,802          |       | 7,996                  |       | 9,469         |          |
| Other                                                                                                                                                                                                                                                           |       | 238,832        |       | 257,121                |       | 304,483       |          |
| Income taxes  payable                                                                                                                                                                                                                                           |       | 12,722         |       | 133,382                |       | 157,951       |          |
| **Total  current liabilities**                                                                                                                                                                                                                                  | ** ** | **1,316,753**  | ** ** | **1,213,821**          | ** ** | **1,437,407** | ** **    |
| LONG-TERM  DEBT                                                                                                                                                                                                                                                 |       | 1,277,495      |       | 1,420,049              |       | 1,681,622     |          |
| LIABILITY FOR  TERMINATION INDEMNITIES                                                                                                                                                                                                                          |       | 52,656         |       | 56,600                 |       | 67,026        |          |
| DEFERRED TAX  LIABILITIES                                                                                                                                                                                                                                       |       | 215,891        |       | 127,120                |       | 150,536       |          |
| OTHER LONG-TERM  LIABILITIES                                                                                                                                                                                                                                    |       | 173,896        |       | 188,421                |       | 223,128       |          |
| COMMITMENTS AND  CONTINGENCIES                                                                                                                                                                                                                                  |       |           |       |                   |       |          |          |
| MINORITY  INTERESTS IN CONSOLIDATED SUBSIDIARIES                                                                                                                                                                                                                |       | 23,760         |       | 13,478                 |       | 15,961        |          |
| **SHAREHOLDERS’  EQUITY:**                                                                                                                                                                                                                                 |       |           |       |                   |       |          |          |
| Capital stock par value € 0.06—455,205,473 and  457,975,723 ordinary shares authorized and issued at December 31, 2004  and 2005, respectively; 448,770,687 and 451,540,937 shares outstanding at  December 31, 2004 and 2005, respectively |       | 27,312         |       | 27,479                 |       | 32,541        |          |
| Additional paid-in  capital                                                                                                                                                                                                                                     |       | 47,167         |       | 150,179                |       | 177,842       |          |
| Retained  earnings                                                                                                                                                                                                                                              |       | 1,812,073      |       | 2,050,883              |       | 2,428,656     |          |
| Unearned stock-based  compensation                                                                                                                                                                                                                              |       | —         |       | (48,567                | )          | (57,513       | )             |
| Accumulated  other comprehensive loss, net of tax                                                                                                                                                                                                               |       | (320,958       | )          | (155,954               | )          | (184,681      | )             |
| **Total**                                                                                                                                                                                                                                                       | ** ** | **1,565,594**  | ** ** | **2,024,020**          | ** ** | **2,396,845** | ** **    |
| Less treasury  shares at cost; 6,434,786 and 6,434,786 shares at December 31, 2004 and  2005, respectively                                                                                                                                                 |       | 69,987         |       | 69,987                 |       | 82,879        |          |
| **Total  shareholders’ equity**                                                                                                                                                                                                                            | ** ** | **1,495,607**  | ** ** | **1,954,033**          | ** ** | **2,313,966** | ** **    |
| **TOTAL**                                                                                                                                                                                                                                                       | ** ** | **4,556,058**  | ** ** | **4,973,522**          | ** ** | **$**         | **5,889,645** | ** ** |

 

----

See notes to ConsolidatedFinancial Statements

(*)           In accordance with U.S. GAAP

(1)           Translated for convenience at the New York City NoonBuying Rate as determined in Note 1

96

----

**LUXOTTICA GROUP S.p.A. and SubsidiariesSTATEMENTS OF CONSOLIDATED INCOMEFOR THE YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(*)**
| ** **                                                         | ** ** | **2003**       | ** ** | **2004**       | ** ** | **2005**       | ** ** | **2005**               | ** ** |
|--------------------------------------------------------------------|------------|----------------|------------|----------------|------------|----------------|------------|------------------------|------------|
| ** **                                                         | ** ** | ** **     | ** ** | **(Euro/000)** | ** ** | ** **     | ** ** | **(US $/000)**(1) | ** ** |
| NET SALES                                                          |       | 2,852,194      |       | 3,255,300      |       | 4,370,744      |       | $                      | 5,175,835  |   |
| COST OF SALES                                                      |       | (903,617       | )          | (1,040,697     | )          | (1,380,653     | )          | (1,634,969             | )          |
| **GROSS  PROFIT**                                                  | ** ** | **1,948,577**  | ** ** | **2,214,603**  | ** ** | **2,990,091**  | ** ** | **3,540,866**          | ** ** |
| **OPERATING  EXPENSES:**                                           |       |           |       |           |       |           |       |                   |       |
| Selling and  advertising                                           |       | (1,235,757     | )          | (1,376,546     | )          | (1,909,747     | )          | (2,261,522             | )          |
| General and  administrative                                        |       | (281,033       | )          | (345,243       | )          | (477,790       | )          | (565,799               | )          |
| **Total**                                                          | ** ** | **(1,516,790** | **)**      | **(1,721,789** | **)**      | **(2,387,537** | **)**      | **(2,827,321**         | **)**      |
| **INCOME  FROM OPERATIONS**                                        | ** ** | **431,787**    | ** ** | **492,814**    | ** ** | **602,554**    | ** ** | **713,544**            | ** ** |
| OTHER INCOME  (EXPENSE):                                           |       |           |       |           |       |           |       |                   |       |
| Interest income                                                    |       | 5,922          |       | 6,662          |       | 5,650          |       | 6,691                  |       |
| Interest expense                                                   |       | (47,117        | )          | (56,115        | )          | (66,332        | )          | (78,550                | )          |
| Other—net                                                     |       | (799           | )          | 13,792         |       | 15,697         |       | 18,588                 |       |
| **Other  income (expenses)—net**                              | ** ** | **(41,994**    | **)**      | **(35,661**    | **)**      | **(44,985**    | **)**      | **(53,271**            | **)**      |
| **INCOME  BEFORE PROVISION FOR INCOME TAXES**                      |       | 389,793        |       | 457,153        |       | 557,569        |       | 660,273                |       |
| PROVISION FOR  INCOME TAXES                                        |       | (117,328       | )          | (161,665       | )          | (206,022       | )          | (243,971               | )          |
| **INCOME  BEFORE MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES** |       | 272,465        |       | 295,488        |       | 351,547        |       | 416,302                |       |
| MINORITY  INTERESTS IN INCOME OF CONSOLIDATED SUBSIDIARIES         |       | (5,122         | )          | (8,614         | )          | (9,253         | )          | (10,957                | )          |
| **NET INCOME**                                                     | ** ** | **267,343**    | ** ** | **286,874**    | ** ** | **342,294**    | ** ** | **405,345**            | ** ** |
|                                                                    |            |                |            |                |            |                |            |                        |            |  |

 

----

See notes to ConsolidatedFinancial Statements

(*)           In accordance with U.S. GAAP

(1)           Translated for convenience at the New York City NoonBuying Rate as determined in Note 1

97

----

**LUXOTTICA GROUP S.p.A. andSubsidiariesSTATEMENTS OF CONSOLIDATED INCOMEFOR THE YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(*)**
| ** **                                                      | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                      | ** ** | **2003**                          | ** ** | **2004** | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                                                      | ** ** | **(Euro)**                        | ** ** | **(US $)**(1) | ** ** |
| **EARNINGS PER SHARE: BASIC**                                   |       | 0.60                              |       | 0.64 |   | 0.76 |   | $0.90 |   |
| **EARNINGS PER SHARE: DILUTED**                                 |       | 0.59                              |       | 0.64 |   | 0.76 |   | $0.89 |   |
| **WEIGHTED AVERAGE NUMBER OF SHARES  OUTSTANDING (thousands):** |       |                              |       |   |   |   |   |   |   |
| Basic                                                           |       | 448,664                           |       | 448,275 |   | 450,179 |   |   |   |
| Diluted                                                         |       | 450,202                           |       | 450,361 |   | 453,303 |   |   |   |

 

----

See notes to ConsolidatedFinancial Statements

(*)           In accordance with U.S. GAAP

(1)           Translated for convenience at the New York City NoonBuying Rate as determined in Note 1

 

98

----

**LUXOTTICA GROUP S.p.A. andSubsidiariesSTATEMENTS OF CONSOLIDATED SHAREHOLDERS’ EQUITYFOR THE YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (*)**
| ** **                                                                             | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **      | ** ** | ** **             | ** **    | ** **             | ** **  | **Accumulated**          | ** ** | ** **               | ** ** | ** **       | ** **   |
|----------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|-----------------|------------|------------------------|---------------|------------------------|-------------|--------------------------|------------|--------------------------|------------|------------------|--------------|
| ** **                                                                             | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **      | ** ** | ** **             | ** **    | **Other**              | ** **  | **Other**                | ** ** | **Treasury**             | ** ** | ** **       | ** **   |
| ** **                                                                             | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **      | ** ** | **Unearned**           | ** **    | **Comprehensive**      | ** **  | **Comprehensive**        | ** ** | **Shares**               | ** ** | **Consolidated** | ** **   |
| ** **                                                                             | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Retained**   | ** ** | **Stock-Based** | ** ** | **Income (Loss)** | ** **    | **Income (Loss)** | ** **  | **Amount,**              | ** ** | **Shareholders’**   | ** ** |
| **(Euro/000)**                                                                         | ** ** | ** **            | ** ** | **Shares**  | ** ** | **Amount**     | ** ** | **Capital**     | ** ** | **Earnings**           | ** **    | **Compensation**       | ** **  | **Net of Tax** | ** ** | **Net of Tax** | ** ** | **at Cost** | ** **   | **Equity** | ** ** |
| **BALANCES, JANUARY 1, 2003**                                                     | ** ** | **454,263,600**       | ** ** | **27,256**  | ** ** | **38,693**     | ** ** | **1,447,374**   | ** ** | **—**             | ** **    | ** **             | ** **  | **(70,881**              | **)**      | **(24,547**              | **)**      | **1,417,895**    | ** **   |
| Exercise of stock  options                                                             |       | 213,433               |       | 13          |       | 1,476          |       |            |       |                   |          |                   |        |                     |       |                     |       | 1,489            |         |
| Translation adjustment                                                                 |       |                  |       |        |       |           |       |            |       |                   |          | (169,307               | )           | (169,307                 | )          |                     |       | (169,307         | )            |
| Minimum pension liability,  net of taxes of Euro 0.7 million                           |       |                  |       |        |       |           |       |            |       |                   |          | (1,228                 | )           | (1,228                   | )          |                     |       | (1,228           | )            |
| Tax benefit on stock  options                                                          |       |                  |       |        |       | 254            |       |            |       |                   |          |                   |        |                     |       |                     |       | 254              |         |
| Purchase of treasury  shares                                                           |       |                  |       |        |       |           |       |            |       |                   |          |                   |        |                     |       | (45,440                  | )          | (45,440          | )            |
| Change in fair value of  derivative instruments, net of taxes of Euro 0.4 million      |       |                  |       |        |       |           |       |            |       |                   |          | (1,067                 | )           | (1,067                   | )          |                     |       | (1,067           | )            |
| Dividends declared (Euro  0.21 per share)                                              |       |                  |       |        |       |           |       | (95,405         | )          |                   |          |                   |        |                     |       |                     |       | (95,405          | )            |
| Net income                                                                             |       |                  |       |        |       |           |       | 267,343         |       |                   |          | 267,343                |        |                     |       |                     |       | 267,343          |         |
| **Comprehensive income**                                                               | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **      | ** ** | ** **             | ** **    | **95,741**             |        |                     |       |                     |       |             |         |
| **BALANCES, DECEMBER 31,  2003**                                                  | ** ** | **454,477,033**       | ** ** | **27,269**  | ** ** | **40,423**     | ** ** | **1,619,312**   | ** ** | **—**             | ** **    | ** **             | ** **  | **(242,483**             | **)**      | **(69,987**              | **)**      | **1,374,534**    | ** **   |
| Exercise of stock  options                                                             |       | 728,440               |       | 43          |       | 5,950          |       |            |       |                   |          |                   |        |                     |       |                     |       | 5,993            |         |
| Translation adjustment                                                                 |       |                  |       |        |       |           |       |            |       |                   |          | (79,897                | )           | (79,897                  | )          |                     |       | (79,897          | )            |
| Minimum pension  liability, net of taxes of Euro 0.2 million                           |       |                  |       |        |       |           |       |            |       |                   |          | 248                    |        | 248                      |       |                     |       | 248              |         |
| Tax benefit on stock  options                                                          |       |                  |       |        |       | 794            |       |            |       |                   |          |                   |        |                     |       |                     |       | 794              |         |
| Change in fair value of  derivative instruments, net of taxes of Euro 0.2 million      |       |                  |       |        |       |           |       |            |       |                   |          | 1,174                  |        | 1,174                    |       |                     |       | 1,174            |         |
| Dividends declared (Euro  0.21 per share)                                              |       |                  |       |        |       |           |       | (94,113         | )          |                   |          |                   |        |                     |       |                     |       | (94,113          | )            |
| Net income                                                                             |       |                  |       |        |       |           |       | 286,874         |       |                   |          | 286,874                |        |                     |       |                     |       | 286,874          |         |
| **Comprehensive income**                                                               | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **      | ** ** | ** **             | ** **    | **208,399**            |        |                     |       |                     |       |             |         |
| **BALANCES, DECEMBER 31,  2004**                                                  | ** ** | **455,205,473**       | ** ** | **27,312**  | ** ** | **47,167**     | ** ** | **1,812,073**   | ** ** | **—**             | ** **    | ** **             | ** **  | **(320,958**             | **)**      | **(69,987**              | **)**      | **1,495,607**    | ** **   |
| Exercise of stock  options                                                             |       | 2,770,250             |       | 167         |       | 28,062         |       |            |       |                   |          |                   |        |                     |       |                     |       | 28,229           |         |
| Translation adjustment                                                                 |       |                  |       |        |       |           |       |            |       |                   |          | 157,776                |        | 157,776                  |       |                     |       | 157,776          |         |
| Aggregate stock based  compensation, net of tax                                        |       |                  |       |        |       | 70,273         |       |            |       | (70,273                | )             |                   |        |                     |       |                     |       | —           |         |
| Realized stock based  compensation, net of tax                                         |       |                  |       |        |       |           |       |            |       | 21,706                 |          |                   |        |                     |       |                     |       | 21,706           |         |
| Minimum pension liability,  net of taxes of Euro 1.6 million                      |       |                  |       |        |       |           |       |            |       |                   |          | 2,534                  |        | 2,534                    |       |                     |       | 2,534            |         |
| Tax benefit on stock  options                                                          |       |                  |       |        |       | 4,677          |       |            |       |                   |          |                   |        |                     |       |                     |       | 4,677            |         |
| Change in fair value of  derivative instruments, net of taxes of Euro 2.3 million |       |                  |       |        |       |           |       |            |       |                   |          | 4,694                  |        | 4,694                    |       |                     |       | 4,694            |         |
| Dividends declared (Euro  0.23 per share)                                              |       |                  |       |        |       |           |       | (103,484        | )          |                   |          |                   |        |                     |       |                     |       | (103,484         | )            |
| Net income                                                                             |       |                  |       |        |       |           |       | 342,294         |       |                   |          | 342,294                |        |                     |       |                     |       | 342,294          |         |
| **Comprehensive income**                                                               | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **      | ** ** | ** **             | ** **    | **507,298**            |        |                     |       |                     |       |             |         |
| **BALANCES, DECEMBER 31, 2005**                                                   | ** ** | **457,975,723**       | ** ** | **27,479**  | ** ** | **150,179**    | ** ** | **2,050,883**   | ** ** | **(48,567**            | **)**         | ** **             | ** **  | **(155,954**             | **)**      | **(69,987**              | **)**      | **1,954,033**    | ** **   |
| **Comprehensive  income****(1)**                                                       | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **      | ** ** | ** **             | ** **    | **$**                  | **600,742** |                     |       |                     |       |             |         |   |
| **BALANCES, (US $/000)****(1)**                                                   | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **      | ** ** | ** **             | ** **    | ** **             |        |                     |       |                     |       |             |         |
| **DECEMBER 31, 2005**                                                             | ** ** | **457,975,723**       | ** ** | **$**       | **32,541** | ** **     | **$**      | **177,842**     | ** ** | **$**                  | **2,428,656** | ** **             | **$**       | **(57,513**              | **)**      | ** **               | ** ** | **$**            | **(184,681** | **)** | **$** | **(82,879** | **)** | **$** | **2,313,966** | ** ** |
|                                                                                        |            |                       |            |             |            |                |            |                 |            |                        |               |                        |             |                          |            |                          |            |                  |              |  |  |  |  |  |  |  |  |  |  |

 

----

See notes to Consolidated Financial Statements

(*)           Inaccordance with U.S. GAAP

(1)           Translatedfor convenience at the New York City Noon Buying Rate as determined inNote 1

99

----

**LUXOTTICAGROUP S.p.A. and SubsidiariesSTATEMENTS OF CONSOLIDATED CASH FLOWSFOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(*)**
| ** **                                                                             | ** ** | **2003**    | ** ** | **2004**       | ** ** | **2005**    | ** ** | **2005**          | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------|------------|----------------|------------|-------------|------------|-------------------|------------|
| ** **                                                                             | ** ** | ** **  | ** ** | **(Euro/000)** | ** ** | ** **  | ** ** | **(US $/000)**(1) | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                              |       |        |       |           |       |        |       |              |       |
| **Net income**                                                                         | ** ** | **267,343** | ** ** | **286,874**    | ** ** | **342,294** | ** ** | **$405,345**      | ** ** |
| **Adjustments to reconcile net income to net cash  provided by operating activities:** |       |        |       |           |       |        |       |              |       |
| Minority interest in income of consolidated subsidiaries                               |       | 5,122       |       | 8,614          |       | 9,253       |       | 10,957            |       |
| Deferred stock-based compensation                                                      |       | —      |       | —         |       | 22,711      |       | 26,894            |       |
| Depreciation and amortization                                                          |       | 134,840     |       | 152,751        |       | 194,205     |       | 229,978           |       |
| (Benefit) provision for deferred income taxes                                          |       | 12,865      |       | 45,414         |       | (90,104     | )          | (106,701          | )          |
| Loss (gain) on disposals of fixed assets—net                                      |       | (124        | )          | 7,641          |       | 6,532       |       | 7,735             |       |
| Unrealized foreign exchange (gain)                                                     |       | —      |       | (13,445        | )          | —      |       | —            |       |
| Termination indemnities matured during the year—net                               |       | 2,403       |       | 6,768          |       | 3,723       |       | 4,409             |       |
| **Changes in operating assets and liabilities, net  of acquisition of businesses:**    |       |        |       |           |       |        |       |              |       |
| Accounts receivable                                                                    |       | 23,888      |       | (15,819        | )          | (33,266     | )          | (39,394           | )          |
| Prepaid expenses and other                                                             |       | (43,556     | )          | 21,077         |       | (56,773     | )          | (67,231           | )          |
| Inventories                                                                            |       | 17,120      |       | 44,139         |       | 64,584      |       | 76,480            |       |
| Accounts payable                                                                       |       | (45,029     | )          | 7,062          |       | 52,233      |       | 61,854            |       |
| Accrued expenses and other                                                             |       | (39,857     | )          | (22,365        | )          | (14,011     | )          | (16,592           | )          |
| Accrual for customers’ right of return                                            |       | (249        | )          | 727            |       | (1,882      | )          | (2,229            | )          |
| Income taxes payable                                                                   |       | (7,227      | )          | (760           | )          | 123,961     |       | 146,795           |       |
| **Total adjustments**                                                                  | ** ** | **60,196**  | ** ** | **241,804**    | ** ** | **281,166** | ** ** | **332,955**       | ** ** |
| **Cash provided by operating activities**                                              | ** ** | **327,539** | ** ** | **528,678**    | ** ** | **623,460** | ** ** | **$738,300**      | ** ** |

 

----

See notes to Consolidated FinancialStatements

(*)           In accordance with U.S. GAAP

(1)           Translated for convenience at the New York City NoonBuying Rate as determined in Note 1

100

----

**LUXOTTICA GROUP S.p.A. andSubsidiariesSTATEMENTS OF CONSOLIDATED CASH FLOWS (Concluded)FOR THE YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(*)**
| ** **                                                        | ** ** | **2003**     | ** ** | **2004**       | ** ** | **2005**     | ** ** | **2005**          | ** ** |
|-------------------------------------------------------------------|------------|--------------|------------|----------------|------------|--------------|------------|-------------------|------------|
| ** **                                                        | ** ** | ** **   | ** ** | **(Euro/000)** | ** ** | ** **   | ** ** | **(US $/000)**(1) | ** ** |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                         |       |         |       |           |       |         |       |              |       |
| Property, plant and equipment:                                    |       |         |       |           |       |         |       |              |       |
| Additions                                                         |       | (81,288      | )          | (117,420       | )          | (229,416     | )          | (271,674          | )          |
| Disposals                                                         |       | 3,839        |       | 198            |       | 1,082        |       | 1,281             |       |
| Purchases of businesses net of cash acquired                      |       | (342,432     | )          | (362,978       | )          | (86,966      | )          | (102,985          | )          |
| Increase in investments                                           |       | (501         | )          | —         |       | —       |       | —            |       |
| Sale of investment in Pearle Europe                               |       | —       |       | —         |       | 144,000      |       | 170,525           |       |
| Additions of intangible assets                                    |       | (48,177      | )          | (301           | )          | (4,479       | )          | (5,304            | )          |
| **Cash used in investing activities**                             | ** ** | **(468,559** | **)**      | **(480,501**   | **)**      | **(175,779** | **)**      | **(208,157**      | **)**      |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                         |       |         |       |           |       |         |       |              |       |
| Long-term debt:                                                   |       |         |       |           |       |         |       |              |       |
| Proceeds                                                          |       | 619,859      |       | 1,187,601      |       | 373,462      |       | 442,254           |       |
| Repayments                                                        |       | (332,045     | )          | (935,443       | )          | (627,949     | )          | (743,617          | )          |
| Swap termination fees                                             |       | —       |       | —         |       | (7,062       | )          | (8,363            | )          |
| (Decrease) increase in overdraft balances                         |       | 156,290      |       | (246,680       | )          | (21,520      | )          | (25,484           | )          |
| Investment in treasury shares                                     |       | (45,440      | )          | —         |       | —       |       | —            |       |
| Exercise of stock options                                         |       | 1,476        |       | 5,994          |       | 28,229       |       | 33,429            |       |
| Dividends                                                         |       | (95,405      | )          | (94,113        | )          | (103,484     | )          | (122,546          | )          |
| **Cash (used in) provided by financing activities**               | ** ** | **304,735**  | ** ** | **(82,641**    | **)**      | **(358,324** | **)**      | **(424,327**      | **)**      |
| **(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS**              | ** ** | **163,715**  | ** ** | **(34,466**    | **)**      | **89,357**   | ** ** | **105,817**       | ** ** |
| **CASH AND EQUIVALENTS, BEGINNING OF YEAR**                       | ** ** | **151,418**  | ** ** | **299,937**    | ** ** | **257,349**  | ** ** | **304,753**       | ** ** |
| **Effect of exchange rate changes on cash and cash  equivalents** | ** ** | **(15,196**  | **)**      | **(8,122**     | **)**      | **25,550**   | ** ** | **30,256**        | ** ** |
| **CASH AND EQUIVALENTS, END OF YEAR**                             | ** ** | **299,937**  | ** ** | **257,349**    | ** ** | **372,256**  | ** ** | **$440,826**      | ** ** |
| **SUPPLEMENTAL DISCLOSURE OF CASH FLOWS  INFORMATION:**           |       |         |       |           |       |         |       |              |       |
| Cash paid during the year for interest                            |       | 44,951       |       | 58,371         |       | 61,770       |       | 73,148            |       |
| Cash paid during the year for income taxes                        |       | 110,609      |       | 108,440        |       | 153,287      |       | 181,522           |       |
| Acquisition of businesses:                                        |       |         |       |           |       |         |       |              |       |
| Fair value of assets acquired                                     |       | 102,323      |       | 157,905        |       | 3,702        |       | 4,384             |       |

 

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See notes to ConsolidatedFinancial Statements

(*)           In accordance with U.S. GAAP

(1)           Translated for convenience at the New York City NoonBuying Rate as determined in Note 1

 

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**LUXOTTICA GROUP S.p.A. andSubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1. ORGANIZATION AND SIGNIFICANTACCOUNTING POLICIES**

**Organization**—Luxottica Group S.p.A. and its subsidiaries(collectively “Luxottica Group” or the “Company”) operate in two industrysegments: (1) manufacturing and wholesale distribution and (2) retaildistribution. Through its manufacturing and wholesale distribution operations,Luxottica Group is engaged in the design, manufacturing, wholesale distributionand marketing of house brand and designer lines of mid to premium-pricedprescription frames and sunglasses. The Company operates in the retail segmentthrough its Retail Division, consisting of LensCrafters, Inc. and otheraffiliated companies (“LensCrafters”), Sunglass Hut International, Inc.and its subsidiaries (“Sunglass Hut International”), OPSM Group Limited and itssubsidiaries (“OPSM”) and Cole National Corporation and its wholly ownedsubsidiaries (“Cole”). As of December 31, 2005, LensCrafters operated 893stores throughout the United States of America and Canada; Sunglass HutInternational operated 1,849 stores located in North America, Europe andAustralia; OPSM operated 549 owned stores and 29 franchised stores under threebrands across states and territories in Australia, New Zealand, Hong Kong,Singapore and Malaysia; and Cole National operated 2,388 owned stores and 462franchised specialty retailers of optical products and personalized giftslocated in the United States of America and Canada. Certain of the Company’sU.S. subsidiaries also are engaged as providers of managed vision care benefitsand claims payment administrators whose programs provide comprehensive eyecarebenefits primarily directed to large employers and health maintenanceorganizations.

**Principlesof Consolidation and Basis of Presentation**—The consolidated financial statements ofLuxottica Group include the financial statements of the parent company, allwholly or majority-owned subsidiaries and variable interest entities forwhich the Company is determined to be the primary beneficiary. The Company’sinvestments in unconsolidated subsidiaries which are at least 20 percentowned and where the Company exercises significant influence over operating andfinancial policies are accounted for using the equity method. Luxottica Groupholds a 44 percent interest in an affiliated manufacturing and wholesaledistributor, located and publicly traded in India, and a 50 percentinterest in an affiliated company located in Great Britain, which are both accountedfor under the equity method. The results of operations of these investments arenot material to the results of the operations of the Company. Investments inother companies in which the Company has less than a 20 percent interestwith no ability to exercise significant influence are carried at cost. Allsignificant intercompany accounts and transactions are eliminated inconsolidation. Luxottica Group prepares its consolidated financial statementsin accordance with accounting principles generally accepted in the UnitedStates of America (“U.S. GAAP”).

The Company has included avariable interest entity (the “Trust”), consisting of a synthetic operatinglease, for one of Cole’s facilities. The Trust is included in theseconsolidated financial statements since the Company is required to absorb anyexpected losses from, and will receive the majority of expected returns on, theactivities of the Trust, and is the primary beneficiary of the Trust. Theassets of Euro 1.6 million and liabilities of Euro 1.6 million havebeen consolidated into the financial statements as of December 31, 2005.Future operating results of the Trust are not expected to have a materialeffect on the Company’s financial position or operating results.

The North America Retail Division’sfiscal year is a 52- or 53-week period ending on the Saturdaynearest December 31. The accompanying consolidated financial statementsinclude the operations of the North America Retail Division for the 53-weekperiod ended January 3, 2004, and the 52-week periods ended January 1,2005 and December 31, 2005.

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**ForeignCurrency Translation and Transactions**—Luxottica Group accounts for its foreign currency denominatedtransactions and foreign operations in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 52, *ForeignCurrency Translation*. The financial statements of foreignsubsidiaries are translated into Euro, which is the functional currency of theparent company and the reporting currency of the Company. Assets andliabilities of foreign subsidiaries, which use the local currency as theirfunctional currency, are translated at year-end exchange rates. Results ofoperations are translated using the average exchange rates prevailingthroughout the year. The resulting cumulative translation adjustments have beenrecorded as a separate component of “Accumulated Other Comprehensive Income(Loss).”

The Company has one subsidiary ina highly inflationary country. The operations of such subsidiary are currentlynot material to the Company’s consolidated financial statements.

Transactions in foreigncurrencies are recorded at the exchange rate in effect at the transaction date.Gains or losses from foreign currency transactions, such as those resultingfrom the settlement of foreign receivables or payables during the year, arerecognized in consolidated income in such year. Aggregate transactiongain/(loss) for the years ended December 31, 2003, 2004 and 2005, wereEuro 1.3 million, Euro 12.5 million and Euro 9.5 million,respectively.

**Cashand Cash Equivalents**—Cashand cash equivalents includes cash on hand, demand deposits, and highly liquidinvestments with an original maturity of three months or less, and amountsin-transit from banks for customer credit cards, debit card and electronic banktransfer (“EBT”) transactions. Substantially all amounts in transit from thebanks are converted to cash within four business days from the time of sale.Credit card, debit card and EBT transactions in transit were approximately Euro23.3 million and Euro 17.8 million at December 31, 2004 and2005, respectively.

**BankOverdrafts**—Bank overdraftsrepresent negative cash balances held in banks and amounts borrowed undervarious unsecured short-term lines of credit (see “Credit Facilities” includedin Note 14 for further discussion of the short-term lines of credit) thatthe Company has obtained through local financial institutions. These facilitiesare usually short-term in nature or may contain provisions that allow them torenew automatically with a cancellation notice period. Certain subsidiaries’agreements require a guarantee from Luxottica Group S.p.A. Interest rates onthese lines of credit vary and can be used to obtain various letters of creditwhen needed.

**Inventories**—Luxottica Group’s manufactured inventories,approximately 65.0 percent and 75.4 percent of total frame inventoryfor 2004 and 2005, respectively, are stated at the lower of cost, as determinedunder the weighted-average method (which approximates the first-in,first-out method, or “FIFO”), or market value. Retail inventory notmanufactured by the Company or its subsidiaries are stated at the lower ofcost, at FIFO or weighted-average cost, or market value. As of January 2,2005, the Company changed its method of valuing certain of its retail inventoryfrom the last-in, first-out method (“LIFO”) to FIFO in order to reduce thenumber of valuation methods among retail divisions. The effect of the change inthe inventory valuation method had an immaterial effect on the 2005 Statementof Consolidated Income. At December 31, 2003 and 2004, approximately 43and 33 percent, or Euro 100.4 million and Euro 97.7 million,respectively, of retail inventory cost was calculated using LIFO. The LIFOreserve at December 31, 2003 and 2004, was less than Euro 2.0 millionand Euro 3.0 million, respectively. Inventories are recorded net ofallowances for estimated losses among other reserves. These reserves arecalculated using various factors including sales volume, historical shrinkresults and current trends.

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**Property,Plant and Equipment**—Property,plant and equipment are stated at historical cost. Depreciation is computedprincipally on the straight-line method over the estimated useful lives of therelated assets as follows:

|                                      | ** ** | **Estimated Useful Life**                         | ** ** |
|--------------------------------------|------------|-------------------------------------------------------------|------------|
| Buildings and  building improvements |       | 19 to 40 years                                              |       |
| Machinery and  equipment             |       | 3 to 12 years                                               |       |
| Aircraft                             |       | 25 years                                                    |       |
| Other equipment                      |       | 5 to 8 years                                                |       |
| Leasehold improvements               |       | lesser of 10 years or the remaining life of the  lease |       |

 

Maintenance and repair expensesare expensed as incurred. Upon the sale or disposition of property andequipment, the cost of the asset and the related accumulated depreciation andleasehold amortization are removed from the accounts and any resulting gain orloss is included in the Statements of Consolidated Income.

**CapitalizedLeased Property**—Capitalizedleased assets are amortized using the straight-line method over the term of thelease, or in accordance with practices established for similar owned assets ifownership transfers to the Company at the end of the lease term.

**Goodwill**—Goodwill represents the excess of the purchaseprice (including acquisition-related expenses) over the value assigned tothe net tangible and identifiable intangible assets acquired. The Company’sgoodwill is tested annually for impairment as of December 31 of each yearin accordance with SFAS No. 142, *Goodwilland Other Intangible Assets*(“SFAS 142”).Additional impairment tests are performed if, for any reason, the Companybelieves that an event has occurred that may impair goodwill. Such tests areperformed at the reporting unit level which consists of two units, Wholesaleand Retail, as required by the provisions of SFAS 142. For the years endedDecember 31, 2003, 2004 and 2005, the result of this process was thedetermination that the carrying value of each reporting unit of the Company wasnot impaired and, as a result, the Company has not recorded a goodwillimpairment charge.

**TradeNames and Other Intangibles**—Inconnection with various acquisitions, Luxottica Group has recorded asintangible assets certain trade names and other intangibles which the Companybelieves have a finite life. Trade names are amortized on a straight-line basisover periods ranging from 20 to 25 years (see Note 6). Otherintangibles include, among other items, distributor networks, customer listsand contracts, franchise agreements and license agreements, and are amortizedover the respective useful lives. All intangibles are subject to test for impairmentin accordance with SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets* (“SFAS 144”).Aggregate amortization expense of trade names and other intangibles for theyears ended December 31, 2003, 2004 and 2005, was Euro 42.6 million,Euro 51.6 million and Euro 64.6 million, respectively.

**Impairmentof Long-Lived Assets**—LuxotticaGroup’s long-lived assets, other than goodwill, are tested for impairmentwhenever events or changes in circumstances indicate that the net carryingamount may not be recoverable. When such events occur, the Company measuresimpairment by comparing the carrying value of the long-lived asset to theestimated undiscounted future cash flows expected to result from the use of thelong-lived assets and their eventual disposition. If the sum of the expectedundiscounted future cash flows were less than the carrying amount of thelong-lived assets, the Company would record an impairment loss, if determinedto be necessary. Such impairment loss is measured as the amount by which thecarrying amount of the long-lived asset exceeds the fair value in accordancewith SFAS 144. The aggregate impairment loss on certain non-performinglong-lived assets

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charged to the Statement of Consolidated Income duringfiscal 2005 was not material and there was no impairment loss charged in fiscal2003 and 2004.

**StoreOpening and Closing Costs**—Storeopening costs are charged to operations as incurred in accordance withStatement of Position No. 98-5, *Accountingfor the Cost of Start-up Activities*. The costs associated withclosing stores or facilities are recorded at fair value as such costs areincurred. Store closing costs charged to the statements of consolidated incomeduring fiscal 2003, 2004 and 2005 were not material.

**SelfInsurance**—The Company isself insured for certain losses relating to workers’ compensation, generalliability, auto liability, and employee medical benefits for claims filed andfor claims incurred but not reported. The Company’s liability is estimated onan undiscounted basis using historical claims experience and industry averages;however, the final cost of the claims may not be known for over five years. Asof December 31, 2004 and 2005, self insurance accruals were Euro36.1 million and Euro 46.8 million, respectively.

**IncomeTaxes**—Income taxes arerecorded in accordance with SFAS No. 109, *Accountingfor Income Taxes*, which requires recognition of deferred tax assetsand liabilities for the expected future tax consequences of events that havebeen included in the Company’s consolidated financial statements or taxreturns. Under this method, deferred tax liabilities and assets are determinedbased on the difference between the consolidated financial statement and taxbasis of assets and liabilities using enacted tax rates in effect for the yearin which the differences are expected to reverse. A valuation allowance isrecorded for deferred tax assets if it is determined that it is more likelythan not that the asset will not be realized. Changes in valuation allowances fromperiod to period are included in the tax provisions in the relevant period ofchange.

**Liabilityfor Termination Indemnities**—Thereserve for employee termination indemnities of Italian companies is considereda defined benefit plan and is accounted for accordingly. Terminationindemnities in other countries are provided through payroll tax and othersocial contributions in accordance with local statutory requirements (seeNote 9).

**RevenueRecognition**—Revenuesinclude sales of merchandise (both wholesale and retail), insurance andadministrative fees associated with the Company’s managed vision care business,eye exams and related professional services, and sales of merchandise tofranchisees along with other revenues from franchisees such as royalties basedon sales and initial franchise fee revenues.

Wholesale Division revenues arerecognized from sales of products at the time of shipment, as title and therisks and rewards of ownership of the goods are assumed by the customer at suchtime. The products are not subject to formal customer acceptance provisions. Insome countries, the customer has the right to return products for a limitedperiod of time after the sale. However, such right of return does not impactthe timing of revenue recognition as all conditions of SFAS No. 48, *Revenue Recognition When Right of Return Exists,*are satisfied at the date of sale. Accordingly, the Company has recorded anaccrual for the estimated amounts to be returned. This estimate is based on theCompany’s right of return policies and practices along with historical data andsales trends. There are no other post-shipment obligations. Revenues receivedfor the shipping and handling of goods are included in sales and the costsassociated with shipments to customers are included in operating expenses.Total shipping costs in fiscal 2003, 2004 and 2005 associated with the sale ofgoods in the Wholesale Division were Euro 6.5 million, Euro6.2 million and Euro 6.0 million, respectively.

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Retail Division revenues,including internet and catalog sales, are recognized upon receipt by thecustomer at the retail location, or when goods are shipped directly to thecustomer for internet and catalog sales. In some countries, the Company allowsretail customers to return goods for a period of time and as such the Companyhas recorded an accrual for the estimated amounts to be returned. This accrualis based on the historical return rate as a percentage of net sales and thetiming of the returns from the original transaction date. There are no otherpost-shipment obligations. Additionally, the Retail Division enters intodiscount programs and similar relationships with third parties that have termsof twelve or more months. Revenues under these arrangements are likewiserecognized as transactions occur in the Company’s retail locations andcustomers take receipt of products and services. Also included in RetailDivision revenues are managed vision care revenues consisting of (i) insurancerevenues, which are recognized when earned over the terms of the respectivecontractual relationships, and (ii) administrative services revenues,which are recognized when services are provided during the contract period.Accruals are established for amounts due under these relationships determinedto be uncollectible.

Cole earns and accrues franchiserevenues based on sales by franchisees which are accrued as earned. Initialfranchise fees are recorded as revenue when all material services or conditionsrelating to the sale of the franchise have been substantially performed orsatisfied by Cole and when the related store begins operations. Accruals areestablished for amounts due under these relationships when they are determinedto be uncollectible.

The Retail Division also sellsseparately priced extended warranty contracts with terms of coverage of 12 to24 months. Revenues from the sale of these warranty contracts are deferredand amortized over the lives of the contracts, while costs to service thewarranty claims are expensed as incurred.

A reconciliation of the changesin deferred revenue from the sale of warranty contracts and other deferreditems for the years ended December 31, 2004 and 2005, is as follows:
| **In thousands of Euro** | ** ** | ** ** | ** ** | **2004**   | ** ** | **2005** | ** ** |
|-----------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| Beginning  balance                      |       | 512        |       | 40,964     |       |
| Translation  difference                 |       | (3,631     | )          | 1,901      |       |
| Cole acquired  balances                 |       | 44,161     |       | —     |       |
| Warranty  contracts sold                |       | 10,152     |       | 44,639     |       |
| Other deferred  revenues                |       | 3,922      |       | 2,528      |       |
| Amortization of  deferred revenues      |       | (14,152    | )          | (46,800    | )          |
| **Total**                               | ** ** | **40,964** | ** ** | **43,232** | ** ** |
| Current                                 |       | 31,948     |       | 37,465     |       |
| **Non-current**                         | ** ** | **9,016**  | ** ** | **5,767**  | ** ** |

 

The Wholesale and RetailDivisions may offer certain promotions during the year. Free frames given tocustomers as part of a promotional offer are recorded in cost of sales at thetime they are delivered to the customer. Discounts and coupons tendered bycustomers are recorded as a reduction of revenue at the date of sale.

**ManagedVision Care Underwriting and Expenses**—The Company sells vision insurance plans which generally have aduration of up to two years. Based on its experience, the Company believes itcan predict utilization and claims experience under these plans, includingclaims incurred but not yet reported, with a high degree of confidence. Claimsare recorded as they are incurred and certain other membership costs areamortized over the covered period.

**Advertisingand Direct Response Marketing**—Costs to develop and create newspaper, television, radio and othermedia advertising are expensed as incurred, and the costs of the advertisingare expensed the first time the airtime or advertising space is used with theexception of certain direct response advertising programs. Costs for certaindirect response advertising programs are capitalized if such direct responseadvertising costs are expected to result in future economic benefit and theprimary purpose of the advertising is to elicit sales to customers who could beshown to have responded specifically to the advertising. Such costs related tothe direct response advertising are amortized over the period during which therevenues are recognized, not to exceed 90 days. Generally, other directresponse program costs that do not meet the capitalization criteria areexpensed the first time the advertising occurs. Advertising expenses incurredfor the years ended December 31, 2003, 2004 and 2005, were Euro178.3 million, Euro 192.4 million and Euro 278.7 million,respectively.

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With the acquisition of Cole in October 2004,the Company receives a reimbursement from its acquired franchisees for certainmarketing costs. Operating expenses in the Consolidated Statements of Incomeare net of amounts reimbursed by the franchisees calculated based on apercentage of their sales. The amounts received in fiscal 2004 and 2005 forsuch reimbursement were Euro 4.2 million and Euro 15.5 million, respectively.

**Pervasivenessof Estimates**—Thepreparation of financial statements in conformity with U.S. GAAP requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Significant judgment and estimatesare required in the determination of the valuation allowances againstreceivables, inventory and deferred tax assets, calculation of pension andother long-term employee benefit accruals, legal and other accruals forcontingent liabilities and the determination of the carrying value oflong-lived assets, among other items. Actual results could differ from thoseestimates.

**EarningsPer Share**—Luxottica Groupcalculates basic and diluted earnings per share in accordance with SFAS No. 128,*Earnings per Share*. Net incomeavailable to shareholders is the same for the basic and diluted earnings pershare calculations for the years ended December 31, 2003, 2004 and 2005.Basic earnings per share are based on the weighted average number of shares ofcommon stock outstanding during the period. Diluted earnings per share arebased on the weighted average number of shares of common stock and common stockequivalents (options) outstanding during the period, except when the commonstock equivalents are anti-dilutive. The following is a reconciliation frombasic to diluted shares outstanding used in the calculation of earnings pershare:
| **In thousands**                                                                                                                          | ** ** | ** ** | ** ** | **2003**  | ** ** | **2004**  | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------|------------|-----------|------------|----------|------------|
| Weighted average  shares outstanding—basic                                                                                                |       | 448,664.4  |       | 448,275.0 |       | 450,179.1 |       |
| Effect of  dilutive stock options                                                                                                              |       | 1,537.7    |       | 2,085.9   |       | 3,124.3   |       |
| Weighted average  shares outstanding—dilutive                                                                                             |       | 450,202.1  |       | 450,360.9 |       | 453,303.4 |       |
| Options not included in  calculation of dilutive shares as the exercise price was greater than the  average price during the respective period |       | 4,046.6    |       | 2,169.6   |       | 569.1     |       |

 

**FairValue of Financial Instruments**—Financial instruments consist primarily of cash, cash equivalents andmarketable securities, debt obligations and, in 2004, derivative financialinstruments which are either accounted for as fair value or cash flow hedges.Luxottica Group estimates the fair value of cash, cash equivalents andmarketable securities based on interest rates available to the Company and bycomparison to quoted market prices and its debt obligations, as there are noquoted market prices, based on interest rates available to the Company. Thefair value associated with financial guarantees has been accrued for whenapplicable and is disclosed in Note 14. The fair values of letters ofcredit are not disclosed as it is not practicable for the Company to do so andsubstantially all of these instruments are in place for operational purposessuch as security on leases and health benefits. At December 31, 2004 and2005, the fair value of the Company’s financial instruments approximated thecarrying value.

**Stock-BasedCompensation**—The Companyhas elected to follow the accounting provisions of Accounting Principles Board(“APB”), Opinion No. 25, *Accounting forStock Issued to Employees* (“APB 25”), for stock-basedcompensation and to provide the disclosures required under SFAS No. 123, *Accounting for Stock-Based Compensation*,as amended by SFAS No. 148, *Accountingfor Stock-Based Compensation*—*Transitionand Disclosure* (collectively, “SFAS 123”) (see Note 10).No stock-based employee compensation cost is reflected in net income foroptions not included in the incentive plans (see Note 10), as all optionsgranted under the plans have an exercise price equal to the market value of theunderlying stock on the date of the grant. For options issued under theincentive plans, stock compensation expense has been recorded based on theconditions of the plan. The Company changed its method of valuing optionsissued after January 1, 2004 from the Black-Scholes model to abinomial model as the Company believes a binomial valuation technique willresult in a better estimate of the fair value of the options. The followingtable illustrates the effect on net income and earnings per share had thecompensation costs of the plans been determined under a fair-value based methodas stated in SFAS 123:

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| **(In Thousands of Euro, except share data):**                                     | ** ** | ** ** | ** ** | **Year ended  December 31,  2003** | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| Net income as  reported                                                                                          |       | 267,343    |       | 286,874                                      |       | 342,294                                      |       |
| Add: Stock-based  compensation cost included in reported net income, net of taxes                                |       | —     |       | —                                       |       | 21,706                                       |       |
| Deduct: Stock-based  compensation expense determined under fair-value based method for all  awards, net of taxes |       | (11,127    | )          | (9,964                                       | )          | (23,203                                      | )          |
| Pro forma                                                                                                        |       | 256,216    |       | 276,910                                      |       | 340,797                                      |       |
| **Basic  earnings per share:**                                                                                   |       |       |       |                                         |       |                                         |       |
| As reported                                                                                                      |       | 0.60       |       | 0.64                                         |       | 0.76                                         |       |
| Pro forma                                                                                                        |       | 0.57       |       | 0.62                                         |       | 0.76                                         |       |
| **Diluted  earnings per share:**                                                                                 |       |       |       |                                         |       |                                         |       |
| As reported                                                                                                      |       | 0.59       |       | 0.64                                         |       | 0.76                                         |       |
| Pro forma                                                                                                        |       | 0.57       |       | 0.61                                         |       | 0.75                                         |       |

 

The fair value of options grantedwas estimated on the date of grant using the Black-Scholes option pricingmodel for options issued prior to January 1, 2004 and using a binomialmodel for options issued after such date with the following weighted averageassumptions:
| ** **                          | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Dividend yield                      |       | 1.06     | %          | 1.71     | %          | 1.54     | %          |
| Risk-free  interest rate            |       | 3.65     | %          | 2.92     | %          | 3.17     | %          |
| Expected option  life (years)       |       | 5        |       | 5.44     |       | 5.84     |       |
| Expected  volatility                |       | 36.00    | %          | 36.56    | %          | 25.92    | %          |
| Weighted average fair  value (Euro) |       | 5.45     |       | 5.10     |       | 4.27     |       |

 

The Company recognizedforfeitures as they occur for the 2003 grants, and changing to the binomialapproach in 2004 has assumed a forfeiture rate of six percent for 2004 and 2005grants.

**Derivative Financial Instruments**—Derivative financial instruments are accountedfor in accordance with SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities* (“SFAS 133”),as amended and interpreted.

SFAS 133 requires that allderivatives, whether or not designed in hedging relationships, be recorded onthe balance sheet at fair value regardless of the purpose or intent for holdingthem. If a derivative is designated as a fair-value hedge, changes in the fairvalue of the derivative and the related change in the hedge item are recognizedin operations. If a derivative is designated as a cash-flow hedge, changes inthe fair value of the derivative are recorded in other comprehensive income/(loss)(“OCI”) in the Statements of Consolidated Shareholders’ Equity and arerecognized in the Statements of Consolidated Income when the hedged itemaffects operations. The effect of these derivatives in the Statements ofConsolidated Operations depends on the item hedged (for example, interest ratehedges are recorded in interest expense). For a derivative that does notqualify as a hedge, changes in fair value are recognized in the Statements ofConsolidated Operations, under the caption “Other—net”.

Certain transactions and otherfuture events, such as (i) the derivative no longer effectively offsettingchanges to the cash flow of the hedged instrument, (ii) the expiration,termination or sale of the derivative, or (iii) any other reason of whichthe Company becomes aware that the derivative no longer qualifies as a cashflow hedge, would cause the balance remaining in other comprehensive income tobe realized immediately as earnings. Based on current interest rates and marketconditions, the estimated aggregate amount to be recognized as earnings fromother comprehensive income relating to these cash flow hedges in fiscal 2006 isapproximately Euro 0.5 million, net of taxes.

Luxottica Group uses derivativefinancial instruments, principally interest rate and currency swap agreements,as part of its risk management policy to reduce its exposure to market risksfrom changes in interest and foreign exchange rates. Although it has not doneso in the past, the Company may enter into other derivative financial instrumentswhen it assesses that the risk can be hedged effectively.

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**Recent Accounting Pronouncements**  —In November 2004,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, *Inventory Costs—an amendment of ARB No. 43,Chapter 4,* to clarify that abnormal amounts of idle facilityexpense, freight, handling costs and wasted material should be recognized asperiod costs. In addition, this statement requires that the allocation of fixedproduction costs of conversion be based on the normal capacity of theproduction facilities. The adoption of such standard is for fiscal yearsbeginning after June 15, 2005. The Company believes the adoption will nothave a material effect on the consolidated financial statements.

In December 2004, the FASBissued SFAS No. 123-R (revised 2004), *Share-Based Payment*(“SFAS 123-R”), whichreplaces the existing SFAS 123 and supersedes APB 25. SFAS 123-Rrequires companies to measure and record compensation expense for stock optionsand other share-based payment methods based on the instruments’ fairvalue. SFAS 123-R became effective for the Company beginning on January 1,2006. The Company has evaluated the impact of the adoption of SFAS No. 123-Rand determined that the additional compensation costs which would have beenrecorded in fiscal 2005 were not material. Based on current options outstandingas of December 31, 2005, excluding the incentive and shareholder grants forwhich the effect of adopting SFAS 123-R would vary significantly dueto numerous variables, including, but not limited to, future stock price andestimated date of vesting, the effect of the adoption of SFAS 123-Ron the 2006 statement of consolidated income would be a reduction of pre-taxincome by approximately Euro 4.4 million.

In December 2004, the FASBissued SFAS No. 153, *Exchanges ofNonmonetary Assets—an amendment of APB Opinion No. 29* (“SFAS 153”).SFAS 153 amends APB No. 29, *Accountingfor Nonmonetary Transactions,*to eliminate the exception fornonmonetary exchanges of similar productive assets and replaces it with ageneral exception for exchanges of nonmonetary assets that do not havecommercial substance. A nonmonetary exchange has commercial substance if thefuture cash flows of the entity are expected to change significantly as a resultof the exchange. SFAS 153 is effective for reporting periods beginningafter June 15, 2005. The adoption of SFAS 153 is not expected to havea material effect on the Company’s consolidated financial statements.

In March 2005, the FASBissued Interpretation No. 47, *Accountingfor Conditional Asset Retirement Obligations—an interpretation of FASBStatement No. 143*(“FIN47”), which clarifies the term “conditional asset retirement obligation”as used in SFAS 143 and requires the recognition of a liability for a “conditionalasset retirement obligation” if the fair value of the liability can bereasonably estimated. FIN 47 is effective for reporting periods beginning afterDecember 15, 2005. The adoption of FIN 47 is not expected to have amaterial effect on the Company’s consolidated financial statements.

In May 2005, the FASB issuedSFAS No. 154, *Accounting Changes andError Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3*(“SFAS 154”). SFAS 154 applies to all voluntary changes inaccounting principles and changes required by accounting pronouncements ininstances where the pronouncement does not include specific transitionprovisions. This Statement replaces APB No. 20, *AccountingChanges*, and SFAS No. 3, *Reporting AccountingChanges in Interim Financial Statements*. SFAS 154 requiresretroactive application to prior periods’ financial statements of changes inaccounting principles unless it is impracticable to do so. SFAS 154 iseffective for accounting changes and corrections of errors made in fiscal yearsbeginning after December 15, 2005.

In June 2005, the EmergingIssues Task Force (“EITF”) reached a consensus on Issue No. 05-6, *Determining the Amortization Period for LeaseholdImprovements* (“EITF 05-6”), which requires that leaseholdimprovements acquired in a business combination or purchased significantlyafter, and not contemplated at the inception of the lease, be amortized overthe lesser of the useful life of the asset or a term that includes leaserenewals that are reasonably assured. This consensus is applicable forleasehold improvements acquired or purchased beginning after June 29, 2005and will be followed in future periods if and when necessary.

In October 2005, the FASBissued FASB Staff Position No. 13-1, *Accountingfor Rental Costs Incurred During aConstruction Period* (“FSP 13-1”),which concluded that rental costs associated with ground and building operatingleases that are incurred during the construction period should be recognized asrental expense in such period. This guidance is effective for reporting periodsbeginning after December 15, 2005. The adoption of FSP 13-1 is notexpected to have a material effect on the Company’s consolidated financialstatements and will be followed in future periods if and when necessary.

In February 2006, the FASBissued SFAS No. 155, Accounting for Certain Hybrid FinancialInstruments—an amendment*of FASB Statements No. 133and 140* (“SFAS 155”),which amends SFAS 133 and SFAS 140, *Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities*. The statement

·                  Permitsfair value remeasurement for any hybrid financial instrument that contains anembedded derivative that otherwise would require bifurcation;

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·                  Clarifieswhich interest-only strips and principal-only strips are not subject to therequirements of Statement No. 133;

·                  Establishesa requirement to evaluate interests in securitized financial assets to identifyinterests that are freestanding derivatives or that are hybrid financialinstruments that contain an embedded derivative requiring bifurcation;

·                  Clarifiesthat concentrations of credit risk in the form of subordination are notembedded derivatives; and

·                  AmendsStatement No. 140 to eliminate the prohibition on a qualifying special-purposeentity from holding a derivative financial instrument that pertains to abeneficial interest other than another derivative financial instrument.

SFAS 155 is effective forall financial instruments acquired or issued after the beginning of an entity’sfirst fiscal year that begins after September 15, 2006. The adoption ofSFAS 155 is not expected to have a material effect on the Company’sconsolidated financial statements.

**Information Expressed in US Dollars***—*The Company’s consolidated financial statementsare stated in Euro, the currency of the country in which the parent company isincorporated and operates. The translation of Euro amounts into US Dollaramounts is included solely for the convenience of international readers and hasbeen made at the rate of Euro 1 to US Dollar 1.1842. Such rate was determinedby using the noon buying rate of the Euro to US Dollar as certified for customspurposes by the Federal Reserve Bank of New York as of December 31, 2005.Such translations should not be construed as representations that Euro amountscould be converted into US Dollar at that or any other rate.

**Reclassifications**—Thepresentation of certain prior year information has been reclassified to conformto the current year presentation.

**2. RELATED PARTY TRANSACTIONS**

**Fixed Assets**—In January 2002,a subsidiary of Luxottica Group acquired certain assets for Euro28.5 million and assumed a bank loan from “Partimmo S.a.S.”, a companyowned by the Company’s Chairman. The assets acquired were a building, includingall improvements thereto, for a total cost of Euro 42.0 million. TheCompany recorded these assets at their historic cost. The Company’sheadquarters are located in this building. The bank loan acquired had anoutstanding balance of Euro 20.6 million on such date. In November 2004,the loan was fully repaid. In connection with the acquisition of this buildingthe Company’s subsidiary entered into an agreement with the Company’s Chairmanwho leases a portion of this building for Euro 0.5 million annually. Theexpiration date of this lease is 2010.

**License Agreement**—TheCompany has a worldwide exclusive license agreement to manufacture anddistribute ophthalmic products under the name of Brooks Brothers. The BrooksBrothers trade name is owned by Retail Brand Alliance, Inc. (“RBA”), whichis owned and controlled by a Director of the Company. The license agreementexpires in 2009. Royalties paid to RBA for such agreement were Euro1.1 million, Euro 0.9 million and Euro 0.5 million in the yearsended December 31, 2003, 2004 and 2005, respectively.

In July 2004, the Companysigned a worldwide exclusive license agreement to manufacture and distributeophthalmic products under the name of Adrienne Vittadini. The AdrienneVittadini trade name is owned by RBA. The license agreement expires on December 31,2007. For the years ended December 31, 2004 and 2005, royalties paid toRBA for such agreement were Euro 0.9 million and Euro 0.9 million,respectively.

**Service Revenues**—Duringthe years ended December 31, 2004 and 2005, Luxottica U.S. Holdings Corp.(“US Holdings”) performed certain services for RBA. Amounts received for theservices provided were Euro 0.5 million, Euro 0.7 million and Euro0.6 million in fiscal 2003, 2004 and 2005, respectively.

**Stock Incentive Plan**—InSeptember 2004, the Company’s Chairman and majority shareholder, Mr. LeonardoDel Vecchio, allocated shares held through La Leonardo Finanziaria S.r.l., anItalian holding company of the Del Vecchio family, representing2.11 percent (or 9.6 million shares) of the Company’s currentlyauthorized and issued share capital, to a stock option plan for top managementof the Company at an exercise price of Euro 13.67 per share (the closing stockprice at December 31, 2005 on the Milan Stock Exchange was Euro 21.43 pershare). The stock options to be issued under the stock option plan vest uponmeeting certain economic objectives. As such, compensation expense is recordedfor the options issued to management under the incentive plan in accordancewith variable accounting under APB 25 based on the market value of theunderlying ordinary shares only when the number of shares to be vested andissued is known. During 2005, it became

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probable that the incentivetargets would be met and, as such, the Company recorded compensation expense ofapproximately Euro 19.9 million net of taxes and recorded future unearnedcompensation expense in equity of approximately Euro 45.8 million net oftaxes, with an offsetting increase in additional paid-in capital for suchamounts. The expense if calculated under SFAS 123-R would have beenapproximately Euro 16.9 million, net of taxes, and is included in proforma net income and earnings per share (see Note 1).

**3. INVENTORIES**

Inventories consisted of thefollowing (in thousands of Euro):
| ** **                   | ** ** | **December 31,** | ** ** |
|------------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2004**              | ** ** | **2005** | ** ** |
| Raw materials  and packaging |       | 50,656                |       | 43.191 |   |
| Work in process              |       | 24,486                |       | 26,932 |   |
| Finished goods               |       | 358,016               |       | 334.208 |   |
| **Total**                    | ** ** | **433,158**           | ** ** | **404,331** | ** ** |

 

**4. ACQUISITIONS AND INVESTMENTS**

a)             OPSM

In May 2003, Luxottica Groupformed an indirect wholly-owned subsidiary in Australia, Luxottica SouthPacific Pty Limited, for the purpose of making a cash offer for all outstandingshares, options and performance rights of OPSM, a publicly traded company onthe Australian Stock Exchange. The cash offer commenced on June 16, 2003,acceptances were received which increased Luxottica’s relevant interest in OPSMshares to 50.68 percent on August 8, 2003, and the offer wascompleted on September 3, 2003. At the close of the offer, Luxottica SouthPacific Pty Limited held 82.57 percent of OPSM’s ordinary shares. As aconsequence of the acquisition, all options and performance rights werecancelled. As a result of Luxottica South Pacific Pty Limited acquiring themajority of OPSM’s shares on August 8, 2003, OPSM’s financial position andresults of operations are reported in the consolidated financial statementssince August 1, 2003. Results of operations for the seven-day period endedAugust 7, 2003 were immaterial. The acquisition was accounted for inaccordance with SFAS 141 and, accordingly, the purchase price of Euro253.7 million or Australian Dollar 442.7 million (includingapproximately Australian Dollar 7.2 million of direct acquisition-relatedexpenses) was allocated to the assets acquired and liabilities assumed based ontheir fair value at the date of the acquisition. The Company uses manydifferent valuation techniques to determine the fair value of the net assetsacquired including but not limited to discounted cash flow and present valueprojections. Intangible assets are recognized separate from goodwill if theyarise from contractual or other legal rights or if they do not meet thedefinition of separable as noted in SFAS 141. The valuation of OPSM’sacquired assets and assumed liabilities was completed in June 2004 withoutsignificant changes to the preliminary valuation. The excess of purchase priceover the net assets acquired (“goodwill”) has been recorded in the accompanyingConsolidated Balance Sheet. The acquisition of OPSM was made as a result of theCompany’s strategy to expand its retail business in Asia Pacific area.

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The purchase price (includingdirect acquisition-related expenses) has been allocated based upon thevaluation of the Company’s acquired assets and liabilities, assumed as follows(reported at the exchange rate on the date of acquisition) (in thousands ofEuro):
| **Assets  purchased:**                                   |       |        |       |
|----------------------------------------------------------|------------|-------------|------------|
| Cash and cash equivalents                                |       | 5,990       |       |
| Inventories                                              |       | 23,623      |       |
| Property, plant and equipment                            |       | 49,781      |       |
| Prepaid expenses and other current assets                |       | 7,433       |       |
| Accounts receivable                                      |       | 1,064       |       |
| Trade name (useful life of 25 years, no residual  value) |       | 141,195     |       |
| Other assets including deferred tax assets               |       | 12,616      |       |
| **Liabilities  assumed:**                                |       |        |       |
| Accounts payable and accrued expenses                    |       | (34,831     | )          |
| Other current liabilities                                |       | (11,426     | )          |
| Deferred tax liabilities                                 |       | (42,359     | )          |
| Minority interests                                       |       | (11,246     | )          |
| Bank overdraft                                           |       | (42,914     | )          |
| **Fair  value of net assets**                            | ** ** | **98,926**  | ** ** |
| Goodwill                                                 |       | 154,750     |       |
| **Total purchase price**                                 | ** ** | **253,676** | ** ** |

 

The following unaudited pro formainformation for the year ended December 31, 2003 summarizes the results ofoperations as if the acquisition of OPSM had been completed on January 1,2003 and includes certain pro forma adjustments such as additional amortizationof the trade name recorded at the acquisition date:
| **(Thousands of Euro, except per share data—Unaudited)** | ** ** | ** ** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| Net Sales                                                                                   |       | 3,018,670  |       |
| Income from  Operations                                                                     |       | 439,676    |       |
| Net Income                                                                                  |       | 266,188    |       |
| No. of  Shares (Thousands)—Basic                                                  |       | 448,664    |       |
| No. of  Shares (Thousands)—Diluted                                                |       | 450,202    |       |
| Earnings per  Share (Euro)—Basic                                                       |       | 0.59       |       |
| Earnings per Share  (Euro)—Diluted                                                     |       | 0.59       |       |

 

This pro forma financialinformation is presented for informational purposes only and is not necessarilyindicative of the results of operations that would have been achieved had theacquisition taken place on January 1, 2003.

On November 26, 2004, theCompany, through its wholly owned subsidiary, Luxottica South Pacific PtyLimited, made an offer for all the un-owned remaining outstanding shares ofOPSM.

On February 7, 2005, on theclose of the offer, the Company acquired 15.5 percent for an aggregatetotal of 98.5 percent of OPSM’s shares, which is in excess of thecompulsory acquisition threshold. Subsequently, the Company announced the startof the compulsory acquisition process for all remaining shares in OPSM notalready owned by the Company. The compulsory acquisition process was completedon March 23, 2005 and as of that date the Company held 100 percent ofOPSM’s shares. The acquisition of the remaining OPSM shares was accounted forin accordance with SFAS 141, and, accordingly, the purchase price of Euro61.9 million or Australian Dollar 102.9 million in cash (includingapproximately Australian Dollar 3.5 million of direct acquisition-relatedexpenses and dividends to be received) was allocated to the assets acquired andliabilities assumed based on their fair value at the date of the acquisition.Since there was no additional fair value of assets acquired and liabilitiesassumed, the difference between the purchase price and the value of the minorityinterest in OPSM has been allocated entirely to goodwill for an amount of Euro46.3 million (Australian Dollar 77.7 million).

 

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b)            I.C.Optics

On January 13, 2003, theCompany announced the signing of a worldwide license agreement for the design,production and distribution of Versace, Versus and Versace Sport sunglasses andprescription frames. The initial ten-year agreement is renewable for anadditional ten years. The transaction was completed through the purchase of ICOptics Group (“IC Optics”), an Italian-based group that produces anddistributes eyewear, for an aggregate amount of Euro 5.4 million. Prior tothis transaction, Gianni Versace S.p.A. and Italocremona S.p.A. held IC Opticsthrough a  50¤50 jointventure. The acquisition was accounted for in accordance with SFAS 141and, accordingly, the purchase price has been allocated to the fair marketvalue of the assets and liabilities of the company acquired including anintangible asset for the license agreement for an amount of approximately Euro28.8 million and goodwill for an amount of approximately Euro10.7 million. Further, an amount of Euro 25 million has been paid foran option right, which enables the Company to extend the original royaltyagreement for an additional ten years. No pro forma financial information ispresented, as the acquisition was not material to the Company’s consolidatedfinancial statements.

c)             E.I.D.

On July 23, 2003, theCompany announced the signing of a ten-year worldwide license agreement forexclusive production and distribution of prescription frames and sunglasseswith the Prada and Miu Miu names. The deal was finalized through Luxottica’spurchase of two of Prada’s fully-owned companies, E.I.D. Italia andE.I.D. Luxembourg, that produce and distribute eyewear, for the amount of Euro26.5 million. The acquisition was accounted for in accordance withSFAS 141 and, accordingly, the purchase price has been allocated to thefair market value of the assets and liabilities of the companies acquiredincluding an intangible asset for the license agreement for an amount ofapproximately Euro 29.7 million. Goodwill for an amount of Euro 11.1 millionover net assets acquired has been recorded in the accompanying ConsolidatedBalance Sheet. No pro forma financial information is presented, as theacquisition was not material to the Company’s consolidated financialstatements.

d)            COLENATIONAL

On July 23, 2003, theCompany formed an indirect wholly-owned subsidiary Colorado AcquisitionCorp. for the purpose of acquiring all the outstanding common stock of Cole, apublicly traded company on the New York Stock Exchange. On January 23,2004, as amended as of June 2, 2004 and July 15, 2004, the Companyand Cole entered into a definitive merger agreement with the unanimous approvalof the Boards of Directors of both companies. On October 4, 2004, Colebecame an indirect wholly owned subsidiary of the Company. The aggregateconsideration paid by the Company to former shareholders, option holders andholders of restricted stock of Cole was approximately Euro 407.9 million(US Dollar 500.6 million). In connection with the merger, the Companyassumed outstanding indebtedness with an approximate aggregate fair value ofthe principal balance of Euro 253.2 million (US Dollar310.8 million). The acquisition was accounted for using the purchasemethod and, accordingly, the purchase price of Euro 423.7 million (USDollar 520.1 million), including approximately Euro 15.8 million (USDollar 19.5 million) of direct acquisition-related expenses wasallocated to the assets acquired and liabilities assumed based on their fairvalue at the date of the acquisition. The Company used various methods tocalculate the fair value of the assets and liabilities and all valuations havebeen completed. The excess of purchase price over net assets acquired (“goodwill”)has been recorded in the accompanying Consolidated Balance Sheet. The acquisitionof Cole was made as result of the Company’s strategy to continue expansion ofits retail business in North America.

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The purchase price (includingacquisition-related expenses) has been allocated based upon the fairvalue of the Company’s acquired assets and liabilities assumed as follows (inthousands of Euro):
| ** **                                                                   | ** ** | **Thousands  of Euro** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------|------------|
| **Assets  purchased:**                                                       |       |                        |       |
| Cash and cash equivalents                                                    |       | 60,762                      |       |
| Inventories                                                                  |       | 95,601                      |       |
| Accounts receivable                                                          |       | 45,446                      |       |
| Prepaid expenses and other current assets                                    |       | 12,456                      |       |
| Property and equipment                                                       |       | 109,174                     |       |
| Trade names (useful lives of 25 years, no residual  value)                   |       | 72,909                      |       |
| Distributor network (useful life of 23 years, no  residual value)            |       | 98,322                      |       |
| Customer list and contracts (useful life of 21-23  years, no residual value) |       | 68,385                      |       |
| Franchise agreements (useful life of 20 years, no  residual value)           |       | 18,413                      |       |
| Other intangibles                                                            |       | 17,214                      |       |
| Asset held for sale—Pearle Europe                                       |       | 143,617                     |       |
| Deferred tax assets                                                          |       | 74,949                      |       |
| Other assets                                                                 |       | 11,252                      |       |
| **Liabilities  assumed:**                                                    |       |                        |       |
| Accounts payable                                                             |       | (49,190                     | )          |
| Accrued expenses and other current liabilities                               |       | (164,205                    | )          |
| Deferred tax liabilities                                                     |       | (94,910                     | )          |
| Long-term debt                                                               |       | (253,284                    | )          |
| Bank overdraft                                                               |       | (22,668                     | )          |
| Other non current liabilities                                                |       | (78,425                     | )          |
| **Fair  value of net assets**                                                | ** ** | **165,818**                 | ** ** |
| Goodwill                                                                     |       | 257.922                     |       |
| **Total purchase price**                                                     | ** ** | **423,740**                 | ** ** |

 

As part of the acquisition ofCole, the Company acquired approximately 21 percent of the outstandingshares of Pearle Europe B.V. (“PE”). A change of control provision included inthe Articles of Association of PE required Cole to make an offer to sell theseshares to the shareholders of PE within 30 days of the change of control,which deadline was extended by agreement of the parties. In December 2004,substantially all the terms of the sale were established at a final cash sellingprice of Euro 144.0 million, subject to customary closing conditions. Thesale transaction closed in January 2005. As the asset is denominated inEuro, which is not the functional currency of the subsidiary that held theinvestment, the Company has recorded an unrealized foreign exchange gain ofapproximately Euro 13.4 million (US Dollar 18.4 million) as of December 31,2004, relating to the changes in the US Dollar/Euro exchange rate between October 4,2004 (the date of acquisition) and December 31, 2004.

The following unaudited pro formainformation for the years ended December 31, 2003 and 2004 summarizes theresults of operations as if the acquisition of Cole had been completed on January 1,2003 and includes certain pro forma adjustments such as additional amortizationexpense attributable to identifiable intangibles:
| **(Thousands of  Euro, except per share data—Unaudited)** | ** ** | ** ** | ** ** | **2003**  | ** ** | **2004** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|-----------|------------|----------|------------|
| Net Sales                                                      |       | 3,901,288  |       | 4,027,057 |       |
| Income from Operations                                         |       | 417,598    |       | 488,223   |       |
| Net Income                                                     |       | 251,605    |       | 276,212   |       |
| No. of Shares  (Thousands)—Basic                     |       | 448,664    |       | 448,275   |       |
| No. of Shares  (Thousands)—Diluted                   |       | 450,202    |       | 450,361   |       |
| Earnings per Share  (Euro)—Basic                          |       | 0.56       |       | 0.62      |       |
| Earnings per Share (Euro)—Diluted                         |       | 0.56       |       | 0.61      |       |

 

This pro forma financialinformation is presented for informational purposes only and is not necessarilyindicative of the results of operations that would have been achieved had theacquisition taken place on January 1, 2003.

On October 17, 2004, Colecaused its subsidiary to purchase Euro 122.2 million (US Dollar 150 million)of its outstanding 87¤8% Senior Subordinated Notes due 2012 in a tenderoffer and consent solicitation for Euro 143 million (US

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Dollar 175.5 million), whichamount represented all of the issued and outstanding notes of such series. On November 30,2004, Cole redeemed all of its outstanding 8 5¤8% Senior Subordinated Notes due 2007 for Euro103.0 million (US Dollar 126.4 million).

e)             Otheracquisitions and establishments:

—In 2003, Luxottica Holland B.V.,a wholly-owned subsidiary, acquired the remaining interest in MirariJapan, a wholesale distributor, for aggregate cash consideration of Euro18 million. The acquisition has been accounted for as a step acquisitionand the Company has recorded goodwill of approximately Euro 16.9 millionin connection therewith.

—In April 2005, the Companypurchased 26 stores from SunShade Holding Corporation and Hao’s International.The acquisition was accounted for under SFAS 141 and, accordingly, thepurchase price of Euro 11.1 million has been allocated to the fair marketvalue of the assets and liabilities of the company as defined by the assetpurchase agreement. All valuations of net assets including but not limited tofixed assets and inventory have not been completed and are subject to changeduring 2006. Estimated preliminary goodwill for an amount of Euro8.5 million over net assets acquired has been recorded in the accompanyingConsolidated Balance Sheets. No pro forma financial information is presented,as the acquisition was not material to the Company’s consolidated financialstatements.

—In September 2005, theCompany purchased 27 stores in Canada. The acquisition was accounted for underSFAS 141 and, accordingly, the purchase price of Euro 13.8 millionhas been preliminarily allocated to the fair market value of the assets andliabilities of the company as defined by the asset purchase agreement. Allvaluations of net assets including but not limited to fixed assets andinventory have not been completed and are subject to change during 2006.Estimated goodwill for an amount of Euro 12.8 million over net assetsacquired has been recorded in the accompanying Consolidated Balance Sheets. Nopro forma financial information is presented, as the acquisition was notmaterial to the Company’s consolidated financial statements. The acquisitionwas made as result of the Company’s strategy to continue expansion of itsretail business in North America.

f)             Pendingacquisitions:

—In July 2005, the Companyannounced that SPV Zeta S.r.l., a new wholly owned Italian subsidiary, willacquire 100 percent of the equity interest in Beijing Xueliang OpticalTechnology Co. Ltd. (“Xueliang Optical”) for a purchase price of ChineseRenminbi (“RMB”) 169 million (approximately Euro 17 million), plusRMB 40 million (approximately Euro 4 million) in assumed liabilities.Xueliang Optical had unaudited sales for the 2004 fiscal year of RMB102 million (approximately Euro 10 million). Xueliang Optical has 79stores in Beijing. Completion of the transaction remains subject to customaryapprovals by the relevant Chinese governmental authorities. The Company hasreceived such approval and expects to close the transaction in the secondquarter of 2006.

—In October 2005, theCompany announced that its new wholly owned Italian subsidiary, SPV Eta S.r.l.,will acquire 100 percent of the equity interests in Ming Long Optical, thelargest premium optical chain in the province of Guangdong, China, for apurchase price of RMB 290 million (approximately Euro 29 million).Completion of the transaction remains subject to customary approvals by therelevant Chinese governmental authorities. The Company currently anticipatesreceiving such approvals by June 2006.

**5. PROPERTY, PLANT AND EQUIPMENT—NET**

Property, plant and equipment-netconsisted of the following (in thousands of Euro):
| ** **                                            | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **2004**              | ** ** | **2005** | ** ** |
| Land and  buildings, including leasehold improvements |       | 475,605               |       | 563,535 |   |
| Machinery and  equipment                              |       | 473,515               |       | 566,185 |   |
| Aircraft                                              |       | 25,908                |       | 39,107 |   |
| Other equipment                                       |       | 305,140               |       | 395,705 |   |
| Building, held  under capital lease                   |       | 2,332                 |       | — |   |
| ** **                                            | ** ** | **1,282,500**         | ** ** | **1,564,532** | ** ** |
| Less:  accumulated depreciation and amortization      |       | 683,255               |       | 829,417 |   |
| **Total**                                             | ** ** | **599,245**           | ** ** | **735,115** | ** ** |

 

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Depreciation and amortizationexpense relating to property, plant and equipment for the years ended December 31,2003, 2004 and 2005 was Euro 92.2 million, Euro 101.1 million andEuro 129.6 million, respectively. Included in other equipment isapproximately Euro 26.6 million and Euro 69.9 million of constructionin progress as of December 31, 2004 and 2005, respectively.

The increase in the value of theaircraft is due to the purchase of a new aircraft in 2005 to replace theprevious aircraft which became obsolete. The net book value of the old aircraftof Euro 10.8 million is included in “Asset held for sale” for a net bookvalue, which is less then the fair value less cost to sell, and the aircraft isexpected to be sold in June 2006. The Company has stopped recordingdepreciation expense on such asset beginning on the date that the asset wasdetermined to be “held for sale.”

**6. GOODWILL AND INTANGIBLE ASSETS—NET**

The changes in the carryingamount of goodwill for the years ended December 31, 2004 and 2005, are asfollows:
| **(Thousands of Euro)**            | ** ** | ** ** | ** ** | **Retail  Segment** | ** ** | **Wholesale  Segment** | ** ** | **Total** | ** ** |
|----------------------------------------------|------------|------------|------------|---------------------|------------|------------------------|------------|-----------|------------|
| Balance as of  January 1, 2004          |       | 1,014,252  |       | 314,662             |       | 1,328,914              |       |
| Acquisitions(a)                              |       | 265,835    |       | —              |       | 265,835                |       |
| Final purchase  price allocation             |       | 2,111      |       | (18,745             | )          | (16,634                | )          |
| Change in  exchange rates(b)                 |       | (77,173    | )          | 20                  |       | (77,153                | )          |
| Balance as of  December 31, 2004        |       | 1,205,025  |       | 295,937             |       | 1,500,962              |       |
| Acquisitions(a)                              |       | 71,897     |       | —              |       | 71,897                 |       |
| Cole’s final  purchase price allocation |       | (8,165     | )          | —              |       | (8,165                 | )          |
| Change in  exchange rates(b)                 |       | 135,729    |       | (40                 | )          | 135,689                |       |
| Balance as of  December 31, 2005        |       | 1,404,486  |       | 295,897             |       | 1,700,383              |       |

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(a)             Goodwillacquired in 2004 consisted primarily of the retail acquisitions of OPSM andCole. Goodwill acquired in 2005 was associated primarily of the OPSM minorityinterest acquisition and some other minor retail acquisitions (SeeNote 4).

(b)            Certaingoodwill balances are denominated in currencies other than Euro (the reportingcurrency) and, as such, balances may fluctuate due to changes in exchangerates.

Intangible assets-net consistedof the following (thousands of Euro):
| ** **                                                                                                                                                                       | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                       | ** ** | **2004**              | ** ** | **2005** | ** ** |
| LensCrafters trade name, net of accumulated amortization of Euro  62,565 thousand and Euro 78,956 thousand as of December 31, 2004 and  2005, respectively(a)               |       | 99,941                |       | 106,823 |   |
| Ray-Ban acquired trade names, net of accumulated amortization  of Euro 76,836 thousand and Euro 90,806 thousand as of December 31, 2004  and 2005, respectively(a)          |       | 202,364               |       | 188,394 |   |
| Sunglass Hut International trade name, net of accumulated  amortization of Euro 33,461 thousand and Euro 48,455 thousand as of  December 31, 2004 and 2005, respectively(a) |       | 189,614               |       | 206,570 |   |
| OPSM trade names, net of accumulated amortization of Euro 7,998  thousand and Euro 14,786 thousand as of December 31, 2004 and 2005,  respectively (see Note 4)(a)          |       | 133,133               |       | 138,172 |   |
| Various trade names of Cole, net of accumulated amortization of Euro 777  thousand and Euro 3,779 thousand as of December 31, 2004 and 2005,  respectively (see Note 4)(a)  |       | 68,023                |       | 71,797 |   |
| Distributor network, net of accumulated amortization of Euro 969  thousand and Euro 5,539 thousand as of December 31, 2004 and 2005,  respectively (see Note 4)(b)          |       | 88,173                |       | 96,370 |   |
| Customer list and contracts, net of accumulated amortization of Euro  701 thousand and Euro 4,006 thousand as of December 31, 2004 and 2005,  respectively (see Note 4)(b)  |       | 61,299                |       | 66,874 |   |
| Franchise agreements, net of accumulated amortization of Euro 209  thousand and Euro 1,195 thousand of December 31, 2004 and 2005,  respectively (see Note 4)(b)            |       | 16,484                |       | 17,890 |   |
| Other intangibles, net of accumulated amortization of Euro 42,085  thousand and Euro 60,392 thousand as of December 31, 2004 and 2005,  respectively (see Note 4)(c)        |       | 113,060               |       | 101,913 |   |
| **Total**                                                                                                                                                                        | ** ** | **972,091**           | ** ** | **994,803** | ** ** |

----

(a)                                 TheLensCrafters, Sunglass Hut International, OPSM and Cole trade names areamortized on a straight-line basis over a period of 25 years and the Ray-Bantrade names over a period of 20 years, as the Company believes these tradenames to be finite-lived assets.

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(b)                                Distributornetwork, customer contracts and lists, and franchise agreements wereidentifiable intangibles recorded in connection with the acquisition of Cole in2004. These assets have finite lives and are amortized on a straight-line basisover periods ranging between 20 and 23 years. The weighted averageamortization period is of 22.2 years.

(c)                                 Otheridentifiable intangibles have finite lives ranging between 3 and 17 yearsand are amortized on a straight-line basis. The weighted average amortizationperiod is 11.4 years. Most of these lives were determined based on theterms of the license agreements and non-compete agreements. During 2005,approximately Euro 7.1 million of intangibles became fully amortized andwere written off.

Certain intangible assets aremaintained in currencies other than Euro (the reporting currency) and, as such,balances may fluctuate due to changes in exchange rates.

Estimated annual amortizationexpense relating to identifiable assets, including the identifiable intangiblesattributable to recent acquisitions for which the purchase price allocation isnot final, is shown below (in thousands of Euro):
| **Years ending December 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|------------|------------|
| 2006                                         |       | 62,796     |       |
| 2007                                         |       | 59,331     |       |
| 2008                                         |       | 57,018     |       |
| 2009                                         |       | 56,884     |       |
| 2010                                         |       | 56,434     |       |

 

**7. INCOME TAXES**

Income before provision forincome taxes and the provision for income taxes consisted of the following(thousands of Euro):
| ** **                                      | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                      | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| Income before  provision for income taxes— |       |                                       |       |   |   |   |   |
| Italian  companies                              |       | 146,055                                    |       | 149,479 |   | 216,438 |   |
| US companies                                    |       | 192,732                                    |       | 235,551 |   | 262,310 |   |
| Foreign  companies                              |       | 51,006                                     |       | 72,123 |   | 78,821 |   |
| **Total**                                       | ** ** | **389,793**                                | ** ** | **457,153** | ** ** | **557,569** | ** ** |
| Provision for  income taxes:                    |       |                                       |       |   |   |   |   |
| Current—                                   |       |                                       |       |   |   |   |   |
| Italian  companies                              |       | 17,313                                     |       | 23,194 |   | 127,730 |   |
| US companies                                    |       | 74,113                                     |       | 65,356 |   | 127,540 |   |
| Foreign  companies                              |       | 13,037                                     |       | 27,701 |   | 40,855 |   |
| ** **                                      | ** ** | **104,463**                                | ** ** | **116,251** | ** ** | **296,125** | ** ** |
| Deferred—                                  |       |                                       |       |   |   |   |   |
| Italian  companies                              |       | 14,174                                     |       | 9,017 |   | (74,874 | ) |
| US companies                                    |       | 1,419                                      |       | 39,377 |   | (14,295 | ) |
| Foreign  companies                              |       | (2,728                                     | )          | (2,980 | ) | (934 | ) |
| ** **                                      | ** ** | **12,865**                                 | ** ** | **45,414** | ** ** | **(90,103** | **)** |
| **Total**                                       | ** ** | **117,328**                                | ** ** | **161,665** | ** ** | **206,022** | ** ** |

 

The Italian statutory tax rate isthe result of two components: national (“IRES”) and regional (“IRAP”) tax. IRAPcould have a substantially different base for its computation than IRES.

117

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Reconciliation between theItalian statutory tax rate and the effective tax rate is as follows:
| ** **                                                                                                                               | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                               | ** ** | **  2003  **           | ** ** | **2004** | ** ** | **2005** | ** ** |
| Italian statutory  tax rate                                                                                                              |       | 38.3                                       | %          | 37.3 | % | 37.3 | % |
| Aggregate effect  of different rates in foreign jurisdictions                                                                            |       | (1.9                                       | )%         | 0.5 | % | 1,7 | % |
| Aggregate  Italian tax benefit—net                                                                                                  |       | —                                     |       | — |   | (4.1 | )% |
| Permanent  differences, principally losses in subsidiary companies funded through capital  contributions, net of non-deductible goodwill |       | (6.3                                       | )%         | (2.4 | )% | — |   |
| Aggregate other  effects                                                                                                                 |       | —                                     |       | — |   | 2.1 | % |
| **Effective rate**                                                                                                                       | ** ** | **30.1**                                   | **%**      | **35.4** | **%** | **37.0** | **%** |

 

The 2005 aggregate Italian taxbenefit is caused by the Company complying with an Italian law that allows forthe step-up in tax basis of certainintangible assets.

Beginning with fiscal year 2004,for income tax purposes, the Company and its Italian subsidiaries file taxreturns on a consolidated basis.

The deferred tax assets andliabilities as of December 31, 2004 and 2005, respectively, were comprisedof (Thousands of Euro):
| ** **                                                        | ** ** | **December 31,**                          | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                        | ** ** | **2004  Deferred Tax  Asset/(Liability)** | ** ** | **2005  Deferred Tax  Asset/(Liability)** | ** ** |
| **Current  deferred income tax assets:**                          |       |                                           |       |   |   |
| Inventory                                                         |       | 47,424                                         |       | 68,176 |   |
| Insurance and  other reserves                                     |       | 27,212                                         |       | 22,765 |   |
| Recorded  reserves                                                |       | 10,248                                         |       | — |   |
| Net operating  loss carryforwards                                 |       | 47,101                                         |       | 1,674 |   |
| Loss on  investments                                              |       | 3,930                                          |       | 2,513 |   |
| Right of return  reserve                                          |       | 10,572                                         |       | 8,039 |   |
| Deferred  revenue—extended warranty contracts                |       | 10,508                                         |       | 5,336 |   |
| Other, net                                                        |       | 14,232                                         |       | 3,691 |   |
| Current deferred  tax assets                                      |       | 171,227                                        |       | 112,194 |   |
| **Current  deferred income tax liabilities:**                     |       |                                           |       |   |   |
| Dividends                                                         |       | (6,092                                         | )          | (8,766 | ) |
| Trade name                                                        |       | (5,179                                         | )          | (5,597 | ) |
| Asset held for  sale—Pearle Europe                           |       | (55,448                                        | )          | — |   |
| Other                                                             |       | —                                         |       | (4,231 | ) |
| **Current  deferred tax asset—net**                          |       | 104,508                                        |       | 93,600 |   |
| **Non**-**current deferred income tax assets:**                   |       |                                           |       |   |   |
| Net operating  loss carryforwards                                 |       | 70,071                                         |       | 52,659 |   |
| Recorded  reserves                                                |       | 14,305                                         |       | 11,248 |   |
| Occupancy  reserves                                               |       | 15,558                                         |       | 14,305 |   |
| Employee-related  reserves (including minimum pension liability)  |       | 28,503                                         |       | 22,585 |   |
| Trade name                                                        |       | —                                         |       | 78,746 |   |
| Other, net                                                        |       | 10,767                                         |       | 14,185 |   |
| Valuation  allowance                                              |       | (22,837                                        | )          | (15,038 | ) |
| Non-current  deferred tax assets—net of valuation allowances |       | 116,367                                        |       | 178,690 |   |
| **Non**-**current deferred income tax liabilities:**              |       |                                           |       |   |   |
| Difference in  basis of fixed assets                              |       | (126,324                                       | )          | (129,682 | ) |
| Depreciation                                                      |       | (2,843                                         | )          | — |   |
| Trade name                                                        |       | (108,833                                       | )          | (116,551 | ) |
| Trade name  revaluation step-up                                   |       | —                                         |       | (40,950 | ) |
| Other  intangibles                                                |       | (19,917                                        | )          | (18,627 | ) |
| Trademark  accelerated amortization                               |       | (74,341                                        | )          | — |   |
| **Non**-**current deferred tax liability—net**               | ** ** | **(215,891**                                   | **)**      | **(127,120** | **)** |

 

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In 2004, the Italian statutorytax rate was reduced to 37.25 percent. As a consequence, deferred taxassets and liabilities have been recomputed in line with the new tax rate. Theresult of the change in the Italian tax rate was immaterial and has been includedin deferred tax expense.

Italian companies’ taxes aresubject to review pursuant to Italian law. As of December 31, 2005, taxyears from 1999 through the most recent year were open for such review. CertainLuxottica Group subsidiaries are subject to tax reviews for previous years andduring 2005 a wholly owned Italian subsidiary was subjected to a taxinspection. As a result of this, some insignificant recorded losses werereversed and an immaterial amount was accrued for as a liability. Management believesno significant unaccrued liabilities will arise from the related tax reviews.

The Company generally does notprovide for an accrual for income taxes on undistributed earnings of itsforeign operations to the related Italian parent company that are intended tobe permanently invested. It is not practicable to determine the amount ofincome tax liability that would have resulted had such earnings actually beenrepatriated. In connection with the 2005 earnings of certain subsidiaries, theCompany has provided for an accrual for Italian income taxes related todeclared dividends of earnings.

At December 31, 2005, USHoldings had restricted U.S. Federal net operating loss carryforwards ofapproximately Euro 114.8 million (US Dollar 135.4 million), which maybe used to offset income generated by US Holdings or by certain of its whollyowned subsidiaries. These losses begin to expire in 2019. With the acquisitionof Cole, the Company acquired approximately Euro 26.5 million (US Dollar32.5 million) of restricted U.S. Federal net operating loss carryforwards,of which approximately Euro 21.1 million (US Dollar 25.8 million)were utilized in 2005. The utilization of a portion of the Cole losscarryforwards is limited due to restrictions imposed by U.S. tax rules governingutilization of loss carryforwards following changes in ownership. A portion ofthe Cole net operating loss carryforwards will expire each year going forward.In fiscal 2004 and 2005, approximately Euro 1.8 million and zero,respectively, expired.

As of December 31, 2004 and2005, the Company had recorded an aggregate valuation allowance of Euro22.8 million and Euro 15.0 million, respectively, against deferredtax assets recorded in connection with net operating loss carryforwards becauseit is more likely than not that the above deferred income tax assets will notbe fully utilized in future periods.

**8. LONG-TERM DEBT**

Long-term debt consisted of thefollowing (thousands of Euro):
| ** **                                                                                                                                                                                                                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                     | ** ** | **2004**              | ** ** | **2005** | ** ** |
| Credit agreement  with various Italian financial institutions(a)                                                                                                                                                                               |       | 450,000               |       | 275,000 |   |
| UniCredito  Italiano credit facility(b)                                                                                                                                                                                                        |       | 125,572               |       | — |   |
| Senior unsecured  guaranteed notes(c)                                                                                                                                                                                                          |       | 221,598               |       | 246,273 |   |
| Credit agreement  with various financial institutions(d)                                                                                                                                                                                       |       | 851,890               |       | 974,338 |   |
| Capital lease  obligations, payable in installments through 2005                                                                                                                                                                               |       | 4,107                 |       | 4,170 |   |
| Other loans with  banks and other third parties, interest at various rates (from 3.14 to 19.96  percent per annum), payable in installments through 2017. Certain  subsidiaries’ fixed assets are pledged as collateral for such loans(e) |       | 29,697                |       | 31,591 |   |
| Total                                                                                                                                                                                                                                          |       | 1,682,864             |       | 1,531,372 |   |
| **Current maturities**                                                                                                                                                                                                                         | ** ** | **405,369**           | ** ** | **111,323** | ** ** |

----

(a)                                 In December 2002, the Company entered into anunsecured credit facility with Banca Intesa S.p.A. The unsecured credit facilityprovided borrowing availability of up to Euro 650 million. This facilityincluded a term portion of Euro 500 million which required a balloonpayment of Euro 200 million in June 2004 and equal quarterlyinstalments of principal of Euro 50 million subsequent to that date.Interest accrued on the term portion based on Euribor as defined in theagreement plus 0.45 percent. The revolving portion provided borrowingavailability of up to Euro 150 million. Amounts borrowed under therevolving loan could be borrowed and repaid until final maturity. The finalmaturity of all outstanding principal amounts and interest was December 27,2005. In December 2005, the Company repaid in full all the outstandingamounts (Euro 50 million left on the term portion and Euro 75 millionof the revolving portion) under this credit facility.

In December 2002, theCompany entered into two interest rate swap transactions (the “Intesa Swaps”)beginning with an aggregate maximum notional amount of Euro 250 million,which decreased by Euro 100 million on June 27, 2004 and by Euro25 million in each subsequent three-month period. The Intesa Swapsexpired on December 27, 2005. The Intesa Swaps were entered into as a cashflow hedge on a portion of the Banca Intesa Euro 650 million unsecuredcredit facility discussed above. As such, changes in the fair value of theIntesa Swaps were included in OCI until they were recorded in the financialstatements. The Intesa Swaps exchanged the floating rate based on Euribor for afixed rate of 2.985 percent per annum.

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As disclosed in Note 4(a),in September 2003, the Company acquired its ownership interest of OPSM andmore than 90 percent of the performance rights and options of OPSM for anaggregate of Australian Dollar 442.7 million (Euro 253.7 million),including acquisition expenses. The purchase price was paid for with theproceeds of a new credit facility with Banca Intesa S.p.A. of Euro200 million, in addition to other short-term lines available. The newcredit facility includes a Euro 150 million term loan, which will requirerepayment of equal semi-annual installments of principal of Euro30 million starting on September 30, 2006 until the final maturitydate. Interest accrues on the term loan at Euribor (as defined in theagreement) plus 0.55 percent (3.04 percent on December 31,2004). The revolving loan provides borrowing availability of up to Euro50 million; amounts borrowed under the revolving portion can be borrowedand repaid until final maturity. At December 31, 2005, Euro25 million had been drawn from the revolving portion. Interest accrues onthe revolving loan at Euribor (as defined in the agreement) plus0.55 percent (2.76 percent on December 31, 2004). The finalmaturity of the credit facility is September 30, 2008. The Company canselect interest periods of one, two or three months. The credit facilitycontains certain financial and operating covenants. The Company was incompliance with those covenants as of December 31, 2005.

In June 2005, the Companyentered into four interest rate swap transactions with various banks with anaggregate initial notional amount of Euro 120 million which will decreaseby Euro 30 million every six months starting on March 30, 2007 (“IntesaOPSM Swaps”). These swaps will expire on September 30, 2008. The IntesaOPSM Swaps were entered into as a cash flow hedge on a portion of the BancaIntesa Euro 200 million unsecured credit facility discussed above. TheIntesa OPSM Swaps exchange the floating rate of Euribor for an average fixedrate of 2.38 percent per annum. The ineffectiveness of cash flow hedgeswas tested both at the inception date and at year end. The results of the testsindicated that the cash flow hedges are highly effective and the amounts ofineffectiveness, if any, on each date of testing were immaterial. As aconsequence approximately Euro 0.9 million, net of taxes, is included inOther Comprehensive Income as of December 31, 2005. Based on currentinterest rates and market conditions, the estimated aggregate amount to berecognized as earnings from other comprehensive income for these cash flowhedges in fiscal 2006 is approximately Euro 0.1 million, net of taxes.

In December 2005, theCompany entered into a new unsecured credit facility with Banco Popolare diVerona e Novara. The 18-month credit facility consists of a revolvingloan that provides borrowing availability of up to Euro 100 million;amounts borrowed under the revolving portion can be borrowed and repaid untilfinal maturity. At December 31, 2005, Euro 100 million had been drawnfrom the revolving portion. Interest accrues on the revolving loan at Euribor(as defined in the agreement) plus 0.25 percent (2.73 percent on December 31,2005). The final maturity of the credit facility is June 1, 2007. TheCompany can select interest periods of one, three or six months. Under thiscredit facility, Euro 100 million was outstanding as of December 31,2005.

(b)                                In June 2002, US Holdings entered into a USDollar 350 million credit facility with a group of four Italian banks ledby UniCredito Italiano S.p.A. which was paid in full upon its maturity in June 2005.The credit facility was guaranteed by Luxottica Group. The term loan portion ofthe credit facility provided US Dollar 200 million of borrowing andrequired repayment of equal quarterly principal installments beginning in March 2003.The revolving loan portion of the credit facility allowed for a maximumborrowing of US Dollar 150 million. Interest accrued at LIBOR as definedin the agreement plus 0.5 percent and the credit facility allowed theCompany to select interest periods of one, two or three months. The creditfacility contained certain financial and operating covenants.

(c)                                 On September 3, 2003, US Holdings closed aprivate placement of US Dollar 300 million (Euro 253.3 million) ofsenior unsecured guaranteed notes (the “Notes”), issued in three series (Series A,Series B and Series C). Interest on the Series A Notes accruesat 3.94 percent per annum and interest on Series B and Series CNotes accrues at 4.45 percent per annum. The Series A and Series BNotes mature on September 3, 2008 and the Series C Notes mature on September 3,2010. The Series A and Series C Notes require annual prepaymentsbeginning on September 3, 2006 through the applicable dates of maturity.The Notes are guaranteed on a senior unsecured basis by the Company andLuxottica S.r.l., a wholly owned subsidiary. The notes contain certainfinancial and operating covenants. The Company was in compliance with thosecovenants as of December 31, 2005. In December 2005, the Companyterminated the fair value interest rate swap agreement described below, and assuch, the Company will amortize the final adjustment to the carrying amount ofthe hedged interest-bearing financial instruments as an adjustment to thefixed-rate debt yield over the remaining life of the debt. The effectiveinterest rates on the Series A, B, and C Notes for their remaining livesare 5.64 percent, 5.99 percent, and 5.44 percent, respectively.

In connection with the issuanceof the Notes, US Holdings entered into three interest rate swap agreements withDeutsche Bank AG (the “DB Swaps”). The three separate agreements’ notionalamounts and interest payment dates coincided with the Notes. The DB Swapsexchanged the fixed rate of the Notes for a floating rate of the six-monthLIBOR rate plus 0.6575 percent for the Series A Notes and thesix-month LIBOR rate plus 0.73 percent for the Series B and Series CNotes. These swaps were treated as fair value hedges of the related debt andqualified for the shortcut method of hedge accounting (assuming noineffectiveness in a hedge in an interest rate swap). Thus the interestincome/expense on the swaps was recorded as an adjustment to the interestexpense on the debt, effectively changing the debt from a fixed rate ofinterest to the swap rate. In December 2005, the Company terminated the DBSwaps due to rising interest rates. The Company paid the bank an aggregate ofEuro 7.0 million (US Dollar 8.4 million), excluding accrued interest,for the final settlement of the DB Swaps.

(d)                                On June 3, 2004, the Company and US Holdingsentered into a credit facility with a group of banks providing for loans in theaggregate principal amount of Euro 740 million and US Dollar325 million. The five-year facility consists of three Tranches (Tranche A,Tranche B, Tranche C). Tranche A is a Euro 405 million amortizing termloan requiring repayment of nine equal quarterly installments of principal ofEuro 45 million beginning in June 2007, which is to be used forgeneral corporate purposes, including the refinancing of existing LuxotticaGroup S.p.A. debt as it matures. Tranche B is a term loan of US Dollar325 million which was drawn upon on October 1, 2004 by US Holdings tofinance the purchase price of the acquisition of Cole. Amounts borrowed underTranche B will mature in June 2009. Tranche C is a Revolving CreditFacility of Euro 335 million-equivalent multi-currency(Euro/US Dollar). Amounts borrowed under Tranche C may be repaid and reborrowedwith all outstanding balances maturing in June 2009. The Company canselect interest periods of one, two, three or six months with interest accruingon Euro-denominated loans based on the corresponding Euribor rate and US Dollardenominated loans based on the corresponding LIBOR rate, both plus a marginbetween 0.40 percent and 0.60 percent based on the “Net Debt/EBITDA”ratio, as defined in the agreement. The interest rate on December 31, 2005was 2.94 percent for Tranche A, 4.56 percent for Tranche B,4.83 percent on Tranche C amounts borrowed in US Dollar and2.87 percent on Tranche C amounts borrowed in Euro. The credit facilitycontains certain financial and operating covenants. The Company was incompliance with those covenants as of December 31, 2005. The Mandated LeadArrangers and Bookrunners are ABN AMRO, Banca Intesa S.p.A., Bank of America,Citigroup Global Markets Limited, HSBC Bank plc, Mediobanca—Banca di CreditoFinanziario S.p.A., The Royal Bank of Scotland plc and UniCredit BancaMobiliare S.p.A. Unicredito Italiano S.p.A.—New York Branch and Unicredit Bancad’Impresa S.p.A. act as Facility Agents. Under this credit facility, Euro974.3 million was outstanding as of December 31, 2005.

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In June 2005, the Companyentered into nine interest rate swap transactions with an aggregate initialnotional amount of Euro 405 million with various banks which will decreaseby Euro 45 million every three months starting on June 3, 2007 (the “ClubDeal Swaps”). These swaps will expire on June 3, 2009. The Club Deal Swapswere entered into as a cash flow hedge on Tranche A of the credit facilitydiscussed above. The Club Deal Swaps exchange the floating rate of Euribor foran average fixed rate of 2.40 percent per annum. The ineffectiveness ofcash flow hedges was tested both at the inception date and at year end. Theresults of the tests indicated that the cash flow hedges are highly effectiveand the amounts of ineffectiveness, if any, on each date of testing wereimmaterial. As a consequence approximately Euro 3.5 million, net of taxes,is included in Other Comprehensive Income as of December 31, 2005. Basedon current interest rates and market conditions, the estimated aggregate amountto be recognized as earnings from other comprehensive income for these cashflow hedges in fiscal 2006 is approximately Euro 0.4 million, net oftaxes.

(e)                                 Other loans consist of numerous small creditagreements and a promissory note, the most significant of which is OPSM’srenegotiated multicurrency loan facility with Westpac Banking Corporation. Thiscredit facility had a maximum available line of Euro 62.4 million(Australian Dollar 100 million), which was reduced to Euro31.2 million (Australian Dollar 50 million) in September 2005.The base rate for the interest charged varies depending on the currency borrowed;for borrowings denominated in Australian Dollars the interest accrues on thebasis of BBR (Bank Bill Rate) and for borrowings denominated in Hong KongDollars the rate is based on HIBOR (HK Inter bank Rate) plus an overall0.40 percent margin (at December 31 2005, the BBR and HIBOR were6.03 percent and 4.46 percent, respectively). At December 31,2005, the facility was utilized for an amount of Euro 13.59 million(Australian Dollar 21.88 million). The final maturity of all outstandingprincipal amounts and interest is August 31, 2006. OPSM has the option tochoose weekly or monthly interest periods. The credit facility contains certainfinancial and operating covenants. OPSM was in compliance with these covenantsas of December 31, 2005.

Excluding current maturities,long-term debt matures in the years subsequent to December 31, 2006 asfollows (thousands of Euro):
| **Year ended December 31,** |       |          |       |
|----------------------------------|------------|---------------|------------|
| 2007                             |       | 370,722       |       |
| 2008                             |       | 369,270       |       |
| 2009                             |       | 669,914       |       |
| 2010                             |       | 9,686         |       |
| Thereafter                       |       | 457           |       |
| **Total**                        | ** ** | **1,420,049** | ** ** |

** **

**9. EMPLOYEE BENEFITS**

**Liabilityfor Termination Indemnities**—Asrequired by Italian labor legislation, the benefit accrued by an employee forservice to date is payable immediately upon separation. Accordingly, theundiscounted value of that benefit payable exceeds the actuarial present valueof that benefit because payment is estimated to occur at the employee’sexpected termination date. The Company measures the vested benefit obligationat the actuarial present value of the vested benefits to which the employeewould be entitled if all employees were to resign or be terminated as of thebalance sheet date. Each year, the Company adjusts its accrual based uponheadcount, changes in compensation level and inflation. This liability is notfunded. There are also some termination indemnities in other countries whichare provided through payroll tax and other social contributions in accordancewith local statutory requirements. The related charge to earnings for the yearsended December 31, 2003, 2004 and 2005 aggregated Euro 12.5 million,Euro 10.4 million and Euro 12.0 million, respectively.

**QualifiedPension Plan***—*During fiscal years 2004and 2005, US Holdings continued to sponsor a qualified noncontributory definedbenefit pension plan which provides for the payment of benefits to eligiblepast and present employees of US Holdings upon retirement. Pension benefits areaccrued based on length of service and annual compensation under a cash balanceformula.

This pension plan was amendedeffective January 1, 2006, granting eligibility to associates who work inthe Cole Vision stores, field management, and the related labs and distributioncenters. Additionally, the pension accrual formula was amended for the Coleassociates as well as all new employees of the Company. The new formula has amore graded benefit accrual pattern than the previous formula.

As of the effective date of theCole acquisition, US Holdings, through its newly acquired subsidiary, sponsorsthe Cole National Group, Inc. Retirement Plan. This is a qualifiednoncontributory defined benefit pension plan that covers Cole employees whohave met eligibility service requirements and are not members of certaincollective bargaining units. The pension plan provides for benefits to be paidto eligible past and present employees at retirement based primarily upon yearsof service and the employees’ compensation levels at and around the time ofretirement. In January 2002, this plan was frozen for all participants.The average pay for all participants was frozen as of March 31, 2002 andcovered compensation was frozen on December 31, 2001. Benefit service wasalso frozen as of March 31, 2002 except for those individuals who were atleast age 50 with at least ten years of benefit service as of that date, whoseservice will continue to increase as long as they remain employed by USHoldings or one of its subsidiaries.

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**NonqualifiedPension Plan and Agreements***—*U.S.Holdings also maintains a nonqualified, unfunded supplemental executiveretirement plan (“SERP”) for participants in its qualified pension plan toprovide benefits in excess of amounts permitted under the provisions ofprevailing tax law. The pension liability and expense associated with this planare accrued using the same actuarial methods and assumptions as those used forthe qualified pension plan.

Starting January 1, 2006,this plan’s benefit provisions are amended to reflect the changes made to theCompany’s qualified pension plan.

As of the Cole acquisition date,US Holdings through its newly acquired subsidiary, sponsors the Cole NationalGroup, Inc. Supplemental Pension Plan. This plan is a nonqualifiedunfunded SERP for certain participants of the Cole pension plan who weredesignated by the Board of Directors of Cole at the recommendation of Cole’s ChiefExecutive Officer at such time. This plan provides benefits in excess ofamounts permitted under the provisions of the prevailing tax law. The pensionliability and expense associated with this plan are accrued using the sameactuarial methods and assumptions as those used for the qualified pension plan.

The following tables provide keyinformation pertaining to US Holdings’ pension plans and SERP. US Holdings usesa September 30 measurement date for these plans.

**Obligationsand Funded Status**
| ** **                                | ** ** | **Pension Plans** | ** ** | **SERP** | ** ** |
|-------------------------------------------|------------|------------------------|------------|----------|------------|
| **(thousands of Euro)**         | ** ** | ** **             | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** |
| Change in benefit  obligations:           |       |                   |       |     |       |   |   |   |   |
| Benefit obligation at beginning of period |       | 191,787                |       | 225,028  |       | 4,667 |   | 4,814 |   |
| Translation differences                   |       | (17,558                | )          | 33,278   |       | (366 | ) | 739 |   |
| Service cost                              |       | 11,584                 |       | 12,356   |       | 199 |   | 218 |   |
| Interest cost                             |       | 11,012                 |       | 13,859   |       | 248 |   | 318 |   |
| Actuarial loss (gain)                     |       | (5,648                 | )          | 2,364    |       | (169 | ) | 497 |   |
| Acquisition                               |       | 41,536                 |       | —   |       | 564 |   | — |   |
| Benefits paid                             |       | (7,685                 | )          | (7,934   | )          | (329 | ) | (55 | ) |
| Benefit  obligation at end of period      |       | 225,028                |       | 278,951  |       | 4,814 |   | 6,531 |   |
|                                           |            |                        |            |          |            |  |  |  |  |  |  |

** **
| ** **                                       | ** ** | **Pension Plan** | ** ** | **SERP**    | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|-------------|------------|
| **(thousands of Euro)**                | ** ** | ** **            | ** ** | **2004**    | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** |
| Change in plan assets:                           |       |                  |       |        |       |   |   |   |   |
| Fair value of plan assets at beginning of period |       | 123,044               |       | 149,644     |       | — |   | — |   |
| Translation differences                          |       | (11,748               | )          | 23,137      |       |   |   |   |   |
| Actual return (loss) on plan assets              |       | 10,486                |       | 18,020      |       |   |   |   |   |
| Plan assets acquired                             |       | 23,913                |       | —      |       |   |   |   |   |
| Employer contribution                            |       | 11,634                |       | 23,449      |       | 329 |   | 55 |   |
| Benefits paid                                    |       | (7,685                | )          | (7,934      | )          | (329 | ) | (55 | ) |
| **Fair  value of plan assets at end of period**  | ** ** | **149,644**           | ** ** | **206,316** |       | — |   | — |   |
| Funded status                                    |       | (75,384               | )          | (72,631     | )          | (4,814 | ) | (6,530 | ) |
| Unrecognized net actuarial loss                  |       | 43,520                |       | 47,373      |       | 965 |   | 1,494 |   |
| Unrecognized prior service cost                  |       | 1,623                 |       | 1,262       |       | 47 |   | 43 |   |
| Other adjustments                                |       | 464                   |       | —      |       | 40 |   | 3 |   |
| **Accrued pension cost**                         | ** ** | **(29,777**           | **)**      | **(23,996** | **)**      | **(3,762** | **)** | **(4,990** | **)** |
|                                                  |            |                       |            |             |            |  |  |  |  |  |  |

 

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Amounts recognized in theConsolidated Balance Sheets consist of the following:
| ** **                                | ** ** | **Pension Plan** | ** ** | **SERP** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|----------|------------|
| **(Amounts in Euro/thousands)** | ** ** | ** **            | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** |
| Liabilities:                              |       |                  |       |     |       |   |   |   |   |
| Accrued pension cost                      |       | 29,777                |       | 23,997   |       | 3,762 |   | 4,990 |   |
| Additional minimum liability              |       | 31,689                |       | 31,372   |       | 745 |   | 852 |   |
| Total accrued  pension liability          |       | 61,466                |       | 55,369   |       | 4,507 |   | 5,842 |   |
| Assets—                              |       |                  |       |     |       |   |   |   |   |
| Intangible asset                          |       | 1,623                 |       | 1,262    |       | 47 |   | 43 |   |
| Other comprehensive  income—         |       |                  |       |     |       |   |   |   |   |
| Accumulated  other comprehensive income   |       | 30,066                |       | 30,110   |       | 698 |   | 809 |   |
|                                           |            |                       |            |          |            |  |  |  |  |  |  |

 

The accumulated benefitobligations for the pension plan as of September 30 were as follows:
| ** **                                                                       | ** ** | **Pension Plan** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                       | ** ** | **2003**              | ** ** | **2004** | ** ** | **2005** | ** ** |
|                                                                             |       | 193,473               |       | 230,990 |   | 248,771 |   |
| **Components of Net Periodic  Benefit Cost:**                                    |       |                  |       |   |   |   |   |
| Service cost                                                                     |       | 11,816                |       | 11,584 |   | 12,356 |   |
| Interest cost                                                                    |       | 12,035                |       | 11,012 |   | 13,859 |   |
| Expected return on plan assets                                                   |       | (13,333               | )          | (12,263 | ) | (14,959 | ) |
| Amortization of actuarial loss                                                   |       | 294                   |       | 564 |   | 1,564 |   |
| Amortization of prior service cost                                               |       | 624                   |       | 568 |   | 566 |   |
| Net periodic pension expense                                                     |       | 11,436                |       | 11,465 |   | 13,386 |   |
| **Additional Information:**                                                      |       |                  |       |   |   |   |   |
| (Decrease)/Increase  in minimum liability included in other comprehensive income |       | 1,045                 |       | (546 | ) | (4,055 | ) |

 

The accumulated benefitobligations for the SERP as of September 30 were as follows:
| ** **                                                                       | ** ** | **SERP** | ** ** |
|----------------------------------------------------------------------------------|------------|----------|------------|
| ** **                                                                       | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|                                                                             |       | 4,610    |       | 4,965 |   | 5,549 |   |
| **Components  of Net Periodic Benefit Cost:**                                    |       |     |       |   |   |   |   |
| Service cost                                                                     |       | 221      |       | 199 |   | 218 |   |
| Interest cost                                                                    |       | 287      |       | 248 |   | 318 |   |
| Expected return on plan assets                                                   |       | —   |       | — |   | — |   |
| Amortization of actuarial loss                                                   |       | 115      |       | 48 |   | 10 |   |
| Amortization of prior service cost                                               |       | 12       |       | 11 |   | 125 |   |
| Net periodic pension expense                                                     |       | 635      |       | 506 |   | 671 |   |
| **Additional  Information:**                                                     |       |     |       |   |   |   |   |
| (Decrease)/Increase  in minimum liability included in other comprehensive income |       | 640      |       | 30 |   | (8 | ) |

 

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**Assumptions**
| ** **                                                                                                                  | ** ** | **Pension Plan** | ** ** | **SERP** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|----------|------------|
| ** **                                                                                                                  | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** |
| Weighted-average  assumptions used to determine benefit obligations at September 30:                                   |       |                  |       |     |       |   |   |   |   |
| Discount rate                                                                                                               |       | 5.75                  | %          | 5.75     | %          | 5.75 | % | 5.75 | % |
| Rate of  compensation increase                                                                                              |       | 4.25                  | %          | 4.25     | %          | 4.25 | % | 4.25 | % |
| Weighted-average  assumptions used to determine net periodic benefit cost for years ended  December 31, 2004 and 2005: |       |                  |       |     |       |   |   |   |   |
| Discount rate                                                                                                               |       | 6.00                  | %          | 5.75     | %          | 6.00 | % | 5.75 | % |
| Expected long-term  return on plan assets                                                                                   |       | 8.50                  | %          | 8.50     | %          | N/A |   | N/A |   |
| Rate of  compensation increase                                                                                              |       | 4.75                  | %          | 4.25     | %          | 4.75 | % | 4.25 | % |
| Mortality table                                                                                                             |       | 1983 GAM              |       | RP-2000  |       | 1983 GAM |   | RP-2000 |   |

 

For 2005, the Company’s assumedlong-term rate of return on the pension plans’ assets was 8.50%. In developingthis assumption, the Company considered input from its third-partypension managers, investment consultants and plan actuaries, including theirreview of asset class return expectations and long-term inflation assumptions.The Company also considered the pension plans’ historical average return overvarious periods of time (through December 31, 2004). Under this approach,the assumption was arrived at by applying historical average total returns byasset class over various time horizons to the plan’s current and target assetallocations. The resulting assumption was also benchmarked against theassumptions used by U.S. corporations as reflected in several surveys.

**Plan Assets**

The pension plans’ target andactual asset allocations and weighted average actual asset allocations by assetcategory as of September 30, 2004 and 2005, are as follows:
| ** **              | ** ** | **Asset**  | ** ** | **US Holdings Pension  Plan Assets  September 30,** | ** ** | **Cole Pension  Plan Assets** | ** ** |
|-------------------------|------------|------------|------------|-------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| **Asset Category** | ** ** | ** ** | ** ** | **Allocation  Target**                                                  | ** ** | **2004**                                | ** ** | **2005** | ** ** | **Ocotber 4,  2004** | ** ** | **September 30,  2005** | ** ** |
| Equity  securities      |       | 65         | %          | 62                                                                      | %          | 60                                      | %          | 65 | % | 68 | % |
| Debt securities         |       | 35         | %          | 35                                                                      | %          | 36                                      | %          | 33 | % | 31 | % |
| Other                   |       | 0          | %          | 3                                                                       | %          | 4                                       | %          | 2 | % | 1 | % |
| Total                   |       | 100        | %          | 100                                                                     | %          | 100                                     | %          | 100 | % | 100 | % |
|                         |            |            |            |                                                                         |            |                                         |            |  |  |  |  |  |  |

 

The actual allocation percentagesat any given time may vary from the targeted amounts due to changes in stockand bond valuations as well as timing of contributions to and benefit paymentsfrom the pension plan trusts.

Plan assets are invested indiversified portfolios consisting of an array of asset classes within the abovetarget allocations and using a combination of active and, in the Cole plan,passive investment strategies. Active strategies employ multiple investmentmanagement firms. Risk is controlled through diversification among assetclasses, managers, styles, market capitalization (equity investments) andsecurities. Risk is further controlled both at the asset class and managerlevel by assigning benchmarks and excess return targets. The investmentmanagers are monitored on a ongoing basis to evaluate performance against theestablished market benchmarks and targets.

Each of the defined benefit pensionplans has an investment policy that was developed to serve as a management toolto provide the framework within which the fiduciary’s investment decisions aremade; establish standards to measure investment managers’ performance; outlinethe roles and responsibilities of the various parties involved; and describethe ongoing review process.

***Benefit Payments—***The following estimated future benefit payments,which reflect expected future service, are expected to be paid in the yearsindicated for both the US Holdings and Cole plans (translated for convenienceat the December 31, 2005 noon buying rate):

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| **(thousands of Euro)** | ** ** | ** ** | ** ** | **Pension Plans** | ** ** | **Supplemental Plans** | ** ** |
|-----------------------------------|------------|------------|------------|------------------------|------------|-----------------------------|------------|
| 2006                              |       | 12,068     |       | 341                    |       |
| 2007                              |       | 10,707     |       | 226                    |       |
| 2008                              |       | 12,036     |       | 1,095                  |       |
| 2009                              |       | 12,998     |       | 388                    |       |
| 2010                              |       | 14,130     |       | 332                    |       |
| 2011—2015                    |       | 100,087    |       | 3,937                  |       |

 

***Contributions—***US Holdings expects to contribute US Dollar29.3 million (Euro 24.7 million at the December 31, 2005 noonbuying rate) to its pension plan and US Dollar 0.4 million (Euro0.3 million at the December 31, 2005 noon buying rate) to its SERP in2006.

***Other Benefits—***US Holdings provides certain post-employmentmedical, disability and life insurance benefits. As of December 31, 2004and 2005, the accrued liability related to this obligation was immaterial and isincluded in accrued employee benefits on the Consolidated Balance Sheets.

US Holdings sponsors a taxincentive savings plan covering all full-time employees. US Holdings makesquarterly contributions in cash to the plan based on a percentage of employees’contributions. Additionally, US Holdings may make an annual discretionarycontribution to the plan which may be made in the form of Luxottica Group’sAmerican Depository Receipts (“ADRs”) or cash.

Aggregate contributions made tothe tax incentive savings plan by US Holdings were US Dollar 8.3 million(Euro 6.7 million) and US Dollar 11.5 million (Euro 9.2 million)for fiscal years 2004 and 2005, respectively.

Effective January 1, 2006,the Cole defined contribution plan was merged into the US Holdings taxincentive savings plan.

With the acquisition of Cole, USHoldings, through one of its wholly owned subsidiaries, now sponsors thefollowing additional other benefit plans which cover certain present and pastemployees of the Cole companies acquired:

·                  Coleprovides post-employment benefits under individual agreements for continuationof health care benefits and life insurance coverage to former employees afteremployment but before retirement. As of December 31, 2004 and 2005, theaccrued liability related to this benefit was US Dollar 1.6 million (Euro1.2 million) and US Dollar 2.4 million (Euro 2.0 million),respectively, and is included in accrued employee benefits on the consolidatedbalance sheet. The increase in the liability in 2005 is largely attributable toa change in the claims cost table used by the plan’s actuary in calculating thefuture liability. This change was made because the Company’s medical plans inwhich the participants are enrolled for 2006 generally provide better medicalbenefits than the previous plans.

·                  Colehas qualified defined contribution plans covering all full-time employees inthe U.S. Eligible employees may contribute a percentage of their compensationto the plan. Cole provides for a mandatory company match in cash of 25 percentof the first 4 percent of employee contributions. The Company may make anannual discretionary contribution to the plan in cash. US Holdings’ matchingcontributions of approximately Euro 0.9 million will be made in early 2006and Euro 0.9 million was contributed in 2005.

·                  Colealso maintains a defined contribution plan covering all full-time employees inPuerto Rico. This plan provides a mandatory match of 50 percent of thefirst six percent of employee contributions. Company contributions to this planwere made weekly throughout 2004 and 2005. The employees in Puerto Rico whoparticipated in the Company’s tax incentive savings plan in the past weretransferred into the Cole plan effective January 1, 2006. Additionally,the plan was amended to provide for a match of 100 percent of the firstthree percent of employee contributions.

·                  Coleestablished and maintains the Cole National Group, Inc. SupplementalRetirement Benefit Plan, which provides supplemental retirement benefits forcertain highly compensated and management employees who were previouslydesignated by the former Board of Directors of Cole as participants. This is anunfunded non-contributory defined contribution plan. Each participant’s accountis credited with a percentage of the participant’s base salary and interestearned on the average balance during the year. This plan was frozen as tofuture salary credits on the effective date of the Cole acquisition in 2004.The plan liability of Euro 1.6 million and Euro 1.7 million at 

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December 31,2004 and 2005, respectively, is included in accrued employee benefits on theconsolidated balance sheet.

·                  Colemaintained a deferred compensation plan for executives and other seniormanagement which allowed for the deferral of a portion of their compensation. Atotal of US Dollar 3.2 million (Euro 2.3 million) was paid to theparticipants in the fourth quarter of 2004 in accordance with the change incontrol provisions of this plan. There is no remaining liability for this planon the consolidated balance sheet at December 31, 2004.

***Defined ContributionPlan*—**US Holdings sponsors a noncontributory profit-sharingplan for employees of its former women’s apparel business. Contributions tothis plan were discontinued for plan years subsequent to January 28, 1995.This plan is in termination status pending the location of the few remainingparticipants with account balances.

***Health Benefit Plans—***US Holdings partially subsidizes health carebenefits for eligible retirees. Employees generally become eligible for retireehealth care benefits when they retire from active service between the ages of55 and 65. Benefits are discontinued at the age of 65.

As of the Cole acquisition date,US Holdings assumed a liability for a postretirement benefit plan maintained byCole in connection with its acquisition of Pearle in 1996. This plan was closedto new participants at the time of Cole’s acquisition of Pearle. Under thisplan, the eligible former employees are provided life insurance and certainhealth care benefits which are partially subsidized by Cole. Medical benefitsunder this plan can be maintained past age 65. 

Net periodic cost of thesebenefits for fiscal years 2004 and 2005 included the following components:
| **(thousands of Euro)**        | ** ** | ** ** | ** ** | **2004** | ** ** | **2005** | ** ** |
|------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Service cost                             |       | 126        |       | 139      |       |
| Interest cost                            |       | 72         |       | 216      |       |
| Amortization of  unrecognized net (gain) |       | (3         | )          | —   |       |
| Amortization of  prior service cost      |       | (23        | )          | (23      | )          |
| Net periodic pension  cost               |       | 172        |       | 332      |       |

 

The following table sets forththe funded status of the postretirement benefit plan:
| **(thousands of Euro)**                 | ** ** | ** ** | ** ** | **2004** | ** ** | **2005** | ** ** |
|---------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Change in benefit  obligation:                    |       |       |       |     |       |
| Benefit  obligation—beginning of year        |       | 1,330      |       | 3,468    |       |
| Translation  differences                          |       | (298       | )          | 533      |       |
| Service cost                                      |       | 126        |       | 139      |       |
| Interest cost                                     |       | 72         |       | 216      |       |
| Plan  participants’ contributions            |       | 23         |       | 57       |       |
| Amendments                                        |       | (94        | )          | —   |       |
| Actuarial gain                                    |       | (2         | )          | (129     | )          |
| Acquisition                                       |       | 2,359      |       | —   |       |
| Change in plan  provisions                        |       | —     |       | 701      |       |
| Benefits paid                                     |       | (48        | )          | (318     | )          |
| Benefits  obligation—end of year             |       | 3,468      |       | 4,667    |       |
| Changes in plan assets:                           |       |       |       |     |       |
| Fair value of  plan assets—beginning of year |       | —     |       | —   |       |
| Translation differences                           |       |       |       |     |       |
| Company  contribution                             |       | 25         |       | 261      |       |
| Plan  participants’ contributions            |       | 23         |       | 57       |       |
| Benefits paid                                     |       | (48        | )          | (318     | )          |
| Fair value of  plan assets—end of year       |       | —     |       | —   |       |
| Funded status                                     |       | (3,468     | )          | (4,668   | )          |
| Unrecognized net  gain and prior service costs    |       | (213       | )          | 365      |       |
| Adjustment for  fourth quarter contributions      |       | —     |       | 74       |       |
| Accrued postretirement  benefit cost              |       | (3,681     | )          | (4,229   | )          |

 

 

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**Benefit Payments**—The following estimated future benefit payments,which reflect expected future service, are estimated to be paid in the yearsindicated for both the US Holdings and Cole plans (amounts in thousands of Eurotranslated for convenience at the noon buying rate at December 31, 2005):
| 2006      |   | 209   |   |
|-----------|--------|-------|--------|
| 2007      |   | 233   |   |
| 2008      |   | 247   |   |
| 2009      |   | 285   |   |
| 2010      |   | 319   |   |
| 2011-2015 |   | 2,082 |   |

 

***Contributions***—The expected contributions for 2005 are Euro0.2 million for the Company and Euro 0.1 million for the employeeparticipants.

For 2005, a 10.0 percent(10.5 percent for 2004) increase in the cost of covered health carebenefits was assumed. This rate was assumed to decrease gradually to5 percent for 2015 and remain at that level thereafter. The health carecost trend rate assumption has a significant effect on the amounts reported. A1.0 percent increase or decrease in the health care trend rate would havean immaterial impact on the consolidated financial statements. The weighted-averagediscount rate used in determining the accumulated post-retirement benefitobligation was 5.75 percent at September 30, 2004 and6.00 percent at September 30, 2005.

The weighted-averagediscount rate used in determining the net periodic benefit cost for 2004 and2005 was 5.75 percent and 6.0 percent, respectively.

Certain of the Company’snon-Italian and non-US subsidiaries provide limited non-pension benefits toretirees in addition to government sponsored programs. The cost of theseprograms is not significant to the Company.

On December 8, 2003, theMedicare Prescription Drug Improvement and Modernization Act of 2003 (the “Act”)was signed into law. In accordance with FASB Staff Position 106-2, theCompany’s measures of accumulated postretirement benefit obligation and netperiodic benefit cost in the consolidated financial statements reflect theeffects of the Act. The adoption of FASB Staff Position 106-2 did nothave a material effect on the Company’s consolidated financial statements.

**10. STOCK OPTION AND INCENTIVE PLANS**

**Stock OptionPlan**

Beginning in April 1998,certain officers and other key employees of the Company and its subsidiarieswere granted stock options of Luxottica Group under the Company’s stock optionplan. The stock options were granted at a price equal to the market value ofthe shares at the date of grant. These options become exercisable in eitherthree equal annual installments beginning on January 31 one year after thedate of grant or, for the 2005 grant, two annual equal instalments beginning onJanuary 31 two years after the date of grant and expire on or before January 31,2014.

As the Company applies APB 25, nocompensation expense was recognized because the exercise price of the optionswas equal to the fair market value on the date of grant. However, as some ofthose individuals were U.S. citizens/taxpayers and as the exercise of suchoptions created taxable income, the Company was afforded a tax benefit in itsFederal tax return equal to the income declared by the individuals. U.S. GAAPdoes not permit the aforementioned tax benefit to be recorded in the statementof income. Therefore, such amount is recorded as a reduction of taxes payableand an increase to additional paid-in capital. For the years ended December 31,2004 and 2005, the benefit recorded was approximately Euro 0.8 million andEuro 4.7 million, respectively.

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The following table summarizesinformation about stock options for each year.
| ** **                                    | ** ** | **Number  of Options  Outstanding** | ** ** | **Weighted Average  Exercise Price  (Denominated  in Euro)(1)** | ** ** |
|-----------------------------------------------|------------|------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| **Outstanding  as of January 1, 2003**   | ** ** | **8,110,033**                            | ** ** | **11.51**                                                                      | ** ** |
| Granted                                       |       | 2,397,300                                |       | 10.51                                                                          |       |
| Forfeitures                                   |       | (176,600                                 | )          | 11.77                                                                          |       |
| Exercised                                     |       | (213,433                                 | )          | 6.97                                                                           |       |
| **Outstanding  as of December 31, 2003** | ** ** | **10,117,300**                           | ** ** | **10.29**                                                                      | ** ** |
| Granted                                       |       | 2,035,500                                |       | 13.79                                                                          |       |
| Forfeitures                                   |       | (70,300                                  | )          | 9.73                                                                           |       |
| Exercised                                     |       | (728,440                                 | )          | 8.07                                                                           |       |
| **Outstanding  as of December 31, 2004** | ** ** | **11,354,060**                           | ** ** | **10.74**                                                                      | ** ** |
| Granted                                       |       | 1,512,000                                |       | 16.89                                                                          |       |
| Forfeitures                                   |       | (51,500                                  | )          | 13.10                                                                          |       |
| Exercised                                     |       | (2,770,250                               | )          | 10.38                                                                          |       |
| **Outstanding as of  December 31, 2005** | ** ** | **10,044,310**                           | ** ** | **12.68**                                                                      | ** ** |

 

Stock option grants outstandingat December 31, 2005 are summarized as follows:
| **Grant** | ** ** | ** ** | ** ** | **Exercise Price  denominated in Euro**(2) | ** ** | **Number  Outstanding** | ** ** | **Number  Exercisable** | ** ** | **Remaining  Life (Years)** | ** ** |
|-----------|------------|------------|------------|-----------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|----------------------------------|------------|
| 1         |       | 7.38       |       | 397,600                                                   |       | 397,600                 |       | 1.1                     |       |
| 2         |       | 4.38       |       | 788,660                                                   |       | 788,660                 |       | 2.1                     |       |
| 3         |       | 9.52       |       | 804,250                                                   |       | 804,250                 |       | 3.1                     |       |
| 4         |       | 12.84      |       | 1,214,750                                                 |       | 1,214,750               |       | 4.1                     |       |
| 5         |       | 15.03      |       | 1,622,650                                                 |       | 1,622,650               |       | 5.1                     |       |
| 6         |       | 10.51      |       | 1,772,200                                                 |       | 1,015,700               |       | 6.1                     |       |
| 7         |       | 13.79      |       | 1,941,200                                                 |       | 584,200                 |       | 7.1                     |       |
| 8         |       | 16.89      |       | 1,503,000                                                 |       | —                  |       | 8.1                     |       |

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(1)             Forconvenience all amounts are translated at the noon buying rate in effect at theend of each year.

(2)             Certainoptions were granted in US Dollars and have been converted using a December 31,2005 conversion rate of Euro 1.00 to US Dollar 1.1842.

The Company adopted SFAS 123-Ras of January 1, 2006, and at such point began expensing stock optionsover their vesting life based on their fair value as of the date of grant. Proforma net income and earnings per share calculated as if the compensation costsof the plans had been determined under a fair-value based method are reportedin Note 1.

**Stock Incentive Plans**

In October 2004, under aCompany Incentive Plan, the Company granted options to acquire an aggregate of1,000,000 shares of the Company to certain of the North American RetailDivision’s employees which may vest and become exercisable on January 31,2007 only if certain financial performance measures are met over the periodending December 2006. At December 31, 2005, there were options toacquire 1,000,000 shares (the closing ADR price at December 31, 2005 onthe New York Stock Exchange was US Dollar 25.31 per share) at an exercise priceof US Dollar 18.59 per share. Compensation expense is recorded in accordancewith variable accounting under APB 25 for the options issued under theincentive plan based on the market value of the underlying ordinary shares whenthe number of shares to be issued is known (“intrinsic value method”). Duringfiscal 2005, it became probable that the incentive targets would be met and assuch the Company has recorded approximately Euro 1.8 million (or US Dollar2.2 million) of compensation expense net of taxes during fiscal 2005 andrecorded future unearned compensation expense in equity of approximately Euro2.7 million (US Dollar 3.2 million) with an offsetting increase inadditional paid-in capital for such amounts. Pro forma net income and earningsper share calculated as if the compensation costs of the plans had beendetermined under a fair-value based method are reported in Note 1.

In September 2004, theCompany’s Chairman and majority shareholder, Mr. Leonardo Del Vecchio,allocated shares held through La Leonardo Finanziaria S.r.l., an Italianholding company of the Del Vecchio family, representing 2.11 percent (or 

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9.6 million shares) of the Company’s currentlyauthorized and issued share capital, to a stock option plan for top managementof the Company at an exercise price of Euro 13.67 per share (the closing stockprice at December 31, 2005 on the Milan Stock Exchange was Euro 21.43 pershare). The stock options to be issued under the stock option plan vest uponmeeting certain economic objectives. As such, compensation expense is recordedin accordance with variable accounting under APB 25 for the options issued tomanagement under the incentive plan based on the market value of the underlyingordinary shares only when the number of shares to be vested and issued isknown. During 2005, it became probable that the incentive targets would be metand, as such, the Company has recorded compensation expense of approximatelyEuro 19.9 million, net of taxesand recorded future unearned compensation expense in equity of approximatelyEuro 45.8 million, net of taxes, with an offsetting increase in additionalpaid-in capital for such amounts. The expense if calculated under SFAS 123-Rwould have been approximately Euro 16.9 million, net of taxes, and isincluded in pro forma net income and earnings per share (see Note 1).

**11. SHAREHOLDERS’ EQUITY**

In June 2004 and June 2005,the Company’s Annual Shareholders Meetings approved cash dividends of Euro94.1 million and Euro 103.5 million, respectively. These amountsbecame payable in July 2004 and June 2005, respectively. Italian lawrequires that five percent of net income be retained as a legal reserve untilthis reserve is equal to one-fifth of the issued share capital. As such, thislegal reserve is not available for dividends to the shareholders. Legalreserves of the Italian entities included in retained earnings at December 31,2004 and 2005, aggregated Euro 8.4 million and Euro 8.6 million,respectively. In addition Euro 3.6 million of other legal reserves offoreign entities is not available for dividends to the shareholders.

Luxottica Group’s legal reserverollforward for fiscal period from 2003–2005 is detailed as follows (inthousands of Euro):
| January 1,  2003         |   | 5,434 |   |
|-------------------------------|--------|-------|--------|
| Increase in  fiscal year 2003 |   | 17    |   |
| December 31,  2003       |   | 5,451 |   |
| Increase in  fiscal year 2004 |   | 3     |   |
| December 31,  2004       |   | 5,454 |   |
| Increase in  fiscal year 2005 |   | 23    |   |
| December 31, 2005        |   | 5,477 |   |

 

In accordance with SFAS No. 87,*Employers’ Accounting for Pensions,*Luxottica Group has recorded a minimum pension liability for underfunded planof Euro 30.7 million and Euro 30.9 million as of December 31,2004 and 2005, respectively, representing the excess of unfunded accumulatedbenefit obligations over previously recorded pension cost liabilities. Acorresponding amount is recognized as an intangible asset except to the extentthat these additional liabilities exceed related unrecognized prior servicecost and net obligation, in which case the offset to the increase in liabilityis charged directly to shareholders’ equity. The principal cause of thedeterioration of the funded status in the pension liability in previous yearswas caused by negative returns from investments held in the internationalequity markets in those years. As of December 31, 2004 and 2005, adecrease of Euro 0.2 million and a decrease of Euro 2.5 million,respectively, in the excess minimum liability, net of income taxes, resulted inan increase in shareholders’ equity.

In September 2002, the Boardof Directors authorized US Holdings to repurchase through the open market up to11,500,000 ADRs of Luxottica Group, representing 2.5 percent of theauthorized and issue share capital, during an 18-month period starting inSeptember 2002. In March 2003, the Company announced that US Holdingshad resolved to purchase up to an additional 10,000,000 ADRs of Luxottica Group,representing 2.2 percent of the authorized and issued share capital of theCompany, over the 18-month period commencing on that date. As of December 31,2004, both repurchase programs expired and US Holdings has purchased 6,434,786(1,911,700 in 2002 and 4,523,786 in 2003) ADRs at an aggregate purchase priceof Euro 70.0 million (U.S. Dollar 73.8 million translated at theexchange rate at the time of the transaction). In connection with therepurchase, an amount of Euro 70.0 million is classified as treasuryshares in the Company’s consolidated financial statements.

**12. SEGMENTS AND RELATED INFORMATION**

The Company adopted SFAS No. 131,*Disclosures About Segments of an Enterpriseand Related Information*, in 1998. The Company operates in two industrysegments: (1) manufacturing and wholesale distribution and (2) retaildistribution. Through its manufacturing and wholesale distribution operations,the Company is engaged in the design, manufacture, wholesale distribution andmarketing of house brand and designer lines of mid- to premium-pricedprescription frames and 

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sunglasses. The Company operates in the retail segmentthrough its Retail Division, consisting of LensCrafters, Sunglass HutInternational, OPSM and Cole.

The following tables summarizethe segmental and geographic information deemed essential by the Company’smanagement for the purpose of evaluating the Company’s performance and formaking decisions about future allocations of resources.

The “Inter-segmenttransactions and corporate adjustments” column includes the elimination ofinter-segment activities which consist primarily of sales of product fromthe manufacturing and wholesale segment to the retail segment and corporaterelated expenses not allocated to reportable segments. This has the effect ofincreasing reportable operating profit for the manufacturing and wholesale andretail segments. Identifiable assets are those tangible and intangible assetsused in operations in each segment. Corporate identifiable assets areprincipally cash, goodwill and trade names.
| **(Thousands of Euro)  Year Ended December 31,** | ** ** | **Manufacturing and  Wholesale** | ** ** | **Retail** | ** ** | **Inter-Segment  Transactions and  Corporate Adjustments** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------------|------------|---------------------------------------|------------|------------|------------|----------------------------------------------------------------------|------------|------------------|------------|
| **2005**                                                                  |       |                                  |       |       |       |                                                                 |       |             |       |
| Net sales                                                                 |       | 1,310,273                             |       | 3,298,171  |       | (237,700                                                             | )(1)       | 4,370,744        |       |
| Income from  operations                                                   |       | 304,333                               |       | 378,425    |       | (80,204                                                              | )(2)       | 602,554          |       |
| Capital  expenditures                                                     |       | 81,070                                |       | 148,346    |       | —                                                               |       | 229,416          |       |
| Depreciation and  amortization                                            |       | 48,720                                |       | 111,115    |       | 34,370                                                               | (3)        | 194,205          |       |
| Identifiable  assets                                                      |       | 1,590,091                             |       | 1,388,189  |       | 1,995,242                                                            | (4)        | 4,973,522        |       |
| **2004**                                                                  |       |                                  |       |       |       |                                                                 |       |             |       |
| Net sales                                                                 |       | 1,094,802                             |       | 2,346,683  |       | (186,185                                                             | )(1)       | 3,255,300        |       |
| Income from  operations                                                   |       | 233,129                               |       | 310,340    |       | (50,655                                                              | )(2)       | 492,814          |       |
| Capital  expenditures                                                     |       | 31,367                                |       | 86,053     |       | —                                                               |       | 117,420          |       |
| Depreciation and  amortization                                            |       | 47,656                                |       | 79,563     |       | 25,532                                                               | (3)        | 152,751          |       |
| Identifiable  assets                                                      |       | 1,566,086                             |       | 1,211,781  |       | 1,778,191                                                            | (4)        | 4,556,058        |       |
| **2003**                                                                  |       |                                  |       |       |       |                                                                 |       |             |       |
| Net sales                                                                 |       | 996,694                               |       | 2,028,237  |       | (172,737                                                             | )(1)       | 2,852,194        |       |
| Income from  operations                                                   |       | 191,116                               |       | 269,851    |       | (29,180                                                              | )(2)       | 431,787          |       |
| Capital  expenditures                                                     |       | 23,580                                |       | 57,708     |       | —                                                               |       | 81,288           |       |
| Depreciation and  amortization                                            |       | 45,208                                |       | 68,606     |       | 21,026                                                               | (3)        | 134,840          |       |
| Identifiable assets                                                       |       | 1,528,074                             |       | 876,661    |       | 1,507,941                                                            | (4)        | 3,912,676        |       |

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(1)             Inter-segmentelimination of net revenues relates to intercompany sales from themanufacturing and wholesale segment to the retail segment.

(2)             Inter-segmentelimination of operating income mainly relates to depreciation and amortizationof corporate identifiable assets and profit-in-stock elimination for framesmanufactured by the wholesale business and included in the retail segmentinventory.

(3)             Inter-segmentelimination of depreciation and amortization relates to depreciation andamortization of corporate identifiable assets.

(4)             Inter-segmentelimination of identifiable assets includes mainly the net value of goodwilland trade names of acquired retail businesses.

The geographic segments includeItaly, the main manufacturing and distribution base, United States and Canada(which includes the United States of America, Canada and Caribbean islands),Asia Pacific (which includes Australia, New Zealand, Singapore, Malaysia,Thailand, China, Hong Kong, Japan and Taiwan) and Other (which includes allother geographic locations including Europe (excluding Italy), South andCentral America and the Middle East). Sales are attributed to geographicsegments based on the legal entity domicile where the sale is originated.Intercompany sales included in inter-segment elimination are accountedfor on a cost plus mark-up basis.

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| **(Thousands of Euro)  Year Ended December 31,** | ** ** | **Italy(6)** | ** ** | **United States  and Canada(6)** | ** ** | **Asia Pacific(6)** | ** ** | **Other(6)** | ** ** | **Adjustments and  Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------------|------------|--------------|------------|--------------------------------------------|------------|--------------------------|------------|--------------|------------|----------------------------------------|------------|------------------|------------|
| **2005**                                                                  |       |         |       |                                       |       |                     |       |         |       |                                   |       |             |       |
| Net sales(5)                                                              |       | 998,420      |       | 3,048,341                                  |       | 516,793                  |       | 575,196      |       | (768,006                               | )          | 4,370,744        |       |
| Income from  operations                                                   |       | 258,391      |       | 323,625                                    |       | 46,993                   |       | 51,200       |       | (77,655                                | )          | 602,554          |       |
| Long-lived  assets, net                                              |       | 228,841      |       | 405,725                                    |       | 92,335                   |       | 8,214        |       | —                                 |       | 735,115          |       |
| Identifiable  assets                                                      |       | 1,294,955    |       | 3,103,932                                  |       | 662,926                  |       | 270,169      |       | (358,460                               | )          | 4,973,522        |       |
| **2004**                                                                  |       |         |       |                                       |       |                     |       |         |       |                                   |       |             |       |
| Net sales(5)                                                              |       | 832,813      |       | 2,083,560                                  |       | 464,905                  |       | 486,630      |       | (612,608                               | )          | 3,255,300        |       |
| Income from  operations                                                   |       | 189,944      |       | 257,897                                    |       | 40,717                   |       | 44,690       |       | (40,434                                | )          | 492,814          |       |
| Long-lived  assets, net                                              |       | 196,088      |       | 326,956                                    |       | 67,973                   |       | 8,228        |       | —                                 |       | 599,245          |       |
| Identifiable  assets                                                      |       | 1,086,274    |       | 2,736,868                                  |       | 549,096                  |       | 239,965      |       | (56,145                                | )          | 4,556,058        |       |
| **2003**                                                                  |       |         |       |                                       |       |                     |       |         |       |                                   |       |             |       |
| Net sales(5)                                                              |       | 743,327      |       | 1,949,692                                  |       | 276,626                  |       | 445,459      |       | (562,910                               | )          | 2,852,194        |       |
| Income from  operations                                                   |       | 106,808      |       | 222,733                                    |       | 20,541                   |       | 41,555       |       | 40,150                                 |       | 431,787          |       |
| Long-lived  assets, net                                              |       | 195,198      |       | 228,409                                    |       | 64,885                   |       | 8,943        |       | —                                 |       | 497,435          |       |
| Identifiable assets                                                       |       | 1,095,350    |       | 2,075,904                                  |       | 572,691                  |       | 217,458      |       | (48,727                                | )          | 3,912,676        |       |

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(5)             Nosingle customer represents five percent or more of sales in any year presented.

(6)             Sales,income from operations and identifiable assets are the result of combination oflegal entities located in the same geographic area.  

**13. FINANCIAL INSTRUMENTS**

**Concentration of Credit Risk—**

Financial instruments whichpotentially expose the Company to concentration of credit risk consistprimarily of investments in cash and cash equivalents and accounts receivable.The Company attempts to limit its credit risk associated with cash equivalentsby placing the Company’s investments with highly rated banks and financialinstitutions. With respect to accounts receivable, the Company limits itscredit risk by performing ongoing credit evaluations. No single customeraccounted for 10 percent or more of the overall accounts receivablebalance. However, included in accounts receivable as of December 31, 2005is approximately Euro 15.1 million due from the host stores of theCompany’s license brands retail division. These receivables represent cashsales deposited by the Company into the host stores’ bank accounts, which aresubsequently forwarded to the Company on a monthly basis. These receivables arebased on contractual arrangements and are short-term in length. The Companybelieves that there is no significant concentration of credit risk with respectto these cash and cash equivalents investments and accounts receivable.

**Concentration of Sales under LicenseAgreement—**

In February 2004, theCompany renewed its license agreement for the design, production anddistribution of frames under the Chanel trade name. Chanel sales representapproximately 4.4 percent and 3.8 percent of total sales in 2004 and2005, respectively. The renewed Chanel license agreement expires in 2008.

**Concentration of Supplier Risk—**

Oakley Inc. is one of thelargest suppliers of products to the Company’s Retail Division. For the 2003,2004 and 2005 fiscal years, Oakley accounted for approximately8.7 percent, 6.8 percent and 4.9 percent of the totalmerchandise purchases from suppliers, respectively. As of December 31,2005, the previous purchase contract has expired and the Company is currentlynegotiating a new contract. Management believes that the loss of this vendorwould not have a significant impact on the future operations of the Company asit could replace this vendor quickly with other products manufactured by theCompany and other third-party suppliers.

As a result of the OPSM and Coleacquisitions, Essilor S.A. has become one of the largest suppliers to theCompany’s Retail Division. For the 2004 and 2005 fiscal years, Essilor S.A.accounted for approximately 9.9 percent and 10.0 percent of theCompany’s total merchandise purchases, respectively. The Company has not signedany specific purchase contract with Essilor. Management believes that the lossof this vendor would not have a significant impact on the future operations ofthe Company as it could replace this vendor quickly with other third-partysuppliers.

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**14. COMMITMENTS AND CONTINGENCIES**

**Royalty Agreements—**

The Company is obligated undernon-cancellable distribution agreements with designers, which expire at variousdates through 2015. In accordance with the provisions of such agreements, theCompany is required to pay royalties and advertising fees based on a percentageof sales (as defined) with, in certain agreements, minimum guaranteed paymentsin each year of the agreements. In the first half of 2003, the Companyterminated its license agreement for the production and distribution of theGiorgio Armani and Emporio Armani eyewear collections and signed a ten-yearworldwide license agreement for the production and distribution of eyewear ofVersace, Versus and Versace Sport frames. The agreement is renewable at theCompany’s discretion for an additional ten years. In the second half of 2003, alicense agreement was signed for the production and distribution of productswith the Prada and Miu Miu trade names. The Prada license agreement expires in2013. In June 2004, the Company signed a new licensing agreement for thedesign, production and worldwide distribution of Donna Karan and DKNYprescription frames and sunglasses. The initial term of the agreement is fiveyears, which began on January 1, 2005 and is renewable for an additionalfive years. In October 2004, the Company signed a new licensing agreementfor the design, production and worldwide distribution of Dolce & Gabbanaand D&G Dolce & Gabbana prescription frames and sunglasses. Theinitial term of the agreement is five years, which began on January 1,2006, with an automatically renewable extension for an additional five yearsupon meeting certain targets. In October 2005, the Company announced thesigning of a 10-year license agreement for the design, production andworldwide distribution of prescription frames and sunglasses under the Burberryname. The agreement began on January 1, 2006.  

Minimum payments required in eachof the years subsequent to December 31, 2005 are detailed as follows(thousands of Euro):
| **YEAR ENDING DECEMBER 31,** |       |        |       |
|-----------------------------------|------------|-------------|------------|
| 2006                              |       | 47,682      |       |
| 2007                              |       | 45,289      |       |
| 2008                              |       | 43,514      |       |
| 2009                              |       | 45,319      |       |
| 2010                              |       | 36,627      |       |
| Thereafter                        |       | 153,337     |       |
| **Total**                         | ** ** | **371,768** | ** ** |

 

Total royalties and relatedadvertising expenses for the years ended December 31, 2003, 2004 and 2005aggregated Euro 64.3 million, Euro 83.0 million andEuro 82.0 million, respectively.

Total payments for royalties andrelated advertising expenses for the years ended December 31, 2003, 2004and 2005 aggregated Euro 124.2 million, Euro 68.5 millionand Euro 119.8 million, respectively.

**Leases and Licenses—**

The Company leases through itsworldwide subsidiaries various retail store, plant, warehouse and office facilities,as well as certain of its data processing and automotive equipment underoperating lease arrangements expiring between 2006 and 2025, with options torenew at varying terms. The lease and license arrangements for the Company’sU.S. retail locations often include escalation clauses and provisions requiringthe payment of incremental rentals, in addition to any established minimumscontingent upon the achievement of specified levels of sales volume. Inaddition, with the acquisition of Cole, the Company operates departments invarious host stores paying occupancy costs solely as a percentage of sales.Certain agreements which provide for operations of departments in a majorretail chain in the United States contain short-term cancellation clauses.

Total rental expense underoperating leases for each year ended December 31 is as follows:
| **Thousands of Euro** | ** ** | ** ** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|---------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Minimum rent                    |       | 204,406    |       | 208,134  |       | 224,913  |       |
| Contingent rent                 |       | 4,883      |       | 15,051   |       | 57,776   |       |
| Sublease income                 |       | (44,739    | )          | (49,247  | )          | (27,645  | )          |
|                            |       | 164,550    |       | 173,938  |       | 255,044  |       |

 

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Future minimum annual rentalcommitments for operating leases are as follows (thousands of Euro):
| **YEARS ENDING DECEMBER 31,** |       |        |       |
|------------------------------------|------------|-------------|------------|
| 2006                               |       | 209,934     |       |
| 2007                               |       | 173,425     |       |
| 2008                               |       | 137,466     |       |
| 2009                               |       | 106,979     |       |
| 2010                               |       | 76,740      |       |
| Thereafter                         |       | 186,170     |       |
| **Total**                          | ** ** | **890,714** | ** ** |

 

**Guarantees—**

The United States ShoeCorporation, a wholly owned subsidiary of the Company, remains contingentlyliable on seven store leases in the United Kingdom. These leases werepreviously transferred to third parties. The third parties have assumed allfuture obligations of the leases from the date each agreement was signed.However, under the common law of the United Kingdom, the lessor still has theright to seek payment of certain amounts from the Company if unpaid by the newobligor. If the Company is required to pay under these guarantees, it has theright to recover amounts from the new obligor. These leases will expire duringvarious years until December 31, 2015. At December 31, 2005, themaximum amount for which the Company’s subsidiary is contingently liable isEuro 10.6 million.

Cole has guaranteed futureminimum lease payments for certain store locations leased directly byfranchisees. These guarantees aggregated approximatelyEuro 7.3 million at December 31, 2005. Performance under aguarantee by the Company is triggered by default of a franchisee on its leasecommitment. Generally, these guarantees also extend to payments of taxes andother expenses payable under the leases, the amounts of which are not readilyquantifiable. The terms of these guarantees range from one to ten years. Manyare limited to periods less than the full term of the lease involved. Under theterms of the guarantees, Cole has the right to assume the primary obligationand begin operating the store. In addition, as part of the franchiseagreements, Cole may recover any amounts paid under the guarantee from thedefaulting franchisee. The Company has accrued a liability at December 31,2005 for the estimates of the fair value of the Company’s obligations fromguarantees entered into or modified after December 31, 2002, using anexpected present value calculation. Such amount is immaterial to theconsolidated financial statements as of December 31, 2004 and 2005.

**Credit Facilities—**

As of December 31, 2004 and2005 Luxottica Group had unused short-term lines of credit of approximatelyEuro 365.8 million and Euro 457.2 million, respectively.

The Company and its wholly-ownedItalian subsidiary Luxottica S.r.l. maintain unsecured lines of credit withprimary banks for an aggregate maximum credit of Euro 490.9 million.These lines of credit are renewable annually, can be cancelled at short noticeand have no commitment fees. At December 31, 2005, these credit lines wereutilized for Euro 144.3 million.

US Holdings maintains fourunsecured lines of credit with four separate banks for an aggregate maximumcredit of Euro 108.1 million (US Dollar 128 million). Theselines of credit are renewable annually, can be cancelled at short notice andhave no commitment fees.

At December 31, 2005, therewere no amounts outstanding and Euro 37.2 million in aggregate faceamount of standby letters of credit outstanding under these lines of credit(see below).

The blended average interest rateon these lines of credit is approximately LIBOR plus 0.25 percent.

**Outstanding Standby Letters of Credit—**

A U.S. subsidiary has obtainedvarious standby letters of credit from banks that aggregatedEuro 35.6 million and Euro 48 million as of December 31,2004 and 2005, respectively. Most of these letters of credit are used forsecurity in risk management contracts or as security on store leases. Mostcontain evergreen clauses under which the letter is automatically renewedunless the bank is notified not to renew. Substantially all the fees associatedwith maintaining the letters of credit fall within the range of 0.60 percentand 0.80 percent annually.

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**Litigation—**

In May and June 2001,certain former stockholders of Sunglass Hut International, Inc. (“SGHI”)commenced actions in the U.S. District Court for the Eastern District of NewYork against the Company and its acquisition subsidiary formed to acquire SGHIon behalf of a purported class of former SGHI stockholders. These actions weresubsequently consolidated into a single amended consolidated class actioncomplaint, which alleged, among other claims, that the defendants violatedcertain provisions of U.S. securities laws and the rules thereunder, inconnection with the acquisition of SGHI in a tender offer and second-stepmerger. The plaintiffs’ principal claim was that certain payments to JamesHauslein, the former Chairman of SGHI, under a consulting, non-disclosure andnon-competition agreement (the “Agreement”) violated the “best price rule”promulgated by the U.S. Securities and Exchange Commission by resulting in apayment for Mr. Hauslein’s SGHI shares and his support of the tender offerthat was higher than the price paid to SGHI’s stockholders in the tender offer.The plaintiffs also alleged that the Company and Mr. Leonardo Del Vecchio,the Company’s Chairman, violated Section 10(b) of the SecuritiesExchange Act of 1934 and Rule 10b-5 promulgated thereunder. Theplaintiffs sought, among other remedies, the payment of such higherconsideration to all tendering shareholders, other than Luxottica Group S.p.A.and its affiliates.

The Company and the otherdefendants filed a motion to dismiss the complaint in its entirety which, on November 26,2003, the Court granted in part and denied in part. The Court granted theCompany’s motion to dismiss plaintiffs’ claim under Section 10(b) andRule 10b-5, but denied the Company’s motion to dismiss plaintiffs’ bestprice rule claim as well as the claim that the Company aided and abetted Mr. Hauslein’sbreach of his fiduciary duties. In so ruling, the Court noted that it wasobligated, for the purpose of rendering its decision on the motion to dismiss,to treat all of the plaintiffs’ allegations in the complaint as true. On June 8,2004, the consolidated complaint was further amended to add Mr. LeonardoDel Vecchio, the Company’s Chairman, as a defendant to the aiding and abettingclaim. Plaintiffs also added a new claim against Mr. Del Vecchio under Section 20(a) ofthe Securities Exchange Act.

On August 31, 2005, theCompany agreed with the plaintiffs to a full and final settlement and release(the “Settlement”) of all claims against the Company, its acquisitionsubsidiary and Mr. Del Vecchio. The Settlement, for a payment ofEuro 11.6 million (or US Dollar 14.5 million) included incurrent year operations, was approved by the Court and final judgment has beenentered dismissing the case with prejudice.

In March 2002, an individualcommenced an action in the California Superior Court for the County of SanFrancisco against Luxottica Group and certain of our subsidiaries, includingLensCrafters and EYEXAM of California, Inc. The plaintiff, along with asecond plaintiff named in an amended complaint, seeks to certify this case as aclass action. The claims have been partially dismissed. The remaining claims,against LensCrafters, EYEXAM and EyeMed Vision Care, LLC, allege variousstatutory violations relating to the operation of LensCrafters’ stores inCalifornia, including violations of California laws governing relationshipsamong opticians, optical retailers, manufacturers of frames and lenses andoptometrists, false advertising and other unlawful or unfair businesspractices. The action seeks unspecified damages, disgorgement and restitutionof allegedly unjustly obtained sums, punitive damages and injunctive relief,including an injunction that would prohibit defendants from providing eyeexaminations or other optometric services at LensCrafters stores in California.In May 2004, the trial court stayed all proceedings in the case pendingthe California Supreme Court’s decision in a case against Cole and itssubsidiaries expected to address certain legal questions related to the issuespresented in this case. The Supreme Court has not yet scheduled oral argumenton that appeal. Although we believe that our operational practices andadvertising in California comply with California law, an adverse decision inthis action or by the Supreme Court in the suit against Cole might causeLensCrafters, EYEXAM and EyeMed to modify or close their activities inCalifornia. Further, LensCrafters, EYEXAM and EyeMed might be required to paydamages and/or restitution, the amount of which might have a material adverseeffect on the Company’s consolidated financial statements.

In February 2002, the Stateof California commenced an action in the California Superior Court for theCounty of San Diego against Cole and certain of its subsidiaries, includingPearle Vision, Inc., and Pearle Vision Care, Inc. The claims allegevarious statutory violations related to the operation of Pearle Vision Centersin California including violations of California laws governing relationshipsamong opticians, optical retailers, manufacturers of frames and lenses and optometrists,false advertising and other unlawful or unfair business practices. The actionseeks unspecified damages, disgorgement and restitution of allegedly unjustlyobtained sums, civil penalties and injunctive relief, including an injunctionthat

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would prohibit defendants from providing eye examinationsor other optometric services at Pearle Vision Centers in California. In July 2002,the trial court entered a preliminary injunction to enjoin defendants fromcertain business and advertising practices. Both Cole and the State ofCalifornia appealed that decision. On November 26, 2003, the appellatecourt issued an opinion in which it stated that because California lawprohibited defendants from providing eye examinations and other optometricservices at Pearle Vision Centers, the trial court should have enjoineddefendants from advertising the availability of eye examinations at PearleVision Centers. The appellate court also ruled in Cole’s favour with respect tocharging dilation fees, which ruling partially lifted the preliminaryinjunction with respect to these fees that had been imposed in July 2002.On March 3, 2004, the California Supreme Court granted Cole’s petition forreview of the portion of the appellate court’s decision stating that Californialaw prohibited defendants from providing eye examinations and other optometricservices at Pearle Vision Centers. The appellate court’s decision directing thetrial court to enjoin defendants from advertising these activities was stayedpending the Supreme Court’s resolution of the issue. The Supreme Court has notyet scheduled oral argument on that appeal. Although we believe that Cole’soperational practices and advertising in California comply with California law,the appellate ruling may, if unmodified by the Supreme Court, compel Cole andits subsidiaries to modify or close their activities in California. Further,Cole and its subsidiaries might be required to pay civil penalties, damagesand/or restitution, the amount of which might have a material adverse effect onthe Company’s consolidated financial statements.

Following Cole’s announcement in November 2002of the restatement of Cole’s financial statements, the Securities and ExchangeCommission (“SEC”) began an investigation into Cole’s previous accounting. TheSEC subpoenaed various documents from Cole and deposed numerous formerofficers, directors and employees of Cole. During the course of thisinvestigation, the SEC staff had indicated that it intended to recommend that acivil enforcement action be commenced against certain former officers anddirectors of Cole but not against Cole. Cole was obligated to advancereasonable attorneys’ fees incurred by current and former officers anddirectors who are involved in the SEC investigation subject to undertakingsprovided by such individuals. Cole has insurance available with respect to aportion of these indemnification obligations. In March 2006, the SEC staffindicated that it had concluded its investigation and that, contrary to itsearlier indication, it would not be recommending that an enforcement action becommenced against anyone in connection with the investigation.

On August 29, 2003, theSecurities Appellate Tribunal (“SAT”) in India upheld the decision to require asubsidiary of the Company to make a public offering to acquire up to anadditional 20 percent of the outstanding shares of RayBan Sun OpticsIndia Ltd. On October 30, 2003, the Company announced that itintended to comply with the SAT’s decision and that the Company, through itssubsidiary, Ray Ban Indian Holdings Inc., would launch a public offer topurchase an additional 20 percent of the outstanding shares of RayBan SunOptics India Ltd. In accordance with applicable Indian regulation, theCompany placed in escrow with the Manager of the Offer Indian Rupee (“Rs.”)226 million (Euro 4.2 million). On November 17, 2003, theSupreme Court of India stayed the SAT’s order and directed that the matter befurther reviewed at the end of January 2004, provided that the Companyissue a letter of credit in favour of the Indian securities regulatory agencywithin the following four week period of Rs. 630.6 million(Euro 11.9 million). The Company has complied with such requirementand the appeal is waiting to be heard before the Supreme Court of India. If theCompany is ultimately required to make the public offer, it expects theaggregate cost of the offer to be approximately Euro 16 million,including stipulated interest increments.

On July 14, 2004, ashareholder of Cole filed a shareholders’ class action complaint against Cole,its directors, and the Company in the Delaware Chancery Court, known asPfeiffer v. Cole National Corp., et al., Civil Action No. 569-N. Thecomplaint alleged, among other things, that the individual defendants breachedtheir fiduciary duties as directors and /or officers to Cole by causing Cole toenter into an agreement to be acquired by the Company for US Dollar 22.50 pershare “without having exposed the company to the marketplace through fair andopen negotiations with all potential bidders and/or an active market check oropen auction for sale of the company.” The complaint sought preliminary andpermanent injunctive relief against the merger, rescission of the merger if itis consummated, and/or damages and other associated relief. The Companybelieved the action to be without merit. In January 2006, the plaintiffvoluntarily dismissed this action without prejudice.

135

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The Company is defendant invarious other lawsuits arising in the ordinary course of business. It is theopinion of the management of the Company that it has meritorious defencesagainst all outstanding claims, which the Company will vigorously pursue, andthat the outcome will not have a material adverse effect on either the Company’sconsolidated financial position or results of operations.

**15. SUBSEQUENT EVENTS**

On February 27, 2006, theCompany announced a ten-year license agreement with Polo Ralph Lauren Corp. forthe design, production and worldwide distribution of prescription frames andsunglasses under the Polo Ralph Lauren name. The agreement will begin on January 1,2007. Terms include an advance payment of royalties ofEuro 169 million (US Dollar 199 million) that will mature overthe ten-year term of the agreement.

On March 10, 2006, theCompany signed an amendment to the term and revolving credit facility disclosedin Note 8 (d). The amended and restated agreement reduces theinterest margin as defined in the agreement, extends the termination date ofthe agreement to five years from the date the amendment was signed andincreases the borrowing capacity of Tranche C toEuro 725 million.

* * * * *

 

136

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**Luxottica Group S.p.A. and Subsidiaries****Schedule II****VALUATION AND QUALIFYING ACCOUNTS**

**ALLOWANCE FOR DOUBTFUL ACCOUNTS****(Amounts expressed in Euro thousands)**
| **Year ended  December 31,** | ** ** | ** ** | ** ** | **Balance at  beginning of  period** | ** ** | **Charged  to costs  and expenses** | ** ** | **Other(1)** | ** ** | **Deductions** | ** ** | **Balance  at end  of period** | ** ** |
|----------------------------------------|------------|------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|--------------|------------|----------------|------------|------------------------------------------|------------|
| 2003                                   |       | 18,098     |       | 6,731                                          |       | 3,143                                         |       | (6,480       | )          | 21,492         |       |
| 2004                                   |       | 21,492     |       | 4,851                                          |       | 5,598                                         |       | (8,534       | )          | 23,407         |       |
| 2005                                   |       | 23,407     |       | 7,027                                          |       | 2,215                                         |       | (5,095       | )          | 27,554         |       |

 

**ALLOWANCE FOR INVENTORY RESERVE ACCOUNTS****(Amounts expressed in Euro thousands)**
| **Year ended  December 31,** | ** ** | ** ** | ** ** | **Balance at  beginning of  period** | ** ** | **Charged  to costs  and expenses** | ** ** | **Other(2)** | ** ** | **Deductions** | ** ** | **Balance  at end  of period** | ** ** |
|----------------------------------------|------------|------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|--------------|------------|----------------|------------|------------------------------------------|------------|
| 2003                                   |       | 33,055     |       | 22,062                                         |       | (932                                          | )          | (16,242      | )          | 37,943         |       |
| 2004                                   |       | 37,943     |       | 34,766                                         |       | (1,021                                        | )          | (27,913      | )          | 43,775         |       |
| 2005                                   |       | 43,775     |       | 40,000                                         |       | 2,500                                         |       | (27,170      | )          | 59,105         |       |

----

(1)             Otherincludes the beginning amount relating to the acquired balances of OPSM in 2003and Cole National in 2004 as well as translation differences of the period.

(2)             Otherincludes translation differences of the period.

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**ITEM 19. EXHIBITS**

*Exhibits.*The following documents are filed as exhibits herewith,unless otherwise specified and incorporated herein by reference:
| Exhibit  Number | ** ** | **Exhibits**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.1             |       | Articles of Association of Luxottica Group S.p.A.  (incorporated by reference to Amendment No. 3 to Form F-1  (file No. 33-32039) filed with the Commission on January 23,  1990).                                                                                                                                                                                                                                                                                                                                                                                                                          |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 1.2             |       | Amended and Restated By-laws of Luxottica Group  S.p.A. (Unofficial English translation filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 2.1             |       | Amended and Restated Deposit Agreement, dated as of  March 10, 2006, among Luxottica Group S.p.A., Deutsche Bank Trust  Company Americas, as Depositary, and all owners and holders form time to time  of American Depositary Receipts issued thereunder (incorporated by reference  to our Registration Statement on Form F-6, as filed with the  Commission on March 29, 2006.)                                                                                                                                                                                                                                     |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 2.2             |       | Subscription Agreement, dated June 18, 1999,  from Luxottica Luxembourg S.A. and Luxottica Group S.p.A., as  guarantor of the Notes, to Credit Suisse First Boston (Europe) Limited and  UniCredito Italiano S.p.A., as joint lead managers and Banca Commerciale  Italiana, Banca d’Intermediazione Mobiliare IMI, Bayerische Hypo-und  Vereinsbank AG, Caboto Holding SIM S.p.A., Merrill Lynch  International and Paribas, as managers (incorporated by reference to our  Report on Form 6-K dated November 19, 1999, as filed with the  Commission on November 23, 1999). |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 2.3             |       | Fiscal Agency Agreement, dated June 25, 1999,  between Luxottica Luxembourg S.A., Luxottica Group S.p.A., Bankers  Trust Company, Bankers Trust Luxembourg S.A. and Credit Suisse First  Boston (incorporated by reference to our Report on Form 6-K dated  November 19, 1999, as filed with the Commission on November 23,  1999).                                                                                                                                                                                                                                                               |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.1             |       | Agreement and Plan of Merger, dated as of  February 22, 2001, by and among Luxottica Group S.p.A., Shade  Acquisition Corp. and Sunglass Hut International, Inc. (incorporated by  reference to our Report on Form 6-K, dated March 23, 2001, as  filed with the Commission on April 18, 2001).                                                                                                                                                                                                                                                                                                        |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.2             |       | Agreement and Plan of Merger, dated as of  January 23, 2004, by and between Luxottica Group S.p.A., Colorado  Acquisition Corp. and Cole National Corporation (incorporated by reference to  our Report on Form 6-K, dated January 23, 2004, as filed with  the Commission on January 30, 2004).                                                                                                                                                                                                                                                                                                            |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.3             |       | Amendment No. 1 to Agreement and Plan of  Merger, dated as of June 2, 2004, by and between Luxottica  Group S.p.A., Colorado Acquisition Corp. and Cole National Corporation  (incorporated by reference to our Report on Form 6-K for the  quarter ended March 31, 2004, as filed with the Commission on  June 14, 2004).                                                                                                                                                                                                                                                                             |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.4             |       | Luxottica Group S.p.A. 1998 Stock Option Plan  (incorporated by reference to our Form S-8, dated October 20,  1998, as filed with the Commission on October 23, 1998).                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.5             |       | Luxottica Group S.p.A. 2001 Stock Option Plan  (incorporated by reference to our Form S-8 (file no. 333-14006),  as filed with the Commission on October 15, 2001).                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

138

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| Exhibit  Number | ** ** | **Exhibits**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.6             |       | Credit Agreement, dated June 13, 2002, among  Luxottica U.S. Holdings Corp., Luxottica Group S.p.A.,  UBM-Unicredit Banca Mobiliare S.p.A., UniCredito Italiano S.p.A.,  Banca Monte Dei Paschi Di Siena S.p.A., Banca Nazionale del  Lavoro S.p.A. and San Paolo IMI S.p.A. (incorporated by reference  to our Report on Form 6-K for the quarter ended March 31,  2002, as filed with the Commission on July 15, 2002) (Unofficial English  translation filed therewith).                                                                                                                                    |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.7             |       | Credit Agreement, dated as of December 11,  2002, between Luxottica Group S.p.A. and Banca Intesa S.p.A., as  arranger for other financial institutions (Unofficial English summary  incorporated by reference to our Report on Form 20-F for the year  ended December 31, 2002, as filed with the Commission on June 30,  2003).                                                                                                                                                                                                                                                                                                            |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.8             |       | Form of Note Purchase Agreement, dated as of  September 3, 2003, by and between Luxottica U.S. Holdings Corp. and  each of the Purchasers listed in Schedule A attached thereto  (incorporated by reference to our Report on Form 6-K for the six  months ended June 30, 2003, as filed with the Commission on  September 30, 2003).                                                                                                                                                                                                                                                                                                    |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.9             |       | Form of Parent Guarantee, dated as of  September 3, 2003, granted by Luxottica Group S.p.A. (incorporated  by reference to our Report on Form 6-K for the six months ended  June 30, 2003, as filed with the Commission on September 30, 2003).                                                                                                                                                                                                                                                                                                                                                                                              |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.10            |       | Form of Subsidiary Guarantee, dated as of  September 3, 2003, granted by Luxottica S.r.l. (incorporated by  reference to our Report on Form 6-K for the six months ended  June 30, 2003, as filed with the Commission on September 30, 2003).                                                                                                                                                                                                                                                                                                                                                                                                |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.11            |       | Amended and Restated Facilities Agreement, dated  June 3, 2004, for Luxottica Group S.p.A. and Luxottica  U.S. Holdings Corp. arranged by ABN AMRO Bank N.V., Banca Intesa S.p.A.,  Banc of America Securities Limited, Citigroup Global Markets Limited, HSBC  Bank plc, Mediobanca—Banca di Credito Finanziario S.p.A., The Royal  Bank of Scotland plc, Calyon S.A., Succursale di Milano, Calyon New York  Branch, Capitalia S.p.A. and UniCredit Banca Mobiliare S.p.A. with  UniCredito Italiano S.p.A., New York branch, and Unicredit Banca  d’Impresa S.p.A., acting as Agents (filed herewith). |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.12            |       | Amendment Agreement, dated March 10, 2006, for  Luxottica Group S.p.A. and Luxottica U.S. Holdings Corp. arranged  by ABN AMRO Bank N.V., Banca Intesa S.p.A., Banc of America  Securities Limited, Citigroup Global Markets Limited, HSBC Bank plc,  Mediobanca—Banca di Credito Finanziario S.p.A., The Royal Bank of  Scotland plc, Calyon S.A., Succursale di Milano, Calyon New York Branch,  Capitalia S.p.A. and UniCredit Banca Mobiliare S.p.A. with UniCredito  Italiano S.p.A., New York branch, and Unicredit Banca  d’Impresa S.p.A., acting as Agents (filed herewith).                     |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.13            |       | Amendment No. 2 to Agreement and Plan of  Merger, dated as of July 14, 2004, by and between Luxottica Group  S.p.A., Colorado Acquisition Corp. and Cole National Corporation  (incorporated by reference to our report on Form 6-K, dated  July 14, 2004, as filed with the Commission on July 16, 2004).                                                                                                                                                                                                                                                                                                                                        |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.14            |       | Luxottica Group S.p.A. 2006 Stock Option Plan (filed  herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 8.1             |       | List of Subsidiaries (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 12.1            |       | Certificate of Principal Executive Officer Pursuant  to §302 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 12.2            |       | Certificate of Principal Financial Officer Pursuant  to §302 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 13.1            |       | Certificate of Principal Executive Officer Pursuant  to §906 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 13.2            |       | Certificate of Principal Financial Officer Pursuant  to §906 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 15.1            |       | Consent of Deloitte & Touche S.p.A. (filed  herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

 

139

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**SIGNATURES**

Theregistrant hereby certifies that it meets all of the requirements for filing onForm 20-F and that it has duly caused and authorized the undersignedto sign this annual report on its behalf. 
|        |   | LUXOTTICA GROUP S.p.A.  (Registrant)   |
|--------|--------|----------------------------------------|
|   |   |                                   |   |   |
|   |   | By:                                    |   | /s/ ANDREA GUERRA |
|   |   | Andrea Guerra  Chief Executive Officer |

 

Dated: June 28,2006

140

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**EXHIBIT INDEX**
| Exhibit  Number | ** ** | **Exhibits**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.1             |       | Articles of Association of Luxottica  Group S.p.A. (incorporated by reference to Amendment No. 3 to  Form F-1 (file No. 33-32039) filed with the Commission  on January 23, 1990).                                                                                                                                                                                                                                                                                                                                                                                                                          |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 1.2             |       | Amended and Restated By-laws of Luxottica Group  S.p.A. (Unofficial English translation filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 2.1             |       | Amended and Restated Deposit Agreement, dated as of  March 10, 2006, among Luxottica Group S.p.A., Deutsche Bank Trust  Company Americas, as Depositary, and all owners and holders form time to time  of American Depositary Receipts issued thereunder (incorporated by reference  to our Registration Statement on Form F-6, as filed with the  Commission on March 29, 2006.)                                                                                                                                                                                                                                     |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 2.2             |       | Subscription Agreement, dated June 18, 1999,  from Luxottica Luxembourg S.A. and Luxottica Group S.p.A., as  guarantor of the Notes, to Credit Suisse First Boston (Europe) Limited and  UniCredito Italiano S.p.A., as joint lead managers and Banca Commerciale  Italiana, Banca d’Intermediazione Mobiliare IMI, Bayerische Hypo-und  Vereinsbank AG, Caboto Holding SIM S.p.A., Merrill Lynch  International and Paribas, as managers (incorporated by reference to our  Report on Form 6-K dated November 19, 1999, as filed with the  Commission on November 23, 1999). |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 2.3             |       | Fiscal Agency Agreement, dated June 25, 1999,  between Luxottica Luxembourg S.A., Luxottica Group S.p.A., Bankers  Trust Company, Bankers Trust Luxembourg S.A. and Credit Suisse First  Boston (incorporated by reference to our Report on Form 6-K dated  November 19, 1999, as filed with the Commission on November 23,  1999).                                                                                                                                                                                                                                                               |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.1             |       | Agreement and Plan of Merger, dated as of  February 22, 2001, by and among Luxottica Group S.p.A., Shade  Acquisition Corp. and Sunglass Hut International, Inc. (incorporated by  reference to our Report on Form 6-K, dated March 23, 2001, as  filed with the Commission on April 18, 2001).                                                                                                                                                                                                                                                                                                        |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.2             |       | Agreement and Plan of Merger, dated as of  January 23, 2004, by and between Luxottica Group S.p.A., Colorado  Acquisition Corp. and Cole National Corporation (incorporated by reference to  our Report on Form 6-K, dated January 23, 2004, as filed with  the Commission on January 30, 2004).                                                                                                                                                                                                                                                                                                            |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.3             |       | Amendment No. 1 to Agreement and Plan of Merger,  dated as of June 2, 2004, by and between Luxottica Group S.p.A.,  Colorado Acquisition Corp. and Cole National Corporation (incorporated by  reference to our Report on Form 6-K for the quarter ended  March 31, 2004, as filed with the Commission on June 14, 2004).                                                                                                                                                                                                                                                                              |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.4             |       | Luxottica Group S.p.A. 1998 Stock Option Plan  (incorporated by reference to our Form S-8, dated October 20,  1998, as filed with the Commission on October 23, 1998).                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.5             |       | Luxottica Group S.p.A. 2001 Stock Option Plan  (incorporated by reference to our Form S-8 (file no. 333-14006),  as filed with the Commission on October 15, 2001).                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.6             |       | Credit Agreement, dated June 13, 2002, among  Luxottica U.S. Holdings Corp., Luxottica Group S.p.A.,  UBM-Unicredit Banca Mobiliare S.p.A., UniCredito Italiano S.p.A.,  Banca Monte Dei Paschi Di Siena S.p.A., Banca Nazionale del  Lavoro S.p.A. and San Paolo IMI S.p.A. (incorporated by reference  to our Report on Form 6-K for the quarter ended March 31,  2002, as filed with the Commission on July 15, 2002) (Unofficial English  translation filed therewith).                                                                                              |

 

141

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| Exhibit  Number | ** ** | **Exhibits**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.7             |       | Credit Agreement, dated as of December 11,  2002, between Luxottica Group S.p.A. and Banca Intesa S.p.A., as  arranger for other financial institutions (Unofficial English summary  incorporated by reference to our Report on Form 20-F for the year  ended December 31, 2002, as filed with the Commission on June 30,  2003).                                                                                                                                                                                                                                                                                                                  |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.8             |       | Form of Note Purchase Agreement, dated as of  September 3, 2003, by and between Luxottica U.S. Holdings Corp. and  each of the Purchasers listed in Schedule A attached thereto  (incorporated by reference to our Report on Form 6-K for the six  months ended June 30, 2003, as filed with the Commission on  September 30, 2003).                                                                                                                                                                                                                                                                                                          |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.9             |       | Form of Parent Guarantee, dated as of  September 3, 2003, granted by Luxottica Group S.p.A. (incorporated  by reference to our Report on Form 6-K for the six months ended  June 30, 2003, as filed with the Commission on September 30, 2003).                                                                                                                                                                                                                                                                                                                                                                                                    |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.10            |       | Form of Subsidiary Guarantee, dated as of  September 3, 2003, granted by Luxottica S.r.l. (incorporated by  reference to our Report on Form 6-K for the six months ended  June 30, 2003, as filed with the Commission on September 30, 2003).                                                                                                                                                                                                                                                                                                                                                                                                      |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.11            |       | Amended and Restated Facilities Agreement, dated  June 3, 2004, for Luxottica Group S.p.A. and Luxottica  U.S. Holdings Corp. arranged by ABN AMRO Bank N.V., Banca  Intesa S.p.A., Banc of America Securities Limited, Citigroup Global  Markets Limited, HSBC Bank plc, Mediobanca—Banca di Credito  Finanziario S.p.A., The Royal Bank of Scotland plc, Calyon S.A., Succursale  di Milano, Calyon New York Branch, Capitalia S.p.A. and UniCredit Banca  Mobiliare S.p.A. with UniCredito Italiano S.p.A., New York  branch, and Unicredit Banca D’Impresa S.p.A., acting as Agents (filed  herewith). |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.12            |       | Amendment Agreement, dated March 10, 2006, for  Luxottica Group S.p.A. and Luxottica U.S. Holdings Corp. arranged  by ABN AMRO Bank N.V., Banca Intesa S.p.A., Banc of America  Securities Limited, Citigroup Global Markets Limited, HSBC Bank plc,  Mediobanca—Banca di Credito Finanziario S.p.A., The Royal Bank of  Scotland plc, Calyon S.A., Succursale di Milano, Calyon New York Branch,  Capitalia S.p.A. and UniCredit Banca Mobiliare S.p.A. with UniCredito  Italiano S.p.A., New York branch, and Unicredit Banca  D’Impresa S.p.A., acting as Agents (filed herewith).                      |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.13            |       | Amendment No. 2 to Agreement and Plan of  Merger, dated as of July 14, 2004, by and between Luxottica Group  S.p.A., Colorado Acquisition Corp. and Cole National Corporation  (incorporated by reference to our report on Form 6-K, dated  July 14, 2004, as filed with the Commission on July 16, 2004).                                                                                                                                                                                                                                                                                                                                              |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.14            |       | Luxottica Group S.p.A. 2006 Stock Option Plan (filed  herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 8.1             |       | List of Subsidiaries (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 12.1            |       | Certificate of Principal Executive Officer Pursuant  to §302 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 12.2            |       | Certificate of Principal Financial Officer Pursuant  to §302 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 13.1            |       | Certificate of Principal Executive Officer Pursuant  to §906 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 13.2            |       | Certificate of Principal Financial Officer Pursuant  to §906 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 15.1            |       | Consent of Deloitte & Touche S.p.A.  (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

 

 

142

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