**UNITED STATESSECURITIES 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**                                                |
| ** **                                            | ** ** | ** **                                                                                                         |
| **ý**                                            | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                |
|                                                  | ** ** | ** **                                                                                                         |
| **For the  fiscal year ended December 31, 2004** |
| ** **                                            |
| **OR**                                                |
| ** **                                            |
| **o**                                                 | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**            |

 
| **For the  transition period  from                      to                      ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                           |
| **Commission  file number 1-10421**                                                                                                                                                                                                                                                                            |
| ** **                                                                                                                                                                                                                                                                                                     |
| **LUXOTTICA  GROUP S.p.A.**                                                                                                                                                                                                                                                                                    |
| (Exact name of  Registrant as specified in its charter)                                                                                                                                                                                                                                                        |
| (Translation of  Registrant’s name into English)                                                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                                                           |
| **REPUBLIC  OF ITALY**                                                                                                                                                                                                                                                                                         |
| (Jurisdiction of  incorporation or organization)                                                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                                           |
| **VIA CANTÙ  2, MILAN 20123, ITALY**                                                                                                                                                                                                                                                                      |
| (Address of  principal executive offices)                                                                                                                                                                                                                                                                      |

 

Securities registered orto be registered pursuant to Section 12(b) of the Act.

 
| **Title of each class**                                                                                                                                           | ** ** | **Name of each exchange of which registered** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|
| **ORDINARY  SHARES, PAR VALUE  EURO 0.06 PER SHARE***                                                                                                             | ** ** | **NEW  YORK STOCK EXCHANGE**                  |
| ** **                                                                                                                                                        | ** ** | ** **                                    |
| **AMERICAN  DEPOSITARY  SHARES, EACH REPRESENTING  ONE ORDINARY SHARE**                                                                                           | ** ** | **NEW  YORK STOCK EXCHANGE**                  |
| ** **                                                                                                                                                        | ** ** | ** **                                    |
|                                                                                                                                                                   |
| *** 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 orto be registered pursuant to Section 12(g) of the Act:

 

**None.**

 

Securities for whichthere is a reporting obligation pursuant to Section 15(d) of the Act.

 

**None.**

 

Indicate the number ofoutstanding shares of each of the issuer’s classes of capital or common stockas of the close of the period covered by the annual report.

 
| ** ** | **ORDINARY SHARES, PAR VALUE EURO 0.06 PER SHARE** | ** ** | **455,205,473** |
|------------|----------------------------------------------------|------------|-----------------|

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

 

Yes ýNo o

 

Indicate by check markwhich financial statement item the registrant has elected to follow.

 

Item 17 oItem 18 ý

 

 

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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** |          |

 

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**FORWARD-LOOKINGINFORMATION**

 

Throughout this annualreport, management has made certain “forward-looking statements” within themeaning of the Private Securities Litigation Reform Act of 1995 which areconsidered prospective. These statements are made based on management’s currentexpectations and beliefs and are identified by the use of forward-looking wordsand phrases such as “plans,” estimates,” “believes” or “belief,” “expects” orother similar words or phrases.

 

Such statements involve risks,uncertainties and other factors that could cause actual results to differmaterially from those which are anticipated. Such risks and uncertaintiesinclude, but are not limited to, fluctuations in exchange rates, economic andweather factors affecting consumer spending, the ability to successfullyintroduce and market new products, the availability of correction alternativesto prescription eyeglasses, the ability to successfully launch initiatives toincrease sales and reduce costs, the ability to effectively integrate recentlyacquired businesses, including Cole National Corporation and its subsidiaries (“Cole”)acquired in October 2004, risks that expected synergies from theacquisition by Luxottica Group of Cole will not be realized as planned and thatthe combination of Luxottica Group’s managed vision care business with Cole’swill not 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”). These forward-lookingstatements are made as of the date hereof, and we do not assume any obligationto update them.

 

Throughout this annualreport, when we use the terms “Luxottica,” “Company,” “we,” “us” and “our,”unless otherwise indicated or the context otherwise requires, we are referringto Luxottica Group S.p.A. and its consolidated subsidiaries.

 

**TRADEMARKS**

 

Our house brands anddesigner line prescription frames and sunglasses that are referred to in thisannual report, and certain of our other products, are sold under names that aresubject to registered trademarks held by us or, in certain instances, ourlicensors. These trademarks may not be used by any person without our priorwritten consent or the consent of our licensors, as applicable.

 

2

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**PART I**

 

**ITEM 1****. IDENTITYOF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS**

 

Not applicable.

 

**ITEM 2****. OFFERSTATISTICS AND EXPECTED TIMETABLE**

 

Not applicable.

 

**ITEM 3****. KEYINFORMATION**

 

The following tables setforth selected consolidated financial data for the periods indicated and arequalified by reference to, and should be read in conjunction with, ourconsolidated financial statements, the related notes thereto, and Item 5—“Operatingand Financial Review and Prospects” contained elsewhere herein. We prepare ourfinancial statements in accordance with accounting principles generallyaccepted in the United States of America, or U.S. GAAP. The selectedconsolidated financial information for and as of the years ended December 31,2000, 2001, 2002, 2003 and 2004 is derived from our consolidated financialstatements, which have been audited by Deloitte & Touche S.p.A.,independent registered public accounting firm.

 

[TABLES APPEAR ONTHE FOLLOWING PAGE]

 

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| ** **                                                     | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                     | ** ** | **2000(9)**                      | ** ** | **2001(9)(6)** | ** ** | **2002(9)** | ** ** | **2003(7)(9)** | ** ** | **2004(8)** | ** ** | **2004(8)** | ** ** |
| ** **                                                     | ** ** | **(In thousands of Euro)(3)**    | ** ** | **(In thousands  of U.S.$)  (1)(3)** | ** ** |
| **STATEMENT OF INCOME DATA:**                                  |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Net  Sales                                                     |       | 2,439,166                        |       | 3,105,498 |   | 3,201,788 |   | 2,852,194 |   | 3,255,300 |   | 4,407,025 |   |
| Cost  of Sales                                                 |       | (719,241                         | )          | (923,537 | ) | (946,134 | ) | (903,617 | ) | (1,040,697 | ) | (1,408,896 | ) |
| Gross  Profit                                                  |       | 1,719,925                        |       | 2,181,960 |   | 2,255,654 |   | 1,948,577 |   | 2,214,603 |   | 2,998,129 |   |
| OPERATING  EXPENSE                                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Selling  and Advertising                                       |       | (983,576                         | )          | (1,303,397 | ) | (1,360,339 | ) | (1,235,758 | ) | (1,376,546 | ) | (1,863,568 | ) |
| General  and Administrative                                    |       | (324,428                         | )          | (369,071 | ) | (293,806 | ) | (281,033 | ) | (345,243 | ) | (467,390 | ) |
| Total                                                          |       | (1,308,004                       | )          | (1,672,468 | ) | (1,654,146 | ) | (1,516,790 | ) | (1,721,789 | ) | (2,330,958 | ) |
| Income  from Operations                                        |       | 411,921                          |       | 509,492 |   | 601,508 |   | 431,787 |   | 492,814 |   | 667,171 |   |
| OTHER  INCOME (EXPENSE)                                        |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Interest  Income                                               |       | 16,562                           |       | 15,060 |   | 5,036 |   | 5,922 |   | 6,662 |   | 9,019 |   |
| Interest  Expense                                              |       | (72,562                          | )          | (91,978 | ) | (65,935 | ) | (47,117 | ) | (56,115 | ) | (75,968 | ) |
| Other—Net                                                 |       | 6,098                            |       | 8,737 |   | (1,167 | ) | (799 | ) | 13,792 |   | 18,672 |   |
| Other  Income (Expenses)—Net                              |       | (49,902                          | )          | (68,181 | ) | (62,066 | ) | (41,994 | ) | (35,661 | ) | (48,277 | ) |
| Income  Before Provision for Income Taxes                      |       | 362,019                          |       | 441,311 |   | 539,442 |   | 389,793 |   | 457,153 |   | 618,894 |   |
| Provision  for Income Taxes                                    |       | (101,488                         | )          | (123,450 | ) | (162,696 | ) | (117,328 | ) | (161,665 | ) | (218,862 | ) |
| Income  Before Minority Interests in Consolidated Subsidiaries |       | 260,531                          |       | 317,861 |   | 376,746 |   | 272,465 |   | 295,488 |   | 400,032 |   |
| Minority  Interests in Income of Consolidated Subsidiaries     |       | (5,254                           | )          | (1,488 | ) | (4,669 | ) | (5,122 | ) | (8,614 | ) | (11,661 | ) |
| Net  Income                                                    |       | 255,277                          |       | 316,373 |   | 372,077 |   | 267,343 |   | 286,874 |   | 388,371 |   |
| Weighted  Average Shares Outstanding (thousands)               |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| —Basic                                                    |       | 449,987.9                        |       | 451,037.0 |   | 453,174.0 |   | 448,664.4 |   | 448,275.0 |   |   |   |
| —Diluted                                                  |       | 452,920.2                        |       | 453,965.5 |   | 455,353.5 |   | 450,202.1 |   | 450,360.9 |   |   |   |
| Basic  Earnings per Share(2)                                   |       | 0.57                             |       | 0.70 |   | 0.82 |   | 0.60 |   | 0.64 |   | 0.87 |   |
| Diluted  Earnings per Share(2)                                 |       | 0.56                             |       | 0.70 |   | 0.82 |   | 0.59 |   | 0.64 |   | 0.86 |   |
| Cash  Dividends Declared per Share(4)(5)                  |       | 0.09                             |       | 0.14 |   | 0.17 |   | 0.21 |   | 0.21 |   | 0.28 |   |

 

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| (1)    |   | Translated for  convenience at the rate of Euro 1.00 = U.S. $1.3538, based on the Noon  Buying Rate of Euro to U.S. dollar on December 31, 2004. See “Exchange  Rate Information” below for more information regarding the Noon Buying Rate.                                                                    |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                |
| (2)    |   | Earnings per Share for  each year have been calculated based on the weighted-average number of shares  outstanding during the respective years, giving effect to the two-for-one  stock split in 2000 as if the split had occurred on January 1, 2000.  Each American Depositary Share, or ADS, represents one ordinary share. |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| (3)    |   | Except per Share  amounts, which are in Euro and U.S. dollars, as applicable.                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| (4)    |   | Cash Dividends Declared  per Share are expressed in gross amounts without giving effect to applicable  withholding or other deductions for taxes and have been restated to reflect  the two-for-one stock split in 2000 as if the split had occurred on  January 1, 2000.                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| (5)    |   | Our dividend policy is  based upon, among other things, our consolidated net income for each fiscal  year, and dividends for a fiscal year are paid in the immediately following  fiscal year. The dividends reported in the table were declared and paid in  the fiscal year for which they have been reported.                    |

 

4

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| (6)    |   | We acquired all of the  outstanding shares of Sunglass Hut International, Inc. in  April 2001. Therefore, 2001 includes approximately nine months of  operating results of Sunglass Hut International, Inc. and its  subsidiaries (“Sunglass Hut”). |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                         |
| (7)    |   | We acquired  82.57 percent of the outstanding shares of OPSM Group Limited (“OPSM”)  in August 2003. As such, the results for 2003 include approximately five  months of operating results of OPSM and its subsidiaries.                                 |

 

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

 

(9)                                  Certainamounts in prior years have been reclassified to conform with the 2004presentation.

 
| ** **                 | ** ** | **As of December 31,** | ** ** |
|----------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | **2000**                    | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2004** | ** ** |
| ** **                 | ** ** | **(In thousands of Euro)**  | ** ** | **(In thousands of  U.S. $)(1)** | ** ** |
| **BALANCE SHEET DATA:**    |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Working  Capital(2)        |       | (38,755                     | )          | (872,107 | ) | 141,390 |   | (56,185 | ) | 130,587 |   | 176,788 |   |
| Total  Assets              |       | 2,968,208                   |       | 3,948,362 |   | 3,586,332 |   | 3,912,676 |   | 4,556,058 |   | 6,167,992 |   |
| Long-Term  Debt            |       | 506,159                     |       | 132,247 |   | 855,654 |   | 862,492 |   | 1,277,495 |   | 1,729,473 |   |
| Shareholders’  Equity |       | 1,049,163                   |       | 1,342,843 |   | 1,417,895 |   | 1,374,534 |   | 1,495,607 |   | 2,024,753 |   |
| Capital  Stock             |       | 23,322                      |       | 27,172 |   | 27,256 |   | 27,269 |   | 27,312 |   | 36,975 |   |

 

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(1)                                  Translatedfor convenience at the rate of Euro 1.00 = U.S. $1.3538, based on the NoonBuying Rate of Euro to U.S. dollar on December 31, 2004. 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.”

 

**Dividends**

 

We are required to pay anannual dividend on our ordinary shares if such dividend has been approved by amajority of our shareholders at the annual general meeting of shareholders.Before we may pay any dividends with respect to a fiscal year, we are requiredto set aside an amount equal to five percent of our statutory net income forsuch year in our legal reserve until the reserve, including any amounts setaside during prior years, is at least equal to one-fifth of the nominal valueof our issued share capital.

 

At our annual generalmeeting of shareholders held on June 15, 2005, our shareholders approvedthe distribution of a cash dividend in the amount of Euro 0.23 per ordinaryshare. Our Board of Directors proposed, and the shareholders approved, the dateof June 23, 2005 as the date for the payment of such dividend to allholders of record of our ordinary shares on June 17, 2005, including TheBank of New York, as depositary on behalf of holders of our American DepositaryShares, or ADSs. Each ADS represents the right to receive one ordinary shareand is evidenced by an American Depositary Receipt, or ADR. The ADSs were tradedex-dividend on June 20, 2005, and dividends in respect of the ordinaryshares represented by ADSs were paid to The Bank of New York on June 23,2005. The Bank of New York converted the Euro amount of such dividend paymentinto U.S. dollars on June 23, 2005. The dividend amount for each ADSholder will be paid commencing on June 30, 2005 to all such holders ofrecord on June 22, 2005. Future determinations as to dividends will dependupon, among other things, our earnings, financial position and capital requirements,applicable legal restrictions and such other factors as the Board of Directorsand our shareholders may determine.

 

5

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The table below setsforth the cash dividends declared and paid on each ordinary share in each yearindicated.

 
| **Year**   | ** ** | **Cash Dividends per  Ordinary Share(1)(2)(3)** | ** ** | **Translated into U.S. $  per Ordinary Share(4)** | ** ** |
|------------|------------|-------------------------------------------------|------------|---------------------------------------------------|------------|
| ** ** | ** ** | **(Euro)**                                      | ** ** | **(U.S. $)**                                      | ** ** |
| 2000       |       | 0.085                                           |       | 0.081                                             |       |
| 2001       |       | 0.140                                           |       | 0.120                                             |       |
| 2002       |       | 0.170                                           |       | 0.165                                             |       |
| 2003       |       | 0.210                                           |       | 0.242                                             |       |
| 2004       |       | 0.210                                           |       | 0.254                                             |       |
| 2005       |       | 0.230                                           | (5)        | 0.276                                             | (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 and have beenrestated to reflect the two-for-one stock split in 2000 as if the split hadoccurred on January 1, 2000.

 

(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 the immediatelyfollowing fiscal year. The dividends reported in the table were declared andpaid 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 0.23 per ordinary share was approved by our Board of Directorson May 4, 2005 and was voted upon and approved by our shareholders at theannual general meeting of shareholders held on June 15, 2005.

 

(6)                                  Thedividend per ordinary share was converted into U.S. dollars by The Bank of NewYork on June 23, 2005.

 

6

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**Exchange Rate Information**

 

The following tables setforth, for each of the periods indicated, certain information regarding theNoon Buying Rate in New York City for cable transfers in foreign currencies ascertified for customs purposes by the Federal Reserve Bank of New York, whichwe 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, 2000 |       | 0.8270   |       | 1.0332  |       | 0.9209         |       | 0.9388            |       |
| 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  |       | 1.2438         |       | 1.3538            |       |

 

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(1)                                  Theaverage of the Noon Buying Rates in effect on each business day during the period.

 
| **Month**          | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------------|------------|----------|------------|---------|------------|
| December 2004 |       | 1.3224   |       | 1.3625  |       |
| January 2005  |       | 1.2954   |       | 1.3476  |       |
| February 2005 |       | 1.2773   |       | 1.3274  |       |
| March 2005    |       | 1.2877   |       | 1.3465  |       |
| April 2005    |       | 1.2819   |       | 1.3093  |       |
| May 2005      |       | 1.2349   |       | 1.2936  |       |

 

On June 24, 2005,the Noon Buying Rate was U.S. $1.2088 per Euro 1.00.

 

Unless otherwiseindicated, all convenience translations included in this annual report ofamounts expressed in Euro into U.S. dollars for the relevant period or datehave been made using the Noon Buying Rate in effect as of the end of suchperiod or date, as appropriate.

 

In this annual report,unless otherwise stated or the context otherwise requires, references to “$”, “U.S.$”, “dollars” or “U.S. dollars” are to United States dollars, references to “Euro”and “€” are to the Common European Currency, the Euro, references to “Rs” areto Indian rupees, and references to “AUD$” or “A$” are to Australian dollars.On January 1, 2001, we began reporting our operating results and financialposition in Euro, and as such amounts for all previous years have beentranslated from Italian Lire to Euro at the fixed exchange rate of Euro1.00 = Lire 1,936.27.

 

7

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**Risk Factors**

 

Our future operatingresults and financial condition may be affected by various factors, includingthose set forth below.

 

**If we are unable to successfullyintroduce new products, our future sales and operating performance will suffer.**

 

The mid- and premium-pricecategories of the prescription frame and sunglasses markets in which we competeare particularly vulnerable to changes in fashion trends and consumerpreferences. Our historical success is attributable, in part, to ourintroduction of innovative eyewear products which are perceived to represent animprovement over products otherwise available in the market. Our future successwill depend on our continued ability to develop and introduce such innovativeproducts.  If we are unable to continueto do so, our future sales, inventory levels and production costs would benegatively impacted.

 

**The markets in which we competeare highly competitive, and our failure to maintain an efficient distributionnetwork could harm our business.**

 

The mid- and premium-pricecategories of the prescription frame and sunglasses markets in which we operateare highly competitive. We believe that, in addition to successfullyintroducing new products, responding to changes in the market environment andmaintaining superior production capabilities, our ability to remain competitiveis highly dependent on our success in maintaining an efficient distributionnetwork. If we are unable to maintain an efficient distribution network, ourbusiness, results of operations and financial condition could suffer,especially our sales and profitability in the affected regions.

 

**If we do not correctly predictfuture economic conditions and changes in consumer preferences, our sales ofpremium products and profitability will suffer.**

 

The fashion eyewearindustry is cyclical. Downturns in general economic conditions or uncertaintiesregarding future economic prospects, which affect consumer disposable income,have historically adversely affected consumer spending habits in our principalmarkets and thus made the growth in sales and profitability of premium-pricedproduct categories difficult during such downturns. Therefore, future economicdownturns or uncertainties could have a material adverse effect on ourbusiness, results of operations and financial condition, including sales of ourdesigner and other premium brands.

 

The eyewear industry isalso subject to rapidly changing consumer preferences. There can be noassurance that the growth of the fashion eyewear industry will continue or thatconsumer preferences will not change in a manner which will adversely affectthe fashion eyewear industry as a whole or us in particular. Changes in fashioncould also affect the popularity and, therefore, the value of the fashionlicenses granted to us by designers. Any event or circumstance resulting inreduced market acceptance of one or more of these designers could reduce oursales 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 of operationsand financial condition.

 

**If we are unable to achieve andmanage growth, operating margins will be reduced as a result of decreasedefficiency of distribution.**

 

In order to achieve andmanage our growth effectively, we will be required to increase and streamlineproduction and implement manufacturing efficiencies where possible, whilemaintaining strict quality control and the ability to deliver products to ourcustomers in a timely and efficient manner. We must also continuously developnew product designs and features, expand our information systems andoperations, and train and manage an increasing number of management level andother employees. If we are unable to manage these matters effectively, ourefficient distribution process could be at risk and we could lose market sharein affected regions.

 

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**If we do not continue tonegotiate and maintain favorable license arrangements, our sales or cost ofsales will suffer.**

 

We have entered intolicense agreements that enable us to manufacture and distribute prescriptionframes and sunglasses under certain designer names, including *Chanel, Genny, Byblos, Salvatore Ferragamo, Emanuel Ungaro, BrooksBrothers, Sergio Tacchini, Anne Klein, Bulgari, Moschino* and, mostrecently, *Versace, Versus, Prada, Miu Miu, Jil Sander,**Donna Karan*and*Dolce &Gabbana. *These licenseagreements typically have terms of between three and six years (except for thelicense agreements for the *Versace, Versus, Prada,Miu Miu,**Jil Sander*and*Dolce &Gabbana* lines, which have longer terms, and the license agreementfor the *Moschino* line, which is terminable upon12 months’ notice and require us to make guaranteed and contingent royaltypayments to the licensor. See Item 4—“Information on the Company—BusinessOverview—Recent Developments” regarding our new license agreement with DonnaKaran International. We believe that our ability to maintain and negotiatefavorable license agreements with leading designers in the fashion and luxurygoods industries is essential to the branding of our products and, therefore,material to the success of our business. Accordingly, if we are unable tonegotiate and maintain satisfactory license arrangements with leadingdesigners, our growth prospects and financial results could suffer from areduction in sales or an increase in advertising costs and royalty payments todesigners.

 

**Our business could be adverselyaffected by the availability of vision correction alternatives to prescriptioneyeglasses.**

 

Our business could benegatively impacted by the availability and acceptance of vision correctionalternatives to prescription eyeglasses, such as contact lenses and refractiveoptical surgery. According to industry estimates, over 40 million peoplewear contact lenses in the United States, and disposable contact lenses is thefastest growing segment of the lens subsector. In addition, the use ofrefractive optical surgery has grown substantially since it was approved by theU.S. Food and Drug Administration in 1995.

 

Increased use of visioncorrection alternatives could result in decreased use of our prescriptioneyewear products, including a reduction of sales of lenses and accessories soldin our retail outlets, which would have a material adverse impact on ourbusiness, results of operations, financial condition and prospects.

 

**If the Euro continues tostrengthen relative to certain other currencies, our profitability as aconsolidated group will suffer.**

 

Our principalmanufacturing facilities are located in Italy, and we maintain sales anddistribution facilities throughout the world. As a result, we are vulnerable toforeign 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 negativelyimpact the demand for our products or decrease our profitability inconsolidation, 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 our internationaloperations grow, future changes in the exchange rate of the Euro against theU.S. dollar and other currencies may negatively impact our reported results.For example, our reported results have been negatively affected by thecontinued weakening of the U.S. dollar against the Euro in the first six monthsof 2005 as compared to the same period in 2004.

 

See Item 11—“Quantitativeand Qualitative Disclosures about Market Risk.”

 

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**If our international sales sufferdue to changing local conditions, our profitability and future growth will beaffected.**

 

We currently operateworldwide and intend to expand our operations in many countries, includingcertain developing countries in Asia. Therefore, we are subject to variousrisks 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.

 

The likelihood of suchoccurrences and their potential effect on us vary from country to country andare unpredictable, but any such occurrence may have a significant effect on ourbusiness, results of operations, financial condition and prospects.

 

**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.**

 

We rely on trade secret,unfair competition, trade dress, trademark, patent and copyright laws toprotect our rights to certain aspects of our products, including productdesigns, proprietary manufacturing processes and technologies, product researchand concepts and recognized trademarks, all of which we believe are importantto the success of our products and our competitive position. However, pendingtrademark applications may not generate registered trademarks, and anytrademark registration that is granted may be ineffective in preventingcompetition and could be held invalid if subsequently challenged. In addition,the actions we take to protect our proprietary rights may be inadequate toprevent imitation of our products. Our proprietary information could becomeknown to competitors, and we may not be able to meaningfully protect our rightsto proprietary information. Furthermore, other companies may independentlydevelop substantially equivalent or better products that do not infringe on ourintellectual property rights or could assert rights in, and ownership of, ourproprietary rights. Moreover, the laws of certain countries do not protectproprietary rights to the same extent as the laws of the United States.

 

We devote significantresources toward defending our proprietary rights. However, if the level ofpotentially infringing activities by others were to increase substantially, wemight have to significantly increase the resources we devote to protecting ourrights. Additionally, an adverse determination in any dispute involving ourproprietary rights could, among other things, (i) require us to grantlicenses to, or obtain licenses from, third parties, (ii) prevent us frommanufacturing or selling our products or (iii) subject us to substantialliability. Any of these possibilities could have a material adverse effect onour business, results of operations, financial condition and prospects.

 

**If we are unable to maintain ourcurrent operating relationship with Cole Licensed Brands host stores, we wouldsuffer loss of sales and possible impairment of certain intangible assets.**

 

Our sales depend in parton our relationships with the host stores that sell Cole’s Licensed Brandsproducts, including Sears.  Our leasesand licenses with Sears are 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 amaterial adverse effect on our business, results of operations, financialcondition and prospects.

 

**Our business could be adverselyaffected by legal proceedings to which we are, or may become, a party.**

 

We are currently a partyto 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

 

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determinations in one ormore of these proceedings could have a material adverse effect on our business,results of operations and financial condition.

 

**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.**

 

Our operations aresubject to regulation by governmental authorities in the United States andother jurisdictions in which we conduct business. Governmental regulations,both in the United States and other jurisdictions, have historically beensubject 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.

 

See Item 4—“Informationon the Company—Regulatory Matters.”

 

**If we are not successful incompleting and integrating strategic acquisitions to expand or complement ourbusiness, our future profitability and growth will be at risk.**

 

As part of our growthstrategy, we have made, and may continue to make, strategic businessacquisitions to expand or complement our business. Our acquisition activities,however, can be disrupted by overtures from competitors for the targetedcandidates, governmental regulation and rapid developments in our industry. Wemay face additional risks and uncertainties following an acquisition,including: (i) difficulty in integrating the newly-acquired business andoperations in an efficient and effective manner; (ii) inability to achievestrategic objectives, 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; and (vi) liabilities that werenot known at the time of acquisition or the need to address tax or accountingissues. Specifically,with regard to our acquisition of Cole, we may face additional risks anduncertainties following such acquisition, including: (i) difficulty inintegrating the newly-acquired business and operations in an efficient andeffective manner; (ii) inability to achieve strategic objectives, costsavings and other benefits from the acquisition; (iii) the lack of successby the acquired business in its markets; (iv) the loss of key employees ofthe acquired business; (v) the diversion of the attention of seniormanagement from our operations; (vi) liabilities that were not known atthe time of acquisition or the 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 assortmentplanning systems with the Company’s systems; (ix) difficulty integratingCole’s distribution center with the Company’s distribution center; (x)difficulty finalizing 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) the culturaldifferences between the Company’s organization and Cole’s organization. If wefail 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 THECOMPANY**

 

**Overview**

 

We operate in twoindustry segments: (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 and designer lines of mid- to premium-priced prescription frames andsunglasses. Based on sales, we are the world leader in the design, manufactureand distribution of prescription frames and sunglasses in the mid- and premium-pricecategories.

 

With respect to ourmanufacturing activities, we operate six production facilities in Italy. Aseventh facility was closed during 2004 and such closure did not have amaterial effect on our 2004 statement of operations. In addition, we operate afacility in China for the production of certain products including certainfinished products and components that are assembled in Italy for our wholesalebusiness. In 2004, we manufactured approximately 30.5 million prescriptionframes and sunglasses.

 

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Our products are marketedunder a variety of well-known brand names. Our house brands include *Ray-Ban, Revo, Arnette, Killer Loop, Persol, Vogue, Luxottica*and *Sferoflex*. Our designer lines include *Chanel, Genny, Byblos, Salvatore Ferragamo, Emanuel Ungaro, BrooksBrothers, Sergio Tacchini, Anne Klein, Bulgari*, *Moschino,Versace, Versus, Prada, Miu Miu* and*Jil Sander*.Commencing on January 1, 2005, our designer lines also include *Donna Karan* and *DKNY*, andcommencing October 1, 2005, they will include *Dolce &Gabbana* and *D&G*.

 

With respect to ourdistribution activities, we operate our business through an extensive worldwidewholesale and retail distribution network based primarily in North America andAustralia. In 2004, through our wholesale and retail networks, we distributedapproximately 14.5 million prescription frames and approximately19.5 million sunglasses in more than 3,850 models. Our products aredistributed in approximately 120 countries worldwide.

 

Our wholesale network iscomprised of 28 wholly- or partially-owned subsidiaries operating in principalmarkets, over 1,100 sales representatives and approximately 100 independentdistributors. Our primary wholesale customers include retailers of mid- andpremium-priced eyewear such as independent opticians, optical and sunglasschains, optical superstores, sunglass specialty stores and duty-free shops. Incertain countries, and especially in North America, wholesale customers alsoinclude optometrists and ophthalmologists, health maintenance organizations, orHMOs, and department stores.

 

Our retail network ismainly comprised of our subsidiaries, LensCrafters, Inc. (“LensCrafters”),Sunglass Hut; in Australia, New Zealand and Asia, OPSM, which we acquired in August 2003;and in North America, Cole, which we acquired in October 2004. Luxottica’sNorth American retail business is the largest optical retailer in North Americabased on total sales.

 

See “—Products andServices” below for a more detailed discussion of our business.

 

**Company History**

 

In 1961, Leonardo DelVecchio and others established our original operations in Agordo, near Belluno,in northeastern Italy. Since that time, we have enjoyed significant growth inthe scope and size of our operations. We have developed and grown in severalphases, each of which is related to a specific business strategy. Throughoutmost of the 1960’s, we manufactured molds, metal-cutting machinery, frame partsand semi-finished products for the optical market. We then progressivelyexpanded our production capabilities to enable us to produce a finished frameproduct.

 

In 1969, we launched ourfirst line of Luxottica brand frames and began our transformation from a third-partysupplier to an independent manufacturer with a line of branded products.

 

In the early 1970’s, wedistributed our products exclusively through wholesalers. In 1974, with theacquisition of the distributor that had marketed the Luxottica product line inItaly since 1971, we took our first step towards vertical integration.

 

Luxottica Group S.p.A.was organized as a corporation on November 23, 1981 under the laws of theRepublic of Italy. During the early 1980’s, we continued to pursue verticalintegration by acquiring independent optical distributors and forming wholesalesubsidiaries in strategic markets. In 1981, with our acquisition of LaMeccanoptica 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.

 

In 1990, our ADSs werelisted on the New York Stock Exchange. Throughout the 1990’s, we continued toexpand our distribution network by forming new wholesale subsidiaries. In 1995,we became the first frame manufacturer to enter the North American retailmarket through the acquisition of LensCrafters. Throughout the 1990’s, we alsoexpanded into the sunglasses business through various acquisitions. In 1990, weacquired Florence Line S.p.A., the owner of the “Vogue” brand. In 1995, weacquired the medium- to high-end brand product line of Persol S.p.A.

 

In June 1999, weacquired 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

 

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the sunglasses market,strengthened our house brand portfolio and provided us with sunglass crystallens manufacturing technology, 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.

 

In April 2001, wecontinued 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, resulting inour leadership 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.

 

Our principal executiveoffices are located at Via Cantù 2, Milan, 20123, Italy, and our telephonenumber at that address is (011) 39-02-863341. Our agent for service forlimited purposes in the United States is CT Corporation, 111 Eighth Avenue, NewYork, New York 10011, telephone number (212) 894-8940. We are domiciled inMilan, Italy.

 

**Business Overview**

 

***RecentDevelopments***

 

*License Agreements*

 

On July 1, 2004, we signed a licensing agreementfor the design, production and worldwide distribution of Adrienne Vittadiniprescription frames and sunglasses. The term of the agreement is three and ahalf years. For 2005, the distribution will focus mostly in North America.

 

On October 7, 2004, we announced that we signed alicensing agreement for the design, production and worldwide distribution ofDolce & Gabbana and D&G Dolce & Gabbana prescriptionframes and sunglasses (the “DG Products”). The initial term of the agreement isfive years, which will begin on January 1, 2006 with an automaticallyrenewable extension for an additional five years upon meeting certain targets.We recently were authorized to partially start the distribution andmanufacturing of the DG Products on October 1, 2005.

 

On January 1, 2005,we began our production and distribution of *Donna Karan*and*DKNY*prescription frames and sunglasses. The initial termof the license agreememt is five years and is renewable for an additional fiveyears through December 2014. The collections will be available worldwideto Donna Karan Collection and DKNY accounts and select specialty sun andoptical stores. They will also be sold in Donna Karan Collection and DKNYdomestic and international free standing boutiques.

 

On January 12, 2005,we renewed the licensing agreement for the design, production and worldwidedistribution of Brooks Brothers prescription frames and sunglasses for fiveyears through December 31, 2009.

 

*Our ADR Repurchase Plans*

 

On March 25, 2004,one of our two authorized ADR repurchase plans expired. The first plan allowedour subsidiary Luxottica U.S. Holdings Corp., or U.S. Holdings, or any of itssubsidiaries, to repurchase up to 11,500,000 ADRs, representing2.5 percent of our authorized and issued capital, over the 18-month periodcommencing on September 25, 2002. Our other authorized ADR repurchase planprovides for the repurchase of up to an additional 10,000,000 ADRs,representing 2.2 percent of our authorized and issued share capital, overthe 18-month period commencing on March 20, 2003. As of September 30,2004, both repurchase programs expired, with U.S. Holdings having repurchased6,434,786 ADRs at an aggregate purchase price of approximately Euro 70.0million.

 

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*Ray Ban Sun OpticsIndia Ltd.*

 

On August 29, 2003,the Securities Appellate Tribunal, or SAT, in India upheld the order issued bythe 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,provided that our subsidiary issue a letter of credit in favor of the Indiansecurities regulatory agency within the following four week period of Rs630.6 million (Euro 11.9 million). Our subsidiary complied with suchrequirement, and an appeal is pending before the Supreme Court of India. If weare ultimately required to make the public offer, the aggregate cost of theoffer could be approximately Euro 19 million, including stipulatedinterest increments.

 

*Acquisition of Minority Interestof OPSM*

 

On November 26,2004, the Company through our wholly-owned subsidiary, Luxottica South PacificPty, Ltd., made an offer for all the remaining outstanding shares of OPSM Groupthat it did not already own.  The offerwas for 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 group shares we did not already own. At the close of theoffer on February 7, 2005, we held 98.5 percent of OPSM Group shares,which is in excess of the compulsory acquisition threshold.  On February 8, 2005, we announced thestart of the compulsory acquisition process for all remaining shares in OPSMGroup not already owned by us. On February 15, 2005, the Australian StockExchange suspended trading in OPSM Group shares and on February 18, 2005,it delisted OPSM Group shares from the Australian Stock Exchange. Thecompulsory acquisition process was completed on March 24, 2005.

 

*Majority Shareholder StockIncentive Plan*

 

On September 14,2004, we announced that our majority shareholder, Mr. Leonardo DelVecchio, has allocated shares held through the holding company of the DelVecchio family, La Leonardo Finanziaria S.r.l., representing 2.11 percent ofour current authorized and issued share capital, to a stock option plan for topmanagement of the Company. The stock options to be issued under the plan vestupon meeting certain economic objectives.

 

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**Products and Services**

 

***WholesaleOperations***

 

*Our Brands*

 

In our wholesaleoperations, we manufacture and sell our prescription frames and sunglasses aseither house brands or designer lines. House brands consist of eyewear soldunder brand names that we own. Designer lines are produced under designer namesheld by us under license agreements with third parties. Our products, for bothhouse brands and designer lines, consist of a variety of different styles, fromconventional to contemporary and fashion forward styling. Each brand istailored for a specific market segment based on certain characteristics, suchas 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* and *Persol*, and, asa result of the Ray-Ban acquisition, *Ray-Ban, Revo, Killer Loop*and *Arnette*. We currently produce about1,500 distinct styles of frames within our house brands. Each style istypically produced in three sizes and at least four colors. Actual availabilityof product styles, colors and sizes varies among geographic markets dependingupon local demand.

 

The following is asummary description of each of our most significant house brands:

 

•                  **Ray-Ban**: Created in the 1930’s, the *Ray-Ban* line isthe brand leader in the sunglasses market, bringing together renowned sunglasslenses and a timeless style. During 2003, we introduced two new Ray-Bancollections: optical frames and junior sunglasses.

 

•                  **Persol**: Created in 1917 and acquired by Luxottica in 1995, the *Persol* brand is synonymous with class, 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 modern 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. In 2000, this product line wasextended to include *Luxottica Titanium*,a high quality prescription frame line made of lightweight titanium materialwith a minimalist design.

 

•                  **Sferoflex**: This product line, which in 1981 became the first brand name acquired byus, the *Sferoflex* line is comprised ofprescription frames characterized by a classic and comfortable style, withflexible hinges that allow the frame to adapt to the unique face shape of eachwearer.

 

•                  **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 16 designer lines under the names *Chanel, Genny, Byblos, Salvatore Ferragamo, Emanuel Ungaro, BrooksBrothers, Sergio Tacchini, Anne Klein, Bulgari, Moschino, Versace, Versus,Prada, Miu Miu,**Jil Sander*and*Adrienne Vittadini*. As of January 1, 2005, ourdesigner lines

 

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also include *Donna Karan* and *DKNY* andcommencing on October 1, 2005, they will include *Dolce &Gabbana* and *D&G.*  The license agreements governing thesedesigner lines are exclusive contracts and typically have terms of betweenthree and six years (except for the license agreements for the *Versace, Versus, Prada, Miu Miu,**Jil Sander*and*Dolce & Gabbana* lines, which have longer terms,and the license agreement for the *Moschino* line,which is terminable upon 12 months’ notice). See “—Trademarks, Trade Names and License Agreements— LicenseAgreements.” Designer collections are developed through the collaborativeefforts of our in-house design staff and the brand designer. Our designer linespresently feature approximately 2,350 different styles.

 

The following is asummary 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 characterised 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 leading lifestyle brand forthe modern man or woman who chooses to express his/her strength, confidence anduniqueness through a bold 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**: Our *Brooks Brothers*line targets the male market with its high quality frames in a classicalAmerican style. The Brooks Brothers trademark is owned by Retail Brand Alliance, Inc.,which is indirectly owned and controlled by one of our directors.

 

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

 

•                  **Donna Karan and DKNY**: The first new *Donna Karan* and*DKNY* eyewear collections were presentedearly in 2005. Reflecting the design sensibility and spirit of the Donna KaranCollection and DKNY brands, the lines offer men and women styles that aresophisticated, with a modern and lightweight range of materials.

 

•                  **Dolce & Gabbana and D&G**: During the last quarter of 2004 a five-yearlicense agreement was negotiated and signed with the leading fashion group *Dolce & Gabbana* for manufacturing and distributingthe *Dolce & Gabbana* and *D&G* brands. The first eyewear collections will bepresented during the last quarter of 2005.

 

The following tablepresents the respective percentages of our total unit (a “unit” represents aneyeglass frame or sunglass and excludes sales of other materials) sales thatour designer and house brands comprised during the periods indicated:

 
| ** **                                 | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| **(as a  percentage of total unit sales)** | ** ** | **2000**                         | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
| Designer  brands                           |       | 41.1                             |       | 40.6 |   | 39.5 |   | 33.6 |   | 32.8 |   |
| House  brands                              |       | 58.9                             |       | 59.4 |   | 60.5 |   | 66.4 |   | 67.2 |   |
| Total  unit sales                          |       | 100.0                            |       | 100.0 |   | 100.0 |   | 100.0 |   | 100.0 |   |

 

*Prescription Frames andSunglasses*

 

In 2004, we produced acombined total of approximately 30.5 million prescription frames andsunglasses. In 2003 and 2002, we produced a combined total of approximately28.7 million and 30.6 million prescription frames and sunglasses, respectively.

 

Since 1990, sunglasseshave become an increasingly significant product line for us as we seek tocapitalize on growth opportunities in the sunglasses segment. In 1990, weacquired a distributor that supplied sunglasses under the *Vogue*brand name. In 1995, we expanded our activities in the sunglasses market byacquiring Persol S.p.A., an Italian producer of high-quality, fashionablesunglasses and prescription frames in the premium-priced segment of the market.In 1999, we acquired the Ray-Ban business from Bausch & LombIncorporated, including the *Ray-Ban, Revo, Arnette*and *Killer Loop* brand names. As a result ofour acquisition of the Ray-Ban business, the percentage of our unit salesrepresented by sunglasses that we manufacture has grown significantly. Thistrend continued with the acquisition of Sunglass Hut. Thus, unit sales ofsunglasses manufactured by us and third parties in 2004, as a percentage oftotal unit sales, was 57.3 percent, as compared to 59.7 percent in 2002 and58.9 percent in 2003.

 

The following tablepresents the respective percentages of our total unit sales that ourprescription frames and sunglasses comprised for the periods indicated:

 
| ** **           | ** ** | **Year Ended December 31,**          | ** ** |
|----------------------|------------|-------------------------------------------|------------|
| ** **           | ** ** | **(as a percentage of total unit sales)** | ** ** |
| ** **           | ** ** | **2000**                                  | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
| Prescription  frames |       | 49.6                                      |       | 42.8 |   | 40.3 |   | 41.1 |   | 42.7 |   |
| Sunglasses           |       | 50.4                                      |       | 57.2 |   | 59.7 |   | 58.9 |   | 57.3 |   |
| Total  unit sales    |       | 100.0                                     |       | 100.0 |   | 100.0 |   | 100.0 |   | 100.0 |   |

 

17

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***RetailOperations***

 

Our Retail Division isoperated by our subsidiaries LensCrafters, Sunglass Hut, OPSM and, from October 2004,the Cole National 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. In addition to ophthalmic products andsunglasses, we also sell watches and accessories under the store names “WatchWorld” and “Watch Station” and personalized gifts under the store name “ThingsRemembered.”

 

*LensCrafters.*  Through LensCrafters, we operate a retailnetwork of over 880 locations which offer a wide selection of prescriptionframes, sunglasses, lenses and other optical products in the North Americanmarket. LensCrafters is currently the largest optical retail chain in NorthAmerica in terms of sales. LensCrafters stores sell not only Luxotticaproducts, but also a wide range of lenses and optical products made by other suppliers.LensCrafters’ products include innovative lenses, such as FeatherWatesÔ(lightweight, thin and impact-resistant lenses), DURALENSÔ(super scratch-resistant lenses), ByeLinesÔ(bifocal lenses without visible lines), InvisiblesÔ(anti-reflective lenses) and “MVP Maximum View Progressives” (multi-focallenses without visible lines). Substantially all of our LensCrafters stores arelocated in high-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.

 

We believe that ouracquisition 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.

 

When we acquiredLensCrafters in 1995, LensCrafters had approximately 600 stores. Between 1995and 1998, we opened new stores and acquired other retail chains, reaching over850 stores in North America by 1999.

 

From 1999 to 2004,LensCrafters’ expansion focused primarily on further development of thosestores opened between 1996 and 1998. However, we will continue to evaluatepotential retail expansion opportunities in North America through the openingof retail chains and stores in areas where we are not already heavilyrepresented and in other prime locations. As of December 31, 2004,LensCrafters leased 888 retail stores.

 

Since the LensCraftersacquisition, we have improved the efficiency of LensCrafters stores by managingthe inventory from our central worldwide distribution center in Italy. This hasimproved inventory service and allowed for a more rapid supply of styles basedon daily sales and inventory data. This has also increased the percentage ofour products available in LensCrafters stores. In addition, we have focused ourpromotional activities on those customers looking for a better purchaseexperience with high-quality products, rapid and efficient customer service andinnovative lens and frame technology. In order to increase LensCrafters’ focuson sunglasses, we added a section, “one-third sun,” devoted only to sunglasses,in many stores. As a result of these initiatives, LensCrafters’ net sales haveincreased significantly since 1995.

 

*SunglassHut.*  With theacquisition of Sunglass Hut in 2001, we became the world’s leading specialtyretailer of sunglasses based on sales, and a world leader in specialtyretailing of popular priced watches based on sales. Sunglass Hut has over 1,850retail locations located throughout North America, Europe and Australia.Sunglass Hut operates in-line stores and kiosks in shopping malls, as well asstores in street centers in high-traffic streets and in airports. We haveincreased sales of Luxottica-manufactured products at Sunglass Hut locationsfrom approximately 14.3 percent of total Sunglass Hut net sales in April 2001(the first month following the acquisition) to 58.5 percent in December 2004.In addition to sunglasses that we manufacture, Sunglass Hut continues to sell avariety of frames manufactured by third-party vendors, including Oakley Inc.,Maui Jim, Inc. and others. Oakley Inc. is our largest third-partysupplier, accounting for approximately 11.8 percent, 8.7 percent and 6.8 percentof our total merchandise purchases from suppliers in 2002, 2003 and 2004,respectively. After the acquisition of Sunglass Hut, we consolidated theadministrative and certain other functions of the Sunglass Hut business withour LensCrafters operations allowing us to realize significant synergiesbetween the two optical retailing companies. As of December 31, 2004,Sunglass Hut operated an aggregate of 1,858 outlets throughout North America,Europe and Australia. Sunglass Hut outlets are located mostly in enclosed mallsand airports with an average retail space of 526 square feet per kiosk/store.

 

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*ColeNational.* With the acquisition of Cole in October 2004,we aquired a group of distribution outlets and a provider and administrator ofmanaged vision care services under one group. Cole through its wholly owned subsidiaries operates retail visionlocations under the names “Pearle Vision,” “Sears Optical,” “Target Optical”and “BJ’s Optical.”  It operates managedvision care programs primarily through Cole Managed Vision.  Additionally, Cole National operates a chainof personalized gift stores, e-commerce and catalogs under the name “ThingsRemembered.”  The licensed brands (Sears,Target and BJ’s) optical retail locations are located in the host stores thatbear their names.  Pearle Vision storesare mostly located in strip malls outside of the conventional malls where mostLensCrafters and Sunglass Hut stores are located.  In addition, we have franchised Pearle Visionlocations located throughout North America. The Company believes that itscombination with Cole will:

 

•                  strengthenits retail operations in the United States;

 

•                  strengthenits managed 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

 

•                  providethe Company with the opportunity to increase its sales of frames manufacturedby the Company in Cole retail stores.

 

The Company has begun toimplement its strategic integration plan with respect to Cole.  See Item 5—“Operating and Financial Reviewand Prospects—Overview” for more information. Cole operated over 2,400 ownedand leased department locations and over 500 franchise locations throughoutNorth America as of December 31, 2004.

 

We will continue to lookto expand our retail operations in North America through opening of new storesor kiosks, or strategic acquisitions when we deem them to be appropriate.

 

*OPSM.*In August 2003, we completed the acquisition of 82.57 percent of OPSM. Asdiscussed in “Recent Developments,” we completed the acquisition of theminority interest in OPSM in March 2005. This acquisition has resulted inwhat we believe is a leadership position in the prescription business in theAustralian and New Zealand markets and provided us with new growthopportunities in the Asian market. As of December 31, 2004, OPSM had 461stores in Australia operating under three brands, OPSM, Laubman & Pankand Budget Eyewear, each of which targets a clearly defined market segment.OPSM is the market leader in New Zealand, with 36 stores as of December 31,2004, and has expanded into Asia, with 74 stores in Hong Kong, nine storesin Singapore and 13 stores in Malaysia, each as of December 31, 2004.

 

**Our Principal Markets**

 

The following tablepresents our net sales by geographic market for the periods indicated:

 
| ** **                 | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **(In thousands of Euro)**       | ** ** |
| ** **                 | ** ** | **2002**                         | ** ** | **2003** | ** ** | **2004** | ** ** |
| Italy                      |       | 792,370                          |       | 743,327 |   | 832,813 |   |
| North  America             |       | 2,345,834                        |       | 1,949,692 |   | 2,083,560 |   |
| Asia-Pacific               |       | 185,956                          |       | 276,626 |   | 464,905 |   |
| Other                      |       | 491,045                          |       | 445,459 |   | 486,630 |   |
| Adjustment/Eliminations(1) |       | (613,417                         | )          | (562,911 | ) | (612,609 | ) |
| Total                      |       | 3,201,788                        |       | 2,852,194 |   | 3,255,300 |   |

 

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

 

19

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**Production Process**

 

***Overview***

 

We produce both metal andplastic frames. In addition to our frame manufacturing capacity, since 1999 wehave also produced crystal and polycarbonate sunglass lenses exclusively forour sunglasses collections. Production is principally carried out in our sixItalian manufacturing facilities. In China, we produce certain productsdistributed mainly by LensCrafters and certain finished products and componentsthat are assembled in Italy for our wholesale business. Each of our facilitiesis tailored to a specific production technology that we believe allows us toachieve a high level of productivity.

 

***Designand Prototype Selection***

 

We believe that animportant aspect of our success has been our emphasis on design and thecontinuous development of new styles. Our in-house designers work jointly withexternal designers to develop new models.

 

For our designer lineproducts, our design team works with licensors to discuss the basic themes andfashion concepts for each product and then works closely with the licensor’sdesigners to refine such themes. In addition, our design team works directlywith our marketing and sales departments, which monitor demand for our currentmodels as well as general style trends in eyewear. The data obtained from ourmarketing and sales departments is then used to refine existing product designsand market positioning in order to react to changing consumer preferences.

 

Once the product conceptshave been selected and approved, we produce prototypes that are used toevaluate the proposed design. Our prototypes are developed using computer-aideddesign/computer-aided manufacturing technology, known as CAD/CAM, which isfully integrated with our manufacturing processes. CAD/CAM technology allows adesigner to view and modify two- and three-dimensional images of a new frame.Because this technology is fully integrated with the manufacturing processes,the conversion from prototype to production is streamlined.

 

All prototypes aresubject to review and approval by our licensors and our designers to ensureconsistency with the distinctive image of each product line. Our collectionsconsist of both new models and the most successful existing models. Each year,we add approximately 1,500 new models to our eyewear collections. The abilityto constantly renew our product base has enabled us to meet consumer demand ineach market segment in which our brands are targeted. See Item 3—“KeyInformation—Risk Factors— If we do not correctly predict future economicconditions and changes in consumer preferences, our sales of premium productsand profitability will suffer.”

 

***Sourcing***

 

The principal rawmaterials and parts purchased for our manufacturing process include plasticresins, metals, lenses and frame parts. We purchase a substantial majority ofour raw materials in Europe and to a lesser extent in Asia and the UnitedStates. In addition, we use certain external suppliers for eyeglass cases andpackaging materials. The Ray-Ban acquisition provided us with know-how andsunglass crystal lens manufacturing capabilities. We believe that our abilityto produce sunglass crystal lenses is strategically important given ourexpanded presence in the sunglasses market.

 

We do not depend on anysingle supplier for any of our principal raw materials. Although we do not haveformal, long-term contracts with our suppliers, we have not experienced any significantinterruptions in our supplies. Historically, prices of the principal rawmaterials used in our manufacturing processes have been stable.

 

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***Manufacturing***

 

We have six framemanufacturing facilities in Italy. Five facilities are located in northeasternItaly, the area in which most of the country’s optical industry is based, andthe remaining facility is located near Turin. All of our facilities are highlyautomated, which has allowed us to maintain a high level of production withoutsignificant capital outlay. In certain of these facilities, we also producesunglass crystal lenses and polycarbonate lenses. From 1998 to 2001, weoperated, through our 50 percent-owned joint venture (Tristar Optical CompanyLtd.) with a Japanese partner, a facility in China to manufacture prescriptionframes for distribution primarily in North America. In 2001, we acquired theremaining 50 percent interest in this Chinese company so that it became one ofour wholly-owned subsidiaries.

 

Over the past severalyears, we have consolidated our manufacturing processes by tailoring each ofour manufacturing facilities in Italy to a specific production technology. Thisconsolidation has allowed us to improve both the productivity and quality ofour operations. We produce plastic frames in our facilities in Sedico,Pederobba and Turin, while metal frames are produced in our facilities inAgordo and Rovereto. Certain frame parts are produced in our facility inCencenighe. In 2004, approximately 69 percent of the frames manufactured by uswere metal-based, and the remainder were plastic.

 

The manufacturing processfor both metal and plastic frames and sunglasses begins with the fabrication ofprecision tooling and molds based on prototypes developed by our in-housedesign and engineering staff. We believe that our in-house capacity to engineerand produce precision tooling and molds gives us a strong competitive advantageby enabling us to reduce the lead time for product development and therebyadapt quickly to market trends, contain production costs, and maintain smallerand more efficient production runs so that we can better respond to the varyingneeds of different markets.

 

The manufacturing processfor metal frames is comprised of approximately 70 phases, beginning with theproduction of basic components such as rims, temples and bridges, which areproduced through a molding process. These components are welded together toform frames through numerous stages of detailed assembly work. Once assembled,the metal frames are treated with various coatings to improve their resistanceand finish, and then prepared for lens fitting and packaging.

 

We manufacture plasticframes using either a milling process or injection molding, depending upon thestyle and color of the frame. In the milling process, a computer-controlledmachine carves frames from colored plastic sheets. This process produces rims,temples and bridges that are then assembled, finished and packaged. In theinjection molding process, plastic resins are liquefied and injected in molds.The plastic parts are then assembled, coated, finished and packaged.

 

Our efficientdistribution network allows us to track sales and inventory data on a weeklybasis. 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.

 

We engage in research anddevelopment activities relating to our manufacturing processes on an on-goingbasis. As a result of such activities, we have invested, and will continue toinvest, in automation, thus increasing efficiency while improving quality. Muchof our manufacturing process is automated, including the production of metaland plastic frame parts and the galvanization of metal frames.

 

***QualityControl***

 

One of our key strategic objectivesis ensuring the quality of our products. In 1997, we were among the firstcompanies in the eyewear industry to obtain ISO 9001 certifications.Subsequently, in 2003, we obtained the “Vision 2000” certification, which isthe third-generation industry recognition for quality production. To ensure thehigh quality of our products, our quality control and process control teamsregularly inspect work-in-progress at various stages of the production cycle.In addition, the majority of materials that we purchase are quality tested. Wealso conduct inspections of, and certify compliance with, the productionprocesses of our main suppliers. Each of our prescription frames and sunglassesundergoes several stages of quality inspection. Due to the efficiency of ourquality controls, the return rate for defective merchandise manufactured by usis approximately one percent.

 

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**Distribution**

 

We distribute ourproducts through wholesale and retail channels.

 

***Distributionby Wholesale Division***

 

We currently distributeour products in approximately 120 countries and operate 28 wholly- or partially-owned wholesale distribution subsidiaries strategically located in majormarkets worldwide. In markets where we do not have wholesale distributionsubsidiaries, we employ approximately 100 independent distributors.

 

Each wholesaledistribution subsidiary operates its own network of sales representatives, whoare normally retained on a commission basis. Our network of wholesaledistribution subsidiaries represents a key element of our business. We believethat control over an extensive distribution network provides us with acompetitive advantage, because it enables us to maximize our brand image,marketing efforts and customer service activities by tailoring our operationsto meet the specific needs and peculiarities of local markets.

 

The following table setsforth certain information regarding our wholesale distribution subsidiaries andaffiliates:

 
| **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  Gulf Llc(1)                  |       | United Arab Emirates     |       | 49                        | %          |
| Luxottica  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                   |       | 75                        | %          |
| Mirarian  Marketing Ltd.                |       | Singapore                |       | 51                        | %          |
| Ray  Ban Sun Optics India Ltd. (2) |       | India                    |       | 44.2                      | %          |

 

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(1)                                  Whilelocal law prohibits a non-United Arab Emirates company from having a majorityequity interest in a United Arab Emirates limited liability company, weeffectively control this entity through agreements with the majorityshareholder and accordingly, include them in our consolidated results.

 

(2)                                  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 maintain close contactwith our distributors in order to monitor sales and to control the quality ofthe points of sale that display products. We typically enter into distributionagreements with importers and distributors that establish minimum annualpurchases and impose territorial limitations. In addition, to the extentpermitted by law, we allow for distribution only through specificallyauthorized retail channels and qualified sales agents.

 

No single customer orgroup of related customers accounted for more than two percent of ourconsolidated net sales in any of the past three years. We do not believe thatthe loss of any single customer would have a material adverse effect on ourfinancial condition or results of operations.

 

Our distribution systemis integrated internationally. A worldwide computerized information networklinks the distribution and sales systems with the production facilities inItaly. This network enables us to monitor worldwide sales trends and inventorypositions on a daily basis and to allocate production resources accordingly.

 

We believe that one ofour key competitive strengths is our ability to promptly satisfy customerdemand in a timely manner, both prior to and following a sale. In order tofurther improve our customer service capabilities, we have centralized ourdistribution centers in Europe (Italy) and Asia (Japan) and are in the finalstages of centralizing our distribution centers in North America (UnitedStates). We believe that centralizing our distribution centers improves theefficiency of our distribution operations while reducing the related costs.

 

***Distributionby Retail Division***

 

Through our RetailDivision, we believe we operate the largest group of optical superstores inboth the United States and Canada based on both sales and store count. Webelieve we are the largest specialty retailer of sunglasses in the world basedon 2004 revenues and believe we have become a leading player in the Australianprescription segment. We also sell watches and accessories under the storenames “Watch World” and “Watch Station” and now, with the acquisition of Cole,we also sell 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 of on-sitelens grinding laboratories. In our Sunglass Hut locations, customers can choosefrom a large selection of Luxottica and third-party vendor manufacturedsunglasses. In addition, Sunglass Hut locations can assist customers inpurchasing other accessories to complement their sunglasses. As of December 31,2004, our retail division consisted of 5,746 owned or leased department retaillocations and 472 franchised locations as follows:

 
| ** **           | ** ** | **North  America** | ** ** | **Europe** | ** ** | **Asia-  Pacific*** | ** ** | **Total** | ** ** |
|----------------------|------------|--------------------|------------|------------|------------|---------------------|------------|-----------|------------|
| LensCrafters         |       | 888                |       |       |       |                |       | 888       |       |
| Sunglass Hut         |       | 1,584              |       | 110        |       | 164                 |       | 1,858     |       |
| OPSM Group           |       |               |       |       |       | 593                 |       | 593       |       |
| Cole National Group  |       | 2,407              |       |       |       |                |       | 2,407     |       |
| Franchised Locations |       | 472                |       |       |       |                |       | 472       |       |
|                 |       | 5,351              |       | 110        |       | 757                 |       | 6,218     |       |

 

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*Asia-Pacific forour Retail Division consists of Australia, New Zealand, Malaysia, Singapore andHong Kong.

 

In 2004, approximately67.5 percent, 8.7 percent and 58.5 percent of the total sales of frames basedon units sold by LensCrafters, OPSM and Sunglass Hut, respectively, wereproduced by our manufacturing facilities. OPSM was acquired in August 2003and at such time 3.5 percent of the total sales of frames sold were produced byour manufacturing facilities. Cole National was acquired in October 2004,and at such time less than 1 percent of the total sales of frames sold wereproduced by

 

23

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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.

 

Substantially allLensCrafters and OPSM stores have an employed or independent optometrist onsite, allowing the customer to have an eye examination, select from a largerange of prescription eyewear, and receive the selected frame with prescriptionlenses from one location. In addition, substantially all of our LensCraftersstores have a lens grinding laboratory on site, which allows our customers toreceive a complete set of prescription frames or sunglasses in approximatelyone hour.

 

**Competition**

 

The prescription frameand sunglasses industry is highly competitive and fragmented. As we market ourproducts throughout the world, we compete with many prescription frame andsunglasses companies in various local markets. We believe that our principalcompetitor in the design, manufacture and distribution of eyewear within theprescription frames market is Safilo Group S.p.A., or Safilo. We believethat our principal competitors in the sunglasses market include Safilo, DeRigo S.A. and Oakley, Inc. Several of our most significantcompetitors in the manufacture and distribution of eyewear are significantvendors to our Retail Division. Our success in these markets will depend on,among other things, our ability to manage an efficient distribution network andto market our products effectively as well as on the popularity and marketacceptance of our brands. See Item 3—“Key Information—Risk Factors—If weare unable to successfully introduce new products, our future sales andoperating performance will suffer” and “—The markets in which we compete arehighly competitive, and our failure to maintain an efficient distributionnetwork could harm our business.”

 

The highly competitiveoptical retail market in North America includes a large number of smallindependent competitors and several national and regional chains of opticalsuperstores. In recent years, a number of factors, including consolidationamong retail chains and the emergence of optical departments in discountretailers, 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 retail operations emphasizeproduct quality, selection, customer service and convenience. We do not competeprimarily on the basis of price.

 

**Marketing**

 

Our marketing andadvertising activities are designed primarily to enhance the image of Luxotticaand our brand portfolio and to drive traffic into our retail locations.Advertising expenses amounted to approximately six percent of our net sales ineach of 2002, 2003 and 2004.

 

***MarketingStrategy for Our Wholesale Business***

 

Our marketing strategy inthe wholesale distribution segment is focused on promoting the value of ourproducts, our extensive brand portfolio and our corporate image. Advertising isextremely important in supporting our marketing strategy, and we thereforeengage in extensive advertising activities, both at the point-of-sale andthrough various media directed at the end consumer of our products.

 

Our point-of-salemarketing materials consist of catalogs, posters, product literature anddisplays. Many of these materials are linked to our consumer advertising campaigns.

 

In our media advertising,we utilize direct media, such as print, radio and television, as well asbillboard advertising. The extent of our advertising activities and theselection of different media depend upon the competitive conditions in each particularmarket. In North America, we advertise in print media, including trade journalsand consumer publications, and on radio and television. In Europe, we advertisein various media, including print, television and billboards. In Japan and therest of Asia, we advertise mainly in print media. In addition, we advertise inpublications targeted to independent practitioners and other market-specificmagazines.

 

We also benefit frombrand-name advertising carried out by licensors of our designer lines intendedto promote the image of the designer line. Our advertising and promotionalefforts in respect of our licensed brands are developed in coordination withour licensors. We contribute to the designer a specified percentage of oursales of the designer line to be devoted to advertising and promotion.

 

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Finally, we participatein major industry trade fairs (including the MIDO fair in Milan, Vision Expo inthe United States and the SILMO in Paris), where our new collections aredisplayed and promoted to the market.

 

***MarketingStrategy for Our Retail Business***

 

In addition to themarketing activities described above, we engage in promotional and advertisingactivities through our Retail Division with both short- and long-termobjectives. Our short-term objectives are to attract customers to our storesand promote sales.  Our long-termobjective is to build the image and visibility of our retail brands throughoutthe world, such as the LensCrafters and Pearle Vision brands in North America,the Sunglass Hut brand worldwide, the OPSM, Laubman & Pank and Budget Eyewearbrands in Australia and New Zealand, and The Optical Shop and The OpticalCentre brands in Hong Kong, thereby encouraging customer loyalty and returnpurchases. We believe that the product quality and service provided by ourRetail Division contribute to our short- and long-term marketing objectives.

 

A considerable amount ofour Retail Division’s marketing budget is dedicated to direct marketingactivities, such as communications with customers (*e.g.*,mailings and catalogues). Our direct marketing activities benefit from ourlarge database of customer information in the United States and in Australia.Another significant portion of the marketing budget is allocated to broadcastand print media (*e.g.*, television, radio andmagazines) designed to reach the broad markets in which we operate withimage-building messages about our retail business.

 

**Trademarks, Trade Names andLicense Agreements**

 

***Trademarksand Trade Names***

 

As of December 31,2004, 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 percent of our net sales in 2004.Management believes that our trademarks have significant value in marketing ourproducts.

 

LensCrafters hasintroduced several trademarked lenses in recent years that contain innovativetechnology, such as FeatherWatesÔ(lightweight, thin and impact resistant lenses), DURALENSÔ(super scratch-resistant lenses), InvisiblesÔ(anti-reflective lenses) and “MVP Maximum View Progressives” (multi-focallenses without visible lines). LensCrafters purchases these lenses under non-exclusivearrangements with third parties. The names of the lenses used by LensCraftersare typically trademarked, and the trademarks are typically owned by us. OPSMhas trademarked several lenses in recent years that it uses in its advertising.They include ActiviseÔ for contactlenses, ActiveÔ for polycarbonate eyeglass lenses and InvisiblesÔfor multi-coated eyeglass lenses.

 

We do not have anypatents that we believe are, individually or in the aggregate, material to ourresults of operations or financial condition.

 

See Item 3 —“KeyInformation—Risk Factors—If we are unable to protect our proprietary rights,the loss of sales and the costs of defending such rights will adversely affectour business and financial results.”

 

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***LicenseAgreements***

 

We have entered intocertain license agreements to manufacture and distribute prescription framesand sunglasses with numerous designers. These license agreements have terms expiring through 2022.  The table below summarizes the principalterms of our most significant license agreements as of June 23, 2005.

 
| **Licensor**                                      | ** ** | **Licensed Marks**                                         | ** ** | **Territory**                                                                                          | ** ** | **Expiration**                                                   |
|---------------------------------------------------|------------|------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|
| Kasper ASL Ltd.                                   |       | Anne Klein                                                 |       | Worldwide 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                                           |
| Moon Shadow S.p.A.                                |       | Moschino                                                   |       | Worldwide exclusive  license to distribute to authorized retailers and distributors (excluding  Japan) |       | Indefinite term  (Termination upon 12 months’ notice)       |
| 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)                                                         |       | December 31, 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) |
| Jil Sander AG                                     |       | Jil Sander                                                 |       | Worldwide exclusive  license                                                                           |       | December 31, 2013                                           |
| Chanel SA,  Chanel SAS, Chanel UK and  Chanel USA |       | Chanel                                                     |       | Worldwide exclusive  license                                                                           |       | March 31, 2008                                              |
| Donna Karan  International                        |       | 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) |

 

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*                                         RetailBrand Alliance, Inc. is indirectly owned and controlled by one of ourdirectors.

**                                  AdrienneVittadini LLC is indirectly owned and controlled by one of our directors.

 

26

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Under these licenseagreements, we are required to pay a royalty which generally ranges from fivepercent to twelve percent of net sales of the relevant collection, which may beoffset by any guaranteed minimum royalty payments. The license agreements alsoprovide for a mandatory marketing contribution that generally amounts to fivepercent of net sales. The particular licensor is responsible for the manner andform of advertising for its collection. Other than the license agreements for the *Versace,Versus, Prada, Miu Miu,**Jil Sander*and*Dolce & Gabbana*lines, which have at least ten-yearterms, and the license agreement for the *Moschino* line,which is terminable upon 12 months’ notice, these license agreements typicallyhave terms ranging from three and six 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.

 

No single designer lineaccounted for more than five percent of net sales for the year ended December 31,2004.  Management believes that, whilethe early termination of one or a small number of the current licenseagreements may have an adverse effect on our results of operations in the shortterm, any such termination would not have a material adverse effect on our long-termresults of operations or financial condition. Upon any early termination of an existing license agreement, we expectthat we would seek to enter into alternative arrangements with other designersto reduce any negative impact of such a termination.

 

**Regulatory Matters**

 

Our products are subjectto governmental health safety regulations in most of the countries where theyare sold, including the United States. We regularly inspect our production techniques and standards to ensurecompliance with applicable requirements. Historically, compliance with such requirements has not had a materialeffect on our operations.

 

In addition, governmentsthroughout the world impose import duties and tariffs on products beingimported into their countries.  Althoughin the past we have not experienced situations in which the duties or tariffsimposed materially impacted our operations, we can provide no assurances thatthis will be true in the future.

 

Our past and presentoperations, including owned and leased real property, are subject to extensiveand changing environmental laws and regulations pertaining to the discharge ofmaterials into the environment, the handling and disposition of wastes orotherwise relating to the protection of the environment.  We believe that we are in substantialcompliance with the applicable environmental laws and regulations.  However, we cannot predict with any certaintythat we will not in the future incur liability under environmental statutes andregulations with respect to contamination of sites formerly or currently ownedor operated by us (including contamination caused by prior owners and operatorsof such sites) and the off-site disposal of hazardous substances.

 

Our retail operations arealso subject to various state or similar legal requirements in the UnitedStates, Australia, Canada, New Zealand, Hong Kong, Singapore and Malaysia thatregulate the permitted relationships between licensed optometrists orophthalmologists, who primarily perform eye examinations and prescribecorrective lenses, and opticians, who fill such prescriptions and sell eyeglassframes.

 

**Organizational Structure**

 

We are a holding company,and virtually all of our operations are conducted through our wholly-ownedsubsidiaries.  We operate in two industrysegments: (i) manufacturing and wholesale distribution, and (ii) retaildistribution.  In the retail segment, weprimarily conduct our operations through LensCrafters, Sunglass Hut, PearleVision, Cole Licensed Brands and OPSM. In the manufacturing and wholesale distribution segment, we operatethrough approximately six manufacturing subsidiaries and 28 geographicallyoriented wholesale distribution subsidiaries. See “—Distribution” for a breakdown of the geographic areas.

 

27

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Thesignificant subsidiaries controlled by Luxottica Group S.p.A., includingholding companies, as of December 31, 2004, were:

 
| **Subsidiary**                         |       | **Country of  Incorporation** |       | **Percentage of  Ownership** | ** ** |
|----------------------------------------|------------|-------------------------------|------------|------------------------------|------------|
| **Manufacturing**                      |       |                          |       |                         | ** ** |
| Luxottica S.r.l.                       |       | Italy                         |       | 100                          | %          |
| Killer Loop Eyewear  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                     |       | 82.57                        | %*         |
|                                   |       |                          |       |                         |       |
|                                        |
| * 100% as of March 2005           |
|                                   |       |
| **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 corporateheadquarters is located at Via Cantù 2, Milan, Italy. Information regarding thelocation, use and approximate size of our principal offices and facilities asof December 31, 2004 is set forth below:

 
| **Location**                         | ** ** | **Use**                                               | ** ** | **Owned/Leased** | ** ** | **Approximate  Area in  Square Feet** | ** ** |
|--------------------------------------|------------|-------------------------------------------------------|------------|------------------|------------|---------------------------------------|------------|
| Milan, Italy                         |       | Corporate Headquarters                                |       | Owned            |       | 16,140                                |       |
| Mason (Ohio), United  States         |       | North American Retail  Division Headquarters          |       | Owned            |       | 288,876                               |       |
| Atlanta, United States               |       | North American Retail  Division Distribution Center   |       | Owned            |       | 96,200                                |       |
| Port Washington (NY),  United States |       | U.S. Offices and U.S.  Wholesale Distribution Center  |       | Owned            |       | 140,700                               |       |
| Agordo (Belluno), Italy              |       | Administrative Offices  and Manufacturing Facility    |       | Owned            |       | 814,004                               |       |
| Fukui, Japan                         |       | Far East Distribution  Center and Offices             |       | Owned            |       | 45,364                                |       |
| Tokyo, Japan                         |       | Far East Sales Office                                 |       | Leased           |       | 13,149                                |       |
| Osaka, Japan                         |       | Far East Sales Office                                 |       | Leased           |       | 1,949                                 |       |
| Nagoya, Japan                        |       | Far East Sales Office                                 |       | Leased           |       | 1,159                                 |       |
| Fukuoka, Japan                       |       | Far East Sales Office                                 |       | Leased           |       | 784                                   |       |
| Rovereto, Italy                      |       | Frame Manufacturing  Facility                         |       | Owned            |       | 215,026                               |       |
| Sedico, Italy                        |       | Frame Manufacturing  Facility and Distribution Center |       | Owned            |       | 437,007                               |       |

 

28

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| **Location**                           | ** ** | **Use**                                               | ** ** | **Owned/Leased** | ** ** | **Approximate  Area in  Square Feet** | ** ** |
|----------------------------------------|------------|-------------------------------------------------------|------------|------------------|------------|---------------------------------------|------------|
| 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

                         |       |
| Guang  Dong, China                     |       | Frame Manufacturing  Facility                         |       | Leased           |       | 71,801                                |       |
| Guangzhou,  China                      |       | Frame Manufacturing  Facility                         |       | Leased           |       | 7,532                                 |       |
| Toronto,  Canada                       |       | Offices and Warehouse                                 |       | Owned            |       | 20,120                                |       |
| Barcelona,  Spain                      |       | Offices                                               |       | Owned            |       | 11,733                                |       |
| London,  United Kingdom                |       | Offices                                               |       | Owned            |       | 12,000                                |       |
| Gotenbourg,  Sweden                    |       | Offices                                               |       | Owned            |       | 15,554                                |       |
| Munich,  Germany                       |       | Offices                                               |       | Leased           |       | 5,941                                 |       |
| Valbonne,  France(1)                   |       | Offices                                               |       | Leased           |       | 14,240                                |       |
| Lisbon,  Portugal                      |       | Offices                                               |       | Owned            |       | 5,920                                 |       |
| Deurne,  Belgium                       |       | Offices                                               |       | Leased           |       | 5,640                                 |       |
| São  Paulo, Brazil                |       | Offices and Warehouse                                 |       | Leased           |       | 25,629                                |       |
| Urtenen  – Schonbuhl, Switzerland |       | Offices                                               |       | Leased           |       | 3,939                                 |       |
| Heemstede,  The Netherlands            |       | Offices                                               |       | Leased           |       | 8,934                                 |       |
| Espo,  Finland                         |       | Offices                                               |       | Leased           |       | 3,213                                 |       |
| Klosterneuberg,  Austria               |       | Offices                                               |       | Leased           |       | 3,256                                 |       |
| Mexico  City, Mexico                   |       | Offices and Warehouse                                 |       | Leased           |       | 17,222                                |       |
| Buenos  Aires, Argentina               |       | Offices and Warehouse                                 |       | Leased           |       | 5,119                                 |       |
| Macquarie  Park, Australia             |       | Sales Office                                          |       | Leased           |       | 61,489                                |       |
| Revesby,  Australia                    |       | Luxottica, OPSM and  Sunglass Hut Distribution Center |       | Leased           |       | 61,048                                |       |
| Adelaide,  Australia                   |       | OPSM Offices and  Ophthalmic Laboratory               |       | Leased           |       | 46,873                                |       |
| Athens,  Greece                        |       | Offices                                               |       | Leased           |       | 40,137                                |       |
| Herzelia,  Israel                      |       | Offices and Warehouse                                 |       | Leased           |       | 7,533                                 |       |
| Johannesburg,  South Africa            |       | Offices                                               |       | Leased           |       | 6,027                                 |       |
| Kongsbers,  Norway                     |       | Offices                                               |       | Leased           |       | 2,152                                 |       |
| Mississauga,  Canada                   |       | Offices and Warehouse                                 |       | Leased           |       | 21,875                                |       |
| Dubai,  U.A.E.                         |       | Sales Office                                          |       | Leased           |       | 1,591                                 |       |
| Umurbey/Izmir,  Turkey                 |       | Offices and Warehouse                                 |       | Owned            |       | 5,810                                 |       |
| Hong  Kong                             |       | Administrative Offices                                |       | Leased           |       | 645                                   |       |

 

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| **Location**                | ** ** | **Use**                              | ** ** | **Owned/Leased** | ** ** | **Approximate  Area in  Square Feet** | ** ** |
|-----------------------------|------------|--------------------------------------|------------|------------------|------------|---------------------------------------|------------|
| Hong  Kong                  |       | OPSM Offices                         |       | Leased           |       | 11,599                                |       |
| Hong  Kong                  |       | OPSM Warehouse                       |       | Leased           |       | 4,659                                 |       |
| Osaka,  Japan               |       | Sales Office                         |       | Leased           |       | 1,958                                 |       |
| Nagoya,  Japan              |       | Sales Office                         |       | Leased           |       | 1,162                                 |       |
| Fukuoka,  Japan             |       | Sales Office                         |       | Leased           |       | 785                                   |       |
| Salonika,  Greece           |       | Sales Office                         |       | Leased           |       | 2,813                                 |       |
| Miami,  United States       |       | Sales Office                         |       | Leased           |       | 1,614                                 |       |
| Krakow,  Poland             |       | Offices                              |       | Leased           |       | 2,150                                 |       |
| Chipping  Norton, Australia |       | OPSM Ophthalmic  Laboratory          |       | Leased           |       | 60,148                                |       |
| Toronto,  Canada            |       | LensCrafters Warehouse               |       | Leased           |       | 9,200                                 |       |
| Springdale,  Ohio           |       | Warehouse and  Ophthalmic Laboratory |       | Leased           |       | 132,000                               |       |
| Auckland,  New Zealand      |       | Offices and Warehouse                |       | Leased           |       | 2,881                                 |       |

 

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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 31,2004, LensCrafters leased 888 retail stores, Sunglass Hut leased 1,858 retailkiosks or stores, Cole National leased 2,407 retail locations includinglicensed departments in host stores, and OPSM leased 593 retail stores. Such leasesexpire between 2005 through 2025 and have terms that we believe are generallyreasonable and reflective of market conditions.

 

We believe that ourcurrent facilities (including our manufacturing capacity) are adequate to meetour present and reasonably foreseeable needs except for the North AmericanRetail Division Headquarters located in Mason, Ohio which began in early 2005to undergo an expansion of approximately 124,000 square feet at a projectedcost of U.S. $12.8 million.  Thisexpansion is expected to be completed in 2006 and is part of the integrationplan of Cole National operations into our existing North American retailheadquarters. Other than the capital lease for our offices in Valbonne(France), there are no material encumbrances on any owned properties.

 

Our capital expenditureswere Euro 117.4 million for the year ended December 31, 2004 and Euro39.7 million for the three-month period ended March 31, 2005. It isour expectation that 2005 annual capital expenditures will be approximatelyEuro 170 million, which includes the purchase of a new aircraft to replacethe previous aircraft which became obsolete, along with an increase in fixedassets relating to the U.S. retail segment in the first three months of 2005including costs associated with the expansion of the North American RetailHeadquarters to accommodate the integration of Cole’s home office operations.We will pay for these future capital expenditures with our current availableborrowing capacity and available cash.

 

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**ITEM 5****.****  OPERATING AND 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, wholesaledistribution and marketing of house brand and designer lines of mid- to premium-pricedprescription frames and sunglasses. During the periods discussed below, we haveoperated in the retail segment through our Retail Division, comprisedprincipally of LensCrafters, Sunglass Hut, since August 2003, OPSM andsince October 2004, Cole National Corporation (“Cole”). As of December 31,2004, the retail segment consisted of 5,746 owned or leased department retaillocations and 472 franchised locations as follows:

 
| ** **           | ** ** | **North  America** | ** ** | **Europe** | ** ** | **Asia-  Pacific*** | ** ** | **Total** | ** ** |
|----------------------|------------|--------------------|------------|------------|------------|---------------------|------------|-----------|------------|
| LensCrafters         |       | 888                |       |       |       |                |       | 888       |       |
| Sunglass Hut         |       | 1,584              |       | 110        |       | 164                 |       | 1,858     |       |
| OPSM Group           |       |               |       |       |       | 593                 |       | 593       |       |
| Cole National Group  |       | 2,407              |       |       |       |                |       | 2,407     |       |
| Franchised Locations |       | 472                |       |       |       |                |       | 472       |       |
|                 |       | 5,351              |       | 110        |       | 757                 |       | 6,218     |       |

 

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*Asia-Pacific forour Retail Division consists of Australia, New Zealand, Malaysia, Singapore andHong Kong.

 

LensCrafters and ColeNational Corporation have retail distribution operations located throughout theUnited States, Canada and Puerto Rico, while OPSM operates retail outletslocated in Australia, New Zealand, Hong Kong, Singapore and Malaysia. SunglassHut is a leading retailer of sunglasses worldwide based on sales.

 

Our net sales consist ofdirect sales of finished products that we manufacture to opticians and otherindependent retailers through our wholesale distribution channel and salesdirectly to consumers through our Retail Division retail channel. Our averageretail unit selling price is significantly higher than our average wholesaleunit selling price, as our retail sales typically include lenses as well asframes.

 

Demand for our products,particularly our higher-end designer lines, is largely dependent on thediscretionary spending power of the consumers in the markets in which weoperate. See Item 3—“Key Information—Risk Factors—If we do not correctlypredict future economic conditions and changes in consumer preferences, oursales of premium products and profitability will suffer.” We have alsohistorically 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 fourth quarter.

 

Our acquisitions haveaffected our results of operations from year to year. Our results of operationsfor the year ended December 31, 2004 are not comparable to the results ofoperations for the year ended December 31, 2003 and prior years due to theinclusion of the operations of Cole beginning in October 2004. Similarly,our results of operations for the year ended December 31, 2003 are notcomparable to the results of operations for the year ended December 31,2002 and prior years due to the inclusion of the operations of OPSM beginningin September 2003.

 

As a result of ouracquisition of LensCrafters in May 1995 and the subsequent expansion ofour business activities in the United States through the acquisition of theRay-Ban business, Sunglass Hut and Cole, our results of operations, which arereported in Euro, have been rendered more susceptible to currency ratefluctuations 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. $0.9450 in 2002 to Euro 1.00 = U.S. $1.1307 in 2003 to Euro1.00 = U.S. $1.2438 in 2004. Additionally, with the acquisition of OPSM,our results of operations have been rendered susceptible to currency fluctuationsbetween the Euro and the A$. Although we engage in certain foreign currencyhedging activities to mitigate the impact of these fluctuations, they haveimpacted 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 continues to strengthen relative to certain othercurrencies, our profitability as a consolidated group will suffer.”

 

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In September 2003,through the completion of a tender offer, Luxottica South Pacific Pty Limitedacquired 82.57 percent of OPSM’s ordinary shares, and more than90 percent of OPSM’s options and performance rights, which entitled us torequire the cancellation of all the options and performance rights stilloutstanding. The aggregate purchase price for the OPSM shares, performancerights and options was A$442.7 million (Euro253.7 million) including acquisition-related expenses. The acquisition wasaccounted for under the purchase method, and the financial position and resultsof operations of OPSM have been included in our consolidated results since August 1,2003.

 

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 OPSMGroup.  The offer was for A$4.35 per share including a fully franked dividend ofA$0.15 per share that was declared by OPSM (resulting in a net price of A$4.20per share). On January 4, 2005, we launched an off-market takeover offerfor all the Australian Stock Exchange–listed OPSM group shares we did notalready own. At the close of the offer on February 7, 2005, we held 98.5percent of OPSM Group shares, which is in excess of the compulsory acquisitionthreshold.  On February 8, 2005, weannounced the start of the compulsory acquisition process for all remainingshares in OPSM Group not already owned by us. On February 15, 2005, theAustralian Stock Exchange suspended trading in OPSM Group shares and on February 18,2005, it delisted OPSM Group shares from the Australian Stock Exchange. Thecompulsory acquisition process was completed on March 24, 2005.

 

On October 4, 2004,Colorado Acquisition Corp., our indirect wholly owned subsidiary, consummatedits merger with Cole National Corporation. As a result of the merger, Cole became our indirect wholly ownedsubsidiary.  The aggregate considerationpaid by us to former shareholders, option holders and holders of restrictedstock of Cole was $500.6 million.  Inconnection with the merger, we assumed outstanding indebtedness with anapproximate aggregate principal balance of U.S. $283.7 million. On October 17,2004, Cole caused its subsidiary CNG to purchase $150 million of itsoutstanding 8 7/8% Senior Subordinated Notes due 2012 in a tender offer andconsent solicitation for $175.5 million, which amount represents all of theissued and outstanding notes of such series. On November 30, 2004, CNG redeemed all of its outstanding 8 5/8%Senior Subordinated Notes due 2007 for $124.6 million.

 

The Company believes thatits combination with Cole will:

 

•                  strengthenits retail operations in the United States;

•                  strengthenits managed 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

•                  providethe Company with the opportunity to increase its sales of frames manufacturedby the Company in Cole retail stores.

 

The Company is executing its strategic integrationplan with respect to Cole. Since the consummation of the acquisition, theCompany has begun to consolidate Cole’s headquarters with its Luxottica Retailheadquarters in Mason, Ohio, and combine various general and administrativefunctions.

 

The integration of ourfinancial and human resources systems is now complete. The Company also intendsto complete the migration of Cole’s corporate functions by September 2005.

 

The Company’s integration plans also include combiningLuxottica Retail’s and Cole’s operating systems. The Company plans to haveintegrated the inventory management and assortment planning systems by October 2005and to finalize the integration of product assortment by December 2005.The Company also plans to integrate the distribution centers by the end of2006.

 

The Company isintegrating its Managed Vision Care system with Cole’s, resulting in a singlebrand (EyeMed) going forward.  TheCompany has already begun selling the new combined product and plans tocomplete combining the Managed Vision Care systems by September 2005.

 

The Company expects thatits North American retail operating margin levels will return to 2004pre-acquisition operating margin levels by the end of 2006.

 

The Company expects thatits integration with Cole will result in synergies in the following areas:

 

•                  general and administrative; and

•                  sale of the Company’s manufactured products.

 

32

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The primary factors thatmay influence the Company’s ability to execute its integration plans andrealize the anticipated cost savings include:

 

•                  the Company’s ability to minimize the disruptive effect ofthe integration on the management of the Company’s retail business;

•                  the timely creation and effective implementation of uniformstandards, controls, procedures and policies;

•                  the capacity of the Company’s operating systems and theirability to support the Cole business; and

•                  the cultural differences between the Company’s organizationand Cole’s organization.

 

**Critical Accounting Policies**

 

The preparation offinancial statements in conformity with U.S. GAAP requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities as of the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period. Our estimates are based on historical experienceand currently available information. Our significant accounting policies arediscussed in Note 1 to our Consolidated Financial Statements included inItem 18 of this annual report. The following is adiscussion of what management believes are our most critical accountingpolicies:

 

***RevenueRecognition***

 

Revenues include sales of merchandise (both wholesaleand retail), insurance and administrative fees associated with the Company’smanaged vision care business, eye exams and related professional services andsales of merchandise to franchisees, along with other revenues from franchiseessuch as royalties based on sales and initial franchise fee revenues.

 

Wholesale Division revenues are recorded from sales ofproducts at the time of shipment, as title and the risks and rewards ofownership of the goods are assumed by the customer at such time. The productsare not subject to formal customer acceptance provisions. In some countries,the customer has the right to return products for a limited period of timeafter the sale. However, such right of return does not impact the timing ofrevenue recognition as all conditions of Statement of Financial AccountingStandards (“SFAS”) No. 48, “Revenue Recognition When Right of ReturnExists,” are satisfied at the date of sale. Accordingly, we have recorded anaccrual for the estimated amounts to be returned.  This estimate is based on our right of returnpolicies and practices along with historical data and sales trends.  There are no other post-shipment obligations.

 

# Retail Division revenues,including internet and catalog sales, are recorded upon receipt by the customerat the retail location, or when goods are shipped directly to the customer forinternet and catalog sales.  In somecountries, we allow retail customers to return goods for a period of time andas such we have recorded an accrual for the estimated amounts to bereturned.  This accrual is based on thehistorical return rate as a percentage of net sales and the timing of thereturns from the original transaction date. There are no other post-shipment obligations.  Additionally, the Retail Division enters intodiscount programs and similar relationships with third parties that have termsof twelve or more months.  Revenues underthese arrangements are likewise recognized as transactions occur in our retaillocations and customers take receipt of products and services.  Also included in Retail Division revenues aremanaged vision care revenues consisting of (i) insurance revenues whichare recognized 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.

#  

# Cole earns and accruesfranchise revenues based on sales by franchisees which are accrued asearned.  Initial franchise fees arerecorded as revenue when all material services or conditions relating to thesale of the franchise have been substantially performed or satisfied by Coleand when the related store begins operations. Accruals are established foramounts due under these relationships determined to be uncollectible.

#  

The Retail Division also sells separately pricedextended warranty contracts with terms of coverage of 12 to 24 months. Revenuesfrom the sale of these warranty contracts are deferred and amortized over thelives of the contracts, while costs to service the warranty claims are expensedas incurred.

 

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# The wholesale and retaildivisions may offer certain promotions during the year.  Free frames given to customers as part of apromotional offer are recorded as cost of sales at the time they are deliveredto the customer.  Discounts and couponstendered by customers are recorded as a reduction of revenue at the date ofsale.

#  

***IncomeTaxes***

 

Income taxes are recordedin accordance with SFAS No. 109, “Accounting for Income Taxes”, whichrequires recognition of deferred tax assets and liabilities for the expectedfuture tax consequences of events that have been included in our consolidatedfinancial statements or tax returns. Under this method, deferred taxliabilities 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 timeof calculation, as well as various other factors.

 

***Inventories***

 

Our manufacturedinventories, approximately 76.9 percent and 65.0 percent of total frameinventory for 2003 and 2004, respectively, are stated at the lower of cost, asdetermined under the weighted-average method (which approximates the first-in,first-out method, or FIFO), or market value. Retail inventory not manufactured by us or our subsidiaries are statedat the lower of cost, as determined by either LIFO (last-in, first-out method)or FIFO, or market.  The LIFO reserve at December 31,2003 and 2004 was not material. Inventories are recorded net of allowances forpossible losses among other reserves. These reserves are calculated usingvarious factors including sales volume, historical shrink results and currenttrends. As such, actual results could differ significantly from the estimatedamounts.

 

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

 

In connection withvarious acquisitions, we have recorded as intangible assets certain goodwilland trade names. At December 31, 2004, the aggregate carrying value ofintangibles, including goodwill, was Euro 2.5 billion or approximately 54percent of total assets.

 

Effective January 1,2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFASNo. 142”). Under SFAS No. 142, goodwill and intangible assets deemedto have an indefinite life are no longer amortized in the same manner as underthe previous standards, but rather are tested for impairment annually and,under certain circumstances, between annual periods. An impairment charge willbe recorded if the fair value of goodwill and other intangible assets is lessthan the carrying value. The calculation of fair value may be based on, amongother items, estimated future cash flows if quoted market prices in activemarkets are not available. We test our goodwill for impairment as of December 31of each year.  We perform our goodwillimpairment test on our wholesale and retail reporting units in accordance withSFAS No. 142.  Based on evaluationsthat we completed in the first quarter of 2002 and in the first quarter of2003, no intangible assets other than goodwill were deemed to have anindefinite life. After evaluations completed in the first quarter of 2003 andin the first quarter of 2004, we concluded that the carrying values of goodwillincluded in the consolidated balance sheets as of December 31, 2003 and2004, respectively, did not exceed their respective fair market value, and as aresult, we did not record an impairment charge under SFAS No. 142.

 

Intangibles subject toamortization based on a finite useful life continue to be amortized on astraight-line basis over their useful lives. Trade names recorded in theconsolidated balance sheets are deemed to have useful lives of between 20 and25 years. Our long-lived assets, other than goodwill, are tested forimpairment whenever events or changes in circumstances indicate that the netcarrying amount may not be recoverable. When such events occur, we measureimpairment by comparing the carrying value of the long-lived asset to the estimatedundiscounted future cash flows expected to result from the use of the assetsand their eventual disposition. If the sum of the expected undiscounted futurecash flows were less than the carrying amount of the assets, we would recognizean impairment loss, if determined to be necessary. Such impairment loss ismeasured as the amount by which the carrying amount of the asset exceeds thefair value of the asset in accordance with SFAS No. 144, “Accounting forthe Impairment or Disposal of Long-Lived Assets.” We determined that, for theyears ended December 31, 2002, 2003 and 2004, there had been no impairmentin the carrying value of our long-lived assets.

 

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**Recent Accounting Pronouncements**

 

In December 2003, the Financial AccountingStandards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 46, “Consolidationof Variable Interest Entities an interpretation of ARB No. 51” (“FIN 46-R”),to address certain FIN No. 46 implementation issues. This interpretationclarifies the application of Accounting Research Bulletin (“ARB”) No. 51, “ConsolidatedFinancial Statements,” for companies with interests in entities that arevariable interest entities (“VIEs”), as defined under FIN No. 46.According to this interpretation, if a company has an interest in a VIE and isat risk for the majority of the VIE’s expected losses or receives a majority ofthe VIE’s expected gains it shall consolidate the VIE.  FIN 46-R also requires additional disclosuresby primary beneficiaries and other significant variable interest holders. FIN 46-Ris effective no later than the end of the first interim or reporting periodending after March 15, 2004, except for those VIEs that are considered tobe special purpose entities for which the effective date is no later than theend of the first reporting period ending after December 15, 2003. Weadopted FIN 46-R on January 1, 2004 and such adoption did not have amaterial effect on our consolidated financial statements.

 

In December 2003, the FASB issued SFAS No. 132-R,“Employer’s Disclosures about Pensions and Other Postretirement Benefits,”which requires additional disclosures in the financial statements about assets,obligations and cash flows, among other items. The new required disclosures arereflected in Note 9 to our Consolidated Financial Statements included inItem 18 of this annual report.

 

In May 2004, the FASB issued FASB Staff Position(“FSP”) No. FAS 106-2, “Accounting and Disclosure Requirements Related tothe Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSPFAS 106-2”), which supersedes FSP FAS 106-1. Under the Medicare Prescription Drug Improvement and Modernization Actof 2003 (the “Act”), if a sponsor of retiree healthcare plans offers drug benefitsthat are at least actuarially equivalent to those to be offered under Medicare Part D,it can be entitled to a federal subsidy equal to 28 percent of the prescriptiondrug claims under the plan.  FSP FAS 106-2requires plan sponsors to disclose the effect of the subsidy on the netperiodic expense and accumulated post retirement benefit obligation in theirinterim and annual financial statements for periods beginning after June 15,2004.  The effect of this Act on ourcurrent plans was immaterial and thus not disclosed separately due to the smallnumber of eligible plan participants.

 

In November 2004, the 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 the adoption will not have a material effect on our consolidatedfinancial statements.

 

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 AccountingPrinciples Board Opinion (“APB”) No. 25, “Accounting for Stock Issued toEmployees.”  SFAS 123-R requirescompanies to measure and record compensation expense for stock options andother share-based payment methods based on the instruments’ fair value. SFAS 123-Ris effective for the Company on January 1, 2006. We are currentlyevaluating the impact of the adoption of SFAS 123-R.

 

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 nonmonetaryexchange has commercial substance if the future cash flows of the entity areexpected to change significantly as a result of the exchange.  SFAS 153 is effective for reporting periodsbeginning after June 15, 2005.  Theadoption of SFAS 153 is not expected to have a material effect on ourconsolidated financial statements.

 

In May 2005, theFASB issued SFAS No. 154, “Accounting Changes and Error Corrections - areplacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS154”). The Statement applies to all voluntary changes in accounting principle,and changes the requirements for accounting for and reporting of a change inaccounting principle. SFAS 154 requires retrospective application to priorperiods’ financial statements of a voluntary change in accounting principleunless it is impracticable. APB No. 20, “Accounting Changes”, previouslyrequired that most voluntary changes in accounting principle be recognized byincluding in net income of the period of the change the cumulative effect ofchanging to the new accounting principle. SFAS 154 is effective for accountingchanges and corrections of errors made in fiscal years beginning after December 15,2005. We have not yet assessed the impact of the adoption of SFAS 154.

 

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**Results of Operations**

 

The following table setsforth, for the periods indicated, the percentage of net sales represented bycertain items included in our statements of consolidated income:

 
| ** **                                                 | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                 | ** ** | **2002***                        | ** ** | **2003*** | ** ** | **2004** | ** ** |
| Net  Sales                                                 |       | 100.0                            | %          | 100.0 | % | 100.0 | % |
| Cost  of Sales                                             |       | 29.6                             |       | 31.7 |   | 32.0 |   |
| Gross  Profit                                              |       | 70.4                             |       | 68.3 |   | 68.0 |   |
| Operating  Expenses:                                       |       |                             |       |   |   |   |   |
| Selling  and advertising                                   |       | 42.4                             |       | 43.3 |   | 42.3 |   |
| General  and administrative                                |       | 9.2                              |       | 9.9 |   | 10.6 |   |
| Total                                                      |       | 51.7                             |       | 53.2 |   | 52.9 |   |
| Income  From Operations                                    |       | 18.8                             |       | 15.1 |   | 15.1 |   |
| Other  Income (Expenses)—Net                          |       | (1.9                             | )          | (1.5 | ) | (1.1 | ) |
| Provision  For Income Taxes                                |       | (5.1                             | )          | (4.1 | ) | (5.0 | ) |
| Minority  Interests in Income of Consolidated Subsidiaries |       | (0.1                             | )          | (0.2 | ) | (0.3 | ) |
| Net  Income                                                |       | 11.6                             |       | 9.4 |   | 8.8 |   |

 

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*                                         Certainamounts in prior years have been reclassified to conform withthe 2004 presentation.

 

For additional financialinformation by operating segment and geographic region, see Note 12 to ourConsolidated Financial Statements included in Item 18 of this annualreport.

 

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**Comparison of the year ended December 31,2004 to the year ended December 31, 2003**

 

*Net Sales.*Net sales increased 14.1 percent to Euro 3,255.3 million during 2004 ascompared to Euro 2,852.2 million for 2003.

 

Net sales in the retailsegment, through LensCrafters, Sunglass Hut, OPSM and the newly acquired Cole,increased by 15.7 percent to Euro 2,346.7 million for 2004 from Euro 2,028.2million for 2003. This increase was primarily due to the inclusion of Colesales from the date of acquisition on October 4, 2004, which amounted toEuro 240.5 million, as well as the inclusion of OPSM sales for an additionalseven months in 2004, which amounted to Euro 172.5 million. In addition to suchincreases, retail sales in North America increased due to a higher averagesales price per customer transaction resulting from an increase in the sale ofpremium products, partially offset by the weakening of the U.S. dollar againstthe Euro. The effect of the weakening of the U.S. dollar on 2004 retail salesin North America was approximately Euro 204.8 million.  As the U.S. dollar continues to weaken in theperiod subsequent to the year ended December 31, 2004 we will continue tosuffer 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 toincreased sales of our Ray-Ban brand and the new Prada and Versace productlines, which sales began after the first quarter of 2003 and have almost completelyoffset the loss of sales of Giorgio Armani licensed products due to thecancellation of the license agreement with Armani in 2003. Management believesthat by 2005 the new licenses will have more than offset the sales lost due tothe cancellation of the Armani license agreement. We do not believe that thetermination of the license agreement with Armani will have a material adverseeffect on our results of operations for future periods. These increases werepartially offset by the weakening of the U.S. dollar which representsapproximately 15% of this segment’s net sales for fiscal 2004. The effect ofthe weakening of the U.S. dollar on wholesale and manufacturing sales to thirdparties in 2004 was approximately Euro 12.7 million.

 

On a geographic basis netof intercompany transactions, operations in North America resulted in net salesof Euro 2,083.5 million during 2004, comprising 64.0 percent of total netsales, an increase of Euro 134.1 million from 2003. This increase was primarilydue to the inclusion of Cole sales from the date of acquisition on October 4,2004, which amounted to Euro 240.5 million, partially offset by the weakeningof the U.S. dollar against the Euro. Net sales for operations in “Asia Pacific”,which consists of Australia, New Zealand, Singapore, Malaysia, Hong Kong,Thailand, China, Japan and Taiwan, were Euro 435.1 million during 2004,comprising 13.4 percent of total net sales, an increase of Euro 181.3 millionas compared to 2003.  This increase wasmainly attributable to the inclusion of OPSM sales for an additional sevenmonths in 2004.  Net sales for the restof the world accounted for the remaining Euro 736.7 million of net sales during2004, which represented a 13.5 percent increase as compared to 2003. Theincrease in the rest of the world is mostly attributable to higher sales in theEuropean and Latin American regions.

 

During 2004, net sales inthe retail segment accounted for approximately 72.1 percent of total net sales,as compared to approximately 71.1 percent of total net sales in 2003 due to thetwo retail acquisitions previously mentioned.

 

*Cost of Sales.***Cost of salesincreased by 15.2 percent to Euro 1,040.7 million in 2004 from Euro 903.6million in 2003.  Cost of sales in theretail segment increased by Euro 103.4 million, which increase is primarilyattributable to the inclusion of Cole in our results of operations from thedate of acquisition and to the inclusion of OPSM in our results of operationsfor an additional seven months in 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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Selling and advertisingexpenses, including royalty payments, increased by 11.4 percent to Euro 1,376.5million during 2004 from Euro 1,235.8 million in 2003. Euro 88.0 million ofthis increase is attributable to the inclusion of OPSM in our results ofoperations for the first seven months of 2004. Euro 110.2 million of thisincrease is attributable to the inclusion of Cole to our results of operationsin the fourth quarter of 2004 (from the date of acquisition).  These increases were offset by the weakeningof the U.S. dollar, which decreased U.S. selling and advertising expenses byEuro 97.9 million.  As a percentage ofnet sales, selling and advertising expenses decreased to 42.3 percent in 2004from 43.3 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 tradenames 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 a percentage of net sales, general andadministrative expenses increased to 10.6 percent in 2004 from 9.8 percent in2003. This increase was primarily due to the consolidation of OPSM’s results inour results of operations. As we continue the integration of OPSM, we expectits operating expenses as a percentage of sales to decrease due to the expectedhigher efficiency in the fixed cost structure. In addition, the restructuringof the Cole operations is underway and it is expected that the general andadministrative costs of Cole will diminish during 2005.

 

*Income from Operations.*Income from operations for 2004 increased by 14.1 percent toEuro 492.8 million from Euro 431.8 million in 2003. As a percentage ofnet sales, income from operations remained constant at 15.1 percent for both2004 and 2003.

 

Operating margin,calculated as income from operations divided by net sales, in the manufacturingand wholesale distribution segment increased to 21.3 percent in 2004 from 19.2percent in 2003.  This increase inoperating margin is attributable to higher efficiency in our fixed coststructure driven by increases in net sales.

 

For the reasons outlinedabove, operating margin in the retail segment decreased to 13.2 percent in 2004from 13.3 percent in 2003. The consolidation of Cole results, whose operating margin is lower than that of our otherretail chains, will further dilute the operating margin during 2005.  However, we believe that when the finalrestructuring of the North American Retail Division is completed, we willreturn to our historical operating margins by the end of 2006.

 

*Other Income (Expenses)-Net.* Other income(expenses)-net was Euro 35.7 million in 2004 as compared to Euro 42.0 millionin 2003. This decrease in other income (expenses)-net is mainly attributable toan increase in other income-net of Euro 13.4 million attributable to higherrealized and unrealized foreign exchange gains on certain transactions. Withthe acquisition of Cole, as discussed earlier, and a trend in rising interestrates, we expect a significant increase in interest expense for 2005.

 

*Net Income.***Income before taxes increased by 17.3 percent to Euro 457.2 millionin 2004 from Euro 389.8 million in 2003 due to our increase in sales, whichincludes Cole sales for the last three months of 2004, while maintaining ourgross profit margins and keeping our operating expenses constant as apercentage of sales. As a percentage of net sales, income before taxesincreased to 14.0 percent in 2004 from 13.7 percent in 2003. Minority interestincreased to Euro (8.6) million in 2004 from Euro (5.1) million in 2003. Withour previously announced acquisition of the remaining shares of OPSM, we expectour minority interest to decrease in future periods. Our effective tax rate was35.4 percent in 2004, while it was 30.1 percent in 2003. The effective tax rateis estimated to bebetween 37 to 40 percent in 2005 as we ended our permanent benefitsfrom subsidiaries’ losses. Net income increased by 7.3 percent to Euro 286.9million in 2004 from Euro 267.3 million in 2003. Net income as a percentage ofnet sales decreased to 8.8 percent in 2004 from 9.4 percent in 2003.

 

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

 

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***Non-GAAP Financial Measures***

 

We use certain measures of financial performance that:(i) exclude the impact of fluctuations in currency exchange rates in thetranslation of operating results into Euro; (ii) include the results ofoperations of OPSM for the entire year ended December 31, 2003; (iii) includethe results of operations of Cole for the three-month period ended December 31,2003; and (iv) adjust for the fact that the North American retail calendarin 2003 included 53 weeks while fiscal 2004 was a 52-week year.  We believe that these adjusted financialmeasures provide useful information to both management and investors byallowing 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.

 

Operating measures that exclude the impact offluctuation in currency exchange rates are not measures of performance underU.S. GAAP. These non-U.S. GAAP measures are not meant to be considered inisolation or as a substitute for results prepared in accordance with U.S. GAAP.In addition, our method of calculating operating performance to exclude the impactof changes in exchange rates may differ from methods used by other companies.See the table below for a reconciliation of the operating measures excludingthe impact of fluctuations in currency exchange rates to their most directlycomparable U.S. GAAP financial measures. The adjusted financial measures shouldbe used as a supplement to results reported under U.S. GAAP to assist thereader in better understanding our operational 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                     |       |
| **Manufacturing and wholesale net sales** |       | 996.7                        |       | 1,094.8                      |       | 33.1                                          |       | 1,127.9                     |       |
| **Less: intercompany sales**              |       | (172.7                       | )          | (186.2                       | )          | (14.3                                         | )          | (200.5                      | )          |
| **Wholesale sales to third parties**      |       | 824.0                        |       | 908.6                        |       | 18.8                                          |       | 927.4                       |       |
| **Retail net sales**                      |       | 2,028.2                      |       | 2,346.7                      |       | 194.2                                         |       | 2,540.9                     |       |

 

Because of the significant changes, we have included the following tableof consolidated adjusted sales and operating income for 2003. We believe thatthe adjusted amounts may be of assistance in comparing our operatingperformance between 2003 and 2004. However, adjusted financial informationshould not be viewed as a substitute for measures of performance calculated inaccordance with U.S. GAAP. The consolidated adjusted amounts reflect thefollowing adjustments:

 

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

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

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

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

5.               the elimination of the effect of the 53rdweek on 2003.

 

This information is being provided for comparisonpurposes only and does not purport to be indicative of the actual results thatwould have been achieved had the OPSM acquisition been completed as of January 1,2003 and the Cole National acquisition been completed as of October 4,2003.

 

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The following table reflects the Company’sconsolidated net sales and income from operations for 2003 as reported and asadjusted:

 
| **(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                       |       |

 

The following tablesummarizes the combined effect on consolidated net sales of exchange rates, theOPSM and Cole acquisitions and the elimination of the effect of the 53rdweek in 2003 to allow a comparison of net sales 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 53rd 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.

 

At constant exchangerates between the periods, net sales would have increased by 21.6 percentduring 2004 as compared to 2003. The 6.9 percent increase in net sales on aconsistent basis in 2004 as compared to 2003 is mainly attributable to theadditional sales of our Ray-Ban brand and the new Prada and Versace productlines, which sales began after the first quarter of 2003, and the increasedsales of our retail division, as previously discussed.

 

The following tablesummarizes the effect on consolidated income from operations of the OPSMacquisition, the Cole acquisition and the elimination of the effect of the 53rdweek in 2003 to allow a comparison of operating performance on a consistentbasis:

 
| ** **                        | ** ** | **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 53rd 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 consolidatedadjusted basis, including OPSM’s and Cole’s results for 2003 and eliminatingthe 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 percent increase is attributable toan increase in the U.S. retail business partially offset by the weakening ofthe U.S. dollar, which was previously discussed.

 

**Comparison of the year ended December 31,2003 to the year ended December 31, 2002**

 

*Net Sales.* Net salesdecreased 10.9 percent to Euro 2,852.2 million during 2003 ascompared to Euro 3,201.8 million for 2002. This net decrease was primarilydue to the weakening of the U.S. dollar against the Euro.

 

Net sales in the retailsegment, through LensCrafters, Sunglass Hut and OPSM, decreased 9.0 percent to Euro 2,028.2 million for 2003 from Euro 2,227.7 million for2002. This decrease was primarily due to the weakening of the U.S. dollaragainst the Euro.

 

Net sales to thirdparties in the manufacturing and wholesale segment decreased 15.4 percentto Euro 824.0 million in 2003 as compared to Euro 974.1 million in 2002. Net sales in this segment is affected by exchange rates, butnot the 53rd week or the acquisition of OPSM, which apply only to our retailsegment. Assuming constant exchange rates, wholesale sales to third parties in2003 would have decreased by 10.4 percent as compared to 2002. Thisdecline was primarily attributable to the reduction by almost 80 percentof Armani sales during the year following the termination of our licenseagreements with Armani.

 

On a geographic basis,our operations in North America had net sales, as adjusted to eliminateintercompany sales, of Euro 1,949.7 million during 2003, comprising68.4 percent of total net sales, a decrease of Euro 396.1 million from2002. This decrease was substantially due to the weakening of the U.S. dollaragainst the Euro. In U.S. dollars, net sales from our operations in NorthAmerica decreased by U.S. $12.3 million as compared to 2002. Net sales for theremaining markets, as adjusted to eliminate intercompany sales, accounted forthe remaining Euro 902.5 million of net sales during 2003, which represented a5.4 percent increase as compared to 2002. This increase was due to theinclusion of OPSM sales for the five-month period following the acquisition in2003, partially offset by the decrease in Armani sales following thetermination of our license agreements with Armani.

 

*Cost of Sales.* Cost ofsales decreased 4.5 percent to Euro 903.6 million in 2003, from Euro 946.1million in 2002, and increased as a percentage of net sales to31.7 percent from 29.6 percent, respectively. Manufacturing laborcosts decreased 7.8 percent to Euro 240.9 million in 2003 from Euro261.2 million in 2002. As a percentage of net sales, cost of laborincreased to 8.4 percent in 2003 from 8.2 percent in 2002. Theincrease in cost of sales, including manufacturing labor costs, as a percentageof net sales, was mainly attributable to the currency translation of our unitsales, denominated in U.S. dollars, to Euro, such that the weakening of theU.S. dollar against the Euro increased our average cost of sales with respectto our unit sales denominated in U.S. dollars. For 2003, the average number offrames produced daily in Luxottica’s facilities (including Tristar and that ofthe newly acquired IC Optics) was approximately 123,000 as compared to 131,000for 2002.

 

*Gross Profit.* For thereasons outlined above, gross profit decreased 13.6 percent to Euro1,948.6 million in 2003 from Euro 2,255.7 million in 2002. As a percentageof net sales, gross profit decreased to 68.3 percent in 2003 from70.4 percent in 2002.

 

*Operating Expenses.* Totaloperating expenses decreased 8.3 percent to Euro 1,516.8 million in 2003,from Euro 1,654.1 million in 2002. As a percentage of net sales, operatingexpenses increased to 53.2 percent in 2003 from 51.7 percent in 2002.

 

Selling and advertisingexpenses, including royalty payments, decreased 9.2 percent to Euro1,235.8 million during 2003 from Euro 1,360.3 million in 2002. As apercentage of net sales, these expenses increased to 43.3 percent in 2003from 42.5 percent in 2002. While the reduction in selling and advertisingexpenses, including royalty payments, is largely due to the weakening of theU.S. dollar against the Euro, the increase as a percentage of net sales ismainly due to the greater percentage of fixed costs to total costs in ourretail segment.

 

General andadministrative expenses, including intangible asset amortization, decreased4.3 percent to Euro 281.0 million 2003 from Euro 293.8 millionin 2002. As a percentage of net sales, general and administrative expensesincreased to 9.9 percent in 2003 from 9.2 percent in 2002. While thereduction in general and administrative expenses is primarily due to theweakening of the U.S. dollar against the Euro, the increase as a percentage ofnet sales is mainly due to the greater percentage of fixed costs to total costsin the manufacturing and wholesale distribution segment, due to the reductionin sales.

 

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*Income from Operations.*Income from operations for 2003 decreased 28.2 percent to Euro431.8 million from Euro 601.5 million in 2002. As a percentage of netsales, income from operations decreased to 15.1 percent in 2003 from18.8 percent in 2002. The comparison between the results of 2003 and 2002is affected by the fact that our 2003 results included the results ofoperations of OPSM as of August 1, 2003 and the effect of the 53rd week inthe North American retail calendar, while 2002 was a 52-week year.

 

*OtherIncome (Expenses)-Net.* Other income (expenses)-net was Euro42.0 million in 2003 as compared to Euro 62.1 million in 2002. Thisdecrease was attributable to lower interest expense in the current period dueto the reduction of interest rates.

 

*Net Income.* Income beforetaxes decreased 27.7 percent to Euro 389.8 million in 2003 from Euro539.4 million in 2002. As a percentage of net sales, income before taxesdecreased to 13.7 percent in 2003 from 16.8 percent in 2002. Minorityinterest of Euro (5.1) million in 2003 increased from Euro (4.7) million in2002. Our effective tax rate was 30.1 percent in 2003 while it was30.2 percent in 2002. Net income decreased 28.1 percent to Euro267.3 million in 2003 from Euro 372.1 million in 2002. Net income asa percentage of net sales decreased to 9.4 percent in 2003 from11.6 percent in 2002. The decrease in net income was a result of thefactors described above.

 

Basic earnings per sharefor 2003 were Euro 0.60 decreasing from Euro 0.82 for 2002 and diluted earningsper share for 2003 were Euro 0.59 decreasing from Euro 0.82 for 2002.

 

***Non-GAAP Financial Measures***

 

We use certain measures of financial performance thatexclude the impact of fluctuations in currency exchange rates in thetranslation of operating results into Euro, exclude the effect of a 53rdweek in the North American retail calendar in 2003 and adjust the 2002 resultsto include the operations of OPSM for the last five months of 2002.  We believe that these adjusted financialmeasures provide useful information to both management and investors byallowing 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 2003 and 2002 are calculated using, for each currency,the average exchange rate for the year ended December 31, 2002.

 

Operating measures that exclude the impact offluctuation in currency exchange rates are not measures of performance underU.S. GAAP. These non-U.S. GAAP measures are not meant to be considered inisolation or as a substitute for results prepared in accordance with U.S. GAAP.In addition, our method of calculating operating performance to exclude theimpact of changes in exchange rates may differ from methods used by othercompanies. See the table below for a reconciliation of the operating measuresexcluding the impact of fluctuations in currency exchange rates to their most directlycomparable U.S. GAAP financial measures. The adjusted financial measures shouldbe used as a supplement to results reported under U.S. GAAP to assist thereader in better understanding our operational performance.

 

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The following tablepresents the effects of exchange rates, the OPSM acquisition and the 53rd weekin 2003 on our consolidated net sales, in order to allow a comparison of netsales on a consistent basis:

 
| ** **                       | ** ** | **Consolidated Net Sales** | ** ** |
|----------------------------------|------------|----------------------------|------------|
| **(In  millions of Euro)**       | ** ** | **Fiscal Year  2002**      | ** ** | **Fiscal Year  2003** | ** ** | **% change** | ** ** |
| **U.S. GAAP results**            |       | 3,201.8                    |       | 2,852.2 |   | -10.9 | % |
| **Exchange rate effect**         |       |                       |       | 400.6 |   |   |   |
| **Constant exchange rate**       |       | 3,201.8                    |       | 3,252.8 |   | +1.6 | % |
| **OPSM results in 2002**         |       | 108.3                      |       |   |   |   |   |
| **with OPSM in both years**      |       | 3,310.1                    |       | 3,252.8 |   | -1.7 | % |
| **without 53rd week in 2003(1)** |       |                       |       | (44.1 | ) |   |   |
| **Consistent basis**             |       | 3,310.1                    |       | 3,208.7 |   | -3.1 | % |

 

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(1)                                  U.S.$41.7 million converted to Euro at the fiscal year 2002 average exchangerate (calculated using the noon buying rates) of Euro 1.00 = U.S. $0.945.

 

The 3.1 percentdecrease in net sales on a consistent basis in 2003 (excluding the effects ofexchange rates, the OPSM acquisition and the 53rd week in 2003) as compared to2002 is mainly attributable to reduced sales of the Armani product linesfollowing the termination of the Armani license agreements as of December 31,2002.

 

On a consistent basis,including OPSM’s results for the five-month period ended December 31,2002, and excluding the effect of the 53rd week from 2003 results, the decreasein income from operations in 2003, as adjusted, would have been30.5 percent as compared to 2002, as adjusted (see following table).

 
| ** **                       | ** ** | **Consolidated Income from  Operations** | ** ** |
|----------------------------------|------------|------------------------------------------|------------|
| **(In  millions of Euro)**       | ** ** | **Fiscal Year  2002**                    | ** ** | **Fiscal Year  2003** | ** ** | **% change** | ** ** |
| **U.S. GAAP results**            |       | 601.5                                    |       | 431.8 |   | -28.2 | % |
| **% of net sales**               |       | 18.8                                     | %          | 15.1 | % |   |   |
| **OPSM results in 2002**         |       | 6.1                                      |       |   |   |   |   |
| **with OPSM in both years**      |       | 607.6                                    |       | 431.8 |   | -28.9 | % |
| **% of net sales**               |       | 19.0                                     | %          | 15.1 | % |   |   |
| **without 53rd week in 2003(1)** |       |                                     |       | (9.6 | ) |   |   |
| **Consistent basis**             |       | 607.6                                    |       | 422.2 |   | -30.5 | % |
| **% of net sales**               |       | 19.0                                     | %          | 14.8 | % |   |   |

 

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(1)                                  U.S.$10.9 million converted to Euro at the fiscal year 2003 average exchangerate (calculated using the noon buying rates) of Euro 1.00 = U.S. $1.1307.

 

Operating margin, calculatedas income from operations divided by net sales, in the manufacturing andwholesale distribution segment decreased to 19.2 percent in 2003 from25.5 percent in 2002.

 

Operating margin in theretail segment decreased to 13.3 percent in 2003 from 14.3 percent in2002.

 

**Taxes**

 

Our effective tax ratesfor the years ended December 31, 2002, 2003 and 2004 were approximately30.2 percent, 30.1 percent and 35.4 percent, respectively. The effectivetax rates were less than the statutory tax rate due to permanent differencesbetween our income for financial reporting and tax purposes which reflect thenet loss carryforward caused by the prior funding of subsidiary losses throughcapital contributions that are deductible for income tax purposes under Italianlaw, and the reduction in certain investments in subsidiaries. Such subsidiarylosses were primarily attributable to the amortization of certain intangibleassets associated with our acquisitions. This remaining net loss carryforwardwas completely utilized in 2004.

 

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**Liquidity and Capital Resources**

 

***OurCash Flows***

 

*Operating Activities.* Our cashprovided by operating activities was Euro 527.9 million for 2004 as compared toEuro 327.3 million for 2003 and Euro 436.3 million for 2002.  The Euro 200.6 million increase in 2004compared to 2003 is primarily attributable to an increase in net income, aspreviously discussed, and an increase in depreciation and amortization for 2004resulting from the additional depreciation and amortization of the assets ofOPSM, including Euro 5.8 million relating to the amortization of its tradename, and the amortization and depreciation of the assets of Cole includingEuro 4.3 million relating to the amortization of its intangible assets.  The decrease in cash provided by operatingactivities of Euro 109.0 million from 2002 to 2003 is primarily attributable tothe decrease in net income. Accounts receivable was a source of cash in 2003 ofEuro 23.9 million as compared to a use of cash in 2004 of Euro 15.8million.  This change in cash flows fromaccounts receivable is primarily due to the increase in collected sales of ourmanufacturing and wholesale segment thus reducing our receivable balances.Prepaid expenses and other was a source of cash in 2004 and 2002; as comparedto a use of cash in 2003 of Euro 43.6 million. This change was attributable toadvance payments of Euro 31.5 million made in 2003 by us to one of ourlicensors and the timing of certain tax payments by foreign subsidiaries. Theamount of cash provided in 2004 by operating activities for inventory increasedby Euro 47.3 million in 2004 compared to 2003. This change in cash flow frominventory is primarily due to an increase in the inventory turns.  The amount of cash used in 2004 by operatingactivities for accounts payable and accrued expenses decreased by Euro 52.1million and Euro 25.1 million, respectively, in 2004 compared to 2003.  These declines were caused by the timing ofpayments to certain vendors by the manufacturing and wholesale segment and bythe North American retail division as well as the settlement in 2003 of certainliabilities of businesses acquired. Income tax payable was a use of cash in 2004 of Euro 1.6 million ascompared to a use of cash in 2003 of Euro 7.5 million.

 

*Investing Activities.* Our cashused in investing activities was Euro 480.5 million for 2004, primarilyattributable to the Cole National acquisition, for an aggregate amount, net ofcash acquired and including direct acquisition-related expenses, of Euro 363.0million. In 2003, our cash used in investing activities was Euro 468.6 million,primarily due to the acquisitions of I.C. Optics, E.I.D. and 82.57 percent ofOPSM’s ordinary shares and all of OPSM’s options and performance rights, for anaggregate amount of Euro 342.4 million. The Euro 11.9 million increase is also attributable to an increase in fixed assetsrelating to the U.S. retail segment in 2004. In 2002, cash used in investingactivities consisted primarily of capital expenditures made to purchase fixedassets which included the purchase of our headquarters in Milan, and the landand construction costs to build our new North American Retail headquarters inMason, Ohio.

 

*Financing Activities.* Our cashprovided by/(used in) financing activities for 2004,2003 and 2002 was Euro (81.8) million, Euro 305 million and Euro (307.2)million, respectively. Cash used in financing activities for 2004 consistedprimarily of: (i) the net proceeds of Euro 88.6 million from all the creditfacilities (translated at the noon buying rate of Euro 1.00 = U.S. $1.2417 on September 30,2004; actual borrowing was U.S. $ 110.0 million) and (ii) Euro 446.9million (U.S. $605.0 million translated at the noon buying rate of Euro 1=U.S.$1.3538 on December 31, 2004) of proceeds of Tranche B and Tranche C ofthe credit facility entered into in June 2004, used in connection with theacquisition of Cole including the repayment of Cole’s existing notes. Weborrowed Euro 405.0 million in June 2004 (consisting of the proceeds ofTranche A of the credit facility entered into in June 2004) to repay Euro400.0 million of long-term debt. Additionally, we used cash provided byfinancing activities to reduce bank overdrafts and to pay Euro 94.1 million ofdividends to our shareholders. Cash provided by financing activities for 2003consisted primarily of: (i) the new Euro 200.0 million credit facility,the proceeds of which were used in connection with the acquisition of OPSM; (ii) theissuance in the U.S. of $300.0 million of notes (Euro 257.5 million), theproceeds of which were partially used for the OPSM acquisition and to refinanceU.S. $140 million (Euro 120.2 million) of long-term debt; and (iii) borrowingon bank overdrafts to repay maturing long-term debt. These sources were offsetby the payment of Euro 95.4 million of dividends to our shareholders.Additionally, we repurchased treasury shares for Euro 45.4 million in 2003 andthese repurchase programs expired during 2004 with no additional shares purchasedduring 2004. Cash provided by financing activities for 2002 consisted primarilyof: (i) the new Euro 600.0 million credit facility the proceeds of whichwere used to refinance maturing debt; (ii) the new U.S. $300.0 millioncredit facility the proceeds of which were partially used to refinance maturinglong-term debt; and (iii) utilization of restricted cash to repay maturinglong-term debt. These sources were offset by the payment of Euro 77.2 millionof dividends to our shareholders. Additionally, we repurchased treasury sharesfor Euro 24.5 million.

 

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***OurIndebtedness***

 

Our debt agreementscontain certain covenants, including covenants that restrict our ability toincur additional indebtedness. We do not currently expect to require anyadditional financing that would require us to obtain consents or waivers of anyexisting restrictions on additional indebtedness set forth in our debtagreements.

 

The Company has reliedprimarily upon internally generated funds, trade credit and bank borrowings tofinance its operations and expansion.

 

*Bank Overdrafts*

 

Bankoverdrafts represent negative cash balances held in banks and amounts borrowedunder various unsecured short-term lines of credit obtained by Luxottica GroupS.p.A. and certain of our subsidiaries through local financial institutions.These facilities are usually short-term in nature or contain evergreen clauseswith a cancellation notice period. Certain subsidiaries’ agreements require a guarantee from LuxotticaGroup S.p.A.  Interest rates on theselines vary based on the country of borrowing among other factors.  We use these short-term lines of credit tosatisfy our short-term cash needs.

 

*The U.S. $350 Million CreditFacility with UniCredito Italiano and the Convertible Swap Step-Up*

 

To refinance previouslyissued Eurobonds, in June 2002, U.S. Holdings, a U.S. subsidiary, enteredinto a U.S. $350 million credit facility with a group of four Italianbanks led by UniCredito Italiano S.p.A. The new credit facility is guaranteedby Luxottica Group S.p.A. and matures in June 2005. The term loan portionof the credit facility provides U.S. $200 million of borrowing andrequires equal quarterly principal installments beginning in March 2003.The revolving loan portion of the credit facility allows for maximum borrowingsof U.S. $150 million; the revolving loan was partially drawn as of December 31,2004, with outstanding borrowings of U.S. $130.0 million. Interest accruesunder the credit facility at LIBOR (as defined in the agreement) plus0.5 percent (2.920 percent on the term loan portion and 2.917 percent onthe revolver portion on December 31, 2004) and the credit facility allowsU.S. Holdings to select interest periods of one, two or three months. Under thiscredit facility, U.S. $170 million was outstanding as of December 31,2004. The credit facility contains certain financial and operating covenants.We were in compliance with those covenants as of December 31, 2004.

 

In July 2002, U.S.Holdings entered into a Convertible Swap Step-Up (“2002 Swap”). The beginningand maximum notional amount of 2002 Swap is U.S. $275 million, which willdecrease 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. Holdingsto receive an interest payment at the three-month LIBOR rate as defined in theagreement. These amounts are settled net every three months until the finalexpiration of the 2002 Swap on June 17, 2005. The 2002 Swap does notqualify for hedge accounting under SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities,” as amended, and, as such, ismarked to market with the gains or losses from the change in value reflected incurrent operations. Gains of Euro 635 thousand and Euro 1,491 thousand areincluded in current operations in 2003 and 2004, respectively.

 

*The Euro 650 Million Credit Facility with Banca Intesa and the Intesa Swaps*

 

In December 2002, weentered into a new unsecured credit facility with Banca Intesa S.p.A. The newunsecured credit facility provides borrowing availability of up to Euro 650million. The facility includes a Euro 500 million term loan,which required a balloon payment of Euro 200 million in June 2004 andrepayment of equal quarterly installments of principal of Euro 50 millionsubsequent to that date. Interest accrues on the term loan at Euribor asdefined in the agreement plus 0.45 percent (2.628 percent on December 31,2004). The revolving portion provides borrowing availability of up to Euro 150million which can be borrowed and repaid until final maturity. At December 31,2004, Euro 75 million had been drawn under the revolving portion. Interestaccrues on the revolving loan at Euribor as defined in the agreement plus 0.45percent (2.623 percent on December 31, 2004). The final maturity of alloutstanding principal amounts and interest is December 27, 2005. TheCompany has the option to choose interest periods of one, two or three months.The credit facility contains certain financial and operating covenants. We werein compliance with these covenants as of December 31, 2004.

 

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In December 2002, weentered into two interest rate swap transactions (the “Intesa Swaps”) beginningwith an aggregate maximum notional amount of Euro 250 million, which willdecrease by Euro 100 million on June 27, 2004 and by Euro25 million during each subsequent three-month period. These Intesa Swapswill expire on December 27, 2005. The Intesa Swaps were entered into as acash flow hedge of a portion of the Banca Intesa Euro 650 millionunsecured credit facility discussed above. The Intesa Swaps exchange thefloating rate based on Euribor to a fixed rate of 2.985 percent.

 

*The OPSM Acquisition and the Euro200 Million Credit Facility with Banca Intesa*

 

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 for an aggregate ofAustralian dollar 442.7 million (Euro 253.7 million), includingacquisition-related expenses. The purchase price was paid for with the proceedsof a new credit facility with Banca Intesa S.p.A. of Euro 200 million, inaddition to other short-term lines available. The new credit facility includesa Euro 150 million term loan, which will require equal semiannualinstallments of principal repayments of Euro 30 million starting September 30,2006 until the final maturity date. Interest accrues on the term loan atEuribor (as defined in the agreement) plus 0.55 percent (2.729 percenton December 31, 2004). The revolving loan provides borrowing availabilityof up to Euro 50 million; amounts borrowed under the revolving portion canbe borrowed and repaid until final maturity. At December 31, 2004, Euro 25million had been drawn from the revolving portion. Interest accrues on therevolving loan at Euribor (as defined in the agreement) plus 0.55 percent(2.697 percent on December 31, 2004). The final maturity of the creditfacility is September 30, 2008. We can select interest periods of one, twoor three months. The credit facility contains certain financial and operatingcovenants. We were in compliance with those covenants as of December 31,2004.

 

*The U.S. $300 Million SeniorUnsecured 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 A Notes accrues at 3.94 percent per annum and intereston Series B and Series C Notes accrues at 4.45 percent perannum. The Series A and Series B Notes mature on September 3,2008 and the Series C Notes mature on September 3, 2010. The Series Aand Series C Notes require annual prepayments beginning on September 3,2006 through the applicable date of maturity. The Notes are guaranteed on asenior unsecured basis by Luxottica Group S.p.A. and Luxottica S.r.l., a wholly-ownedsubsidiary. The Notes can be prepaid at U.S. Holdings’ option under certaincircumstances. The proceeds from the Notes were used for the repayment ofoutstanding debt and for other working capital needs. The Notes contain certainfinancial and operating covenants. We were in compliance with those covenantsas of December 31, 2004.

 

In connection with theissuance of the Notes, U.S. Holdings entered into three interest rate swapagreements with Deutsche Bank AG (the “DB Swap”). The three separate agreements’notional amounts and interest payment dates coincide with those of the Notes.The DB Swap exchanges the fixed rate of the Notes to a floating rate of thesix-month LIBOR rate plus 0.6575 percent for the Series A Notes and to a floating rate of the six-month LIBOR rateplus 0.73 percent for the Series B and Series C Notes. Theseswaps are treated as fair value hedges of the related debt and qualify for theshortcut method of hedge accounting (assuming no ineffectiveness in a hedge inan interest rate swap). Thus the interest income/expense on the swaps isrecorded as an adjustment to the interest expense on the debt effectivelychanging the debt from a fixed rate of interest to the swap rate.

 

*New Euro 740 Million and U.S.$325 Million Credit Facility*

 

On June 3, 2004, theCompany and U.S. Holdings entered into a new credit facility with a group ofbanks providing for loans in the aggregate principal amount of Euro 740 millionand U.S. $325 million. The five-year facility consists of three Tranches(Tranche A, Tranche B, Tranche C). Tranche A is a Euro 405 million amortizingterm loan requiring repayment of nine equal quarterly installments of principalof Euro 45 million beginning in June 2007, which is to be used for generalcorporate purposes, including the refinancing of existing Luxottica GroupS.p.A. debt as it matures. Tranche B is a term loan of U.S, $ 325 million whichwas drawn upon on October 1, 2004 by U.S. Holdings to finance the purchaseprice for the acquisition of Cole. Amounts borrowed under Tranche B will mature in June 2009. TrancheC is a Revolving Credit Facility of Euro 335 million-equivalent multi-currency(€/U.S. $). Amounts borrowed under Tranche C may be repaid and reborrowed withall outstanding balances maturing in June 2009. The Company can selectinterest periods of one, two, three or six months with interest accruing onEuro-denominated loans based on the corresponding Euribor rate and U.S. $denominated 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, asdefined in the agreement. The interest rate on December 31, 2004 was 2.628percent for Tranche A, 2.456 percent for Tranche B and 2.889 percent on TrancheC. The new credit facility contains certain financial and operating covenants.We were in compliance with

 

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thosecovenants as of December 31, 2004. The Mandated Lead Arrangers andBookrunners are ABN AMRO, Banca Intesa S.p.A., Bank of America, CitigroupGlobal 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 UnicreditBanca d’Impresa S.p.A. act as Facility Agents. Under this credit facility, Euro852 million was outstanding as of December 31, 2004.

 

In August 2004, OPSMrenegotiated the recently expired multicurrency (AUD $/ HK $) loan facilitywith Westpac Banking Corporation. The credit facility has a maximum availableline of AUD $100 million. For borrowings denominated in Australian Dollars, theinterest accrues on the basis of BBR (Bank Bill Rate), and for borrowingsdenominated in Hong Kong Dollars the rate is based on HIBOR (HK Inter bankRate) plus an overall 0.40 percent margin. At December 31, 2004, theinterest rate was 5.85 percent and the facility was utilized for an amount ofAUD 26.7 million. The final maturity of all outstanding principal amounts andinterest is August 31, 2006. OPSM has the option to choose weekly ormonthly interest periods. The credit facility contains certain financial andoperating covenants. We were in compliance with those covenants as of December 31,2004.

 

***OurWorking Capital***

 

Set forth below iscertain information regarding our Working Capital (total current assets minustotal current liabilities)

 
| ** **           | ** ** | **As of December 31,**    | ** ** |
|----------------------|------------|------------------------------------------|------------|
| ** **           | ** ** | **2002**                                 | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **           | ** ** | **(In millions of Euro)** | ** ** |
| Current  Assets      |       | 1,140.1                                  |       | 1,267.1 |   | 1,447.3 |   |
| Current  Liabilities |       | (998.7                                   | )          | (1,323.3 | ) | (1,316.8 | ) |
| Working  Capital     |       | 141.4                                    |       | (56.2 | ) | 130.5 |   |

 

The decrease in workingcapital as of December 31, 2003 when compared with December 31, 2002is mainly attributable to the increase in maturities of long-term debt due in2004 creating an increase in current liabilities as of December 31,2003.  The increase in working capital in2004 is mainly attributable to the asset held for sale, Pearle Europe, acquiredin connection with the acquisition of Cole in October 2004.  See Note 4(e) to the ConsolidatedFinancial Statements for further details.

 

We believe that thefinancial resources available to us will be sufficient to meet our currentlyanticipated working capital and capital expenditure requirements for the next12 months.

 

We do not believe thatthe relatively moderate rates of inflation which have been experienced in thegeographic markets where we compete have had a significant effect on our netsales or profitability. In the past, we have been able to offset cost increasesby increasing prices, although we can give no assurance that we will be able todo so in the future.

 

**Off-Balance Sheet Arrangements**

 

We have no material off-balance sheet arrangementsthat have or are reasonably likely to have a current or future effect on ourfinancial condition, changes in financial condition, revenue or expenses,results of operations, liquidity, capital expenditures 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 exposureto market risks from changes in foreign exchange rates. Although we have notdone so in the past, we may enter into other derivative financial instrumentswhen we assess that the risk can be hedged effectively.

 

**Contractual Obligations andCommercial 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

 

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equipment,and outstanding borrowings under credit agreements and facilities withfinancial institutions to finance our operations. These contractualarrangements may contain minimum annual commitments. A more complete discussionof the obligations and commitments is included in Notes 8 and 14 to ourConsolidated Financial Statements 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, 2004. 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)           |       | 405.4                      |       | 365.2 |   | 903.3 |   | 9.0 |   | 1,682.9 |   |
| Interest  Payments(2)                               |       | 34.8                       |       | 54.0 |   | 18.5 |   | 0.2 |   | 107.5 |   |
| Operating  Leases                                   |       | 204.4                      |       | 316.3 |   | 189.0 |   | 168.3 |   | 878.0 |   |
| Minimum  Royalty Arrangements                       |       | 31.2                       |       | 86.1 |   | 61.2 |   | 150.8 |   | 329.3 |   |
| Total                                               |       | 675.8                      |       | 821.6 |   | 1,172.0 |   | 328.3 |   | 2,997.7 |   |

 

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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 31,2004.

 

(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, 2004 and assume that we make all scheduledprincipal payments as they mature.

 

At December 31,2004, we had available funds of approximately Euro 365.8 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.  In addition, certain U.S. subsidiariesobtained various letters of credit from banks outstanding of Euro 35.6 millionas of December 31, 2004. Most of these letters of credit are used assecurity in risk management contracts or store leases. Most contain annualevergreen clauses under which they are automatically renewed unless the bank isnotified of nonrenewal.  There are nooutstanding letters of credit with an original maturity over one year as of December 31,2004.  We do not have any other materialcommercial commitments. Our capital expenditures were Euro 117.4 millionfor the year ended December 31, 2004 and Euro 39.7 million for thethree-month period ended March 31, 2005. It is our expectation that 2005annual capital expenditures will be approximately Euro 170 million, whichincludes the purchase of a new aircraft to replace the previous aircraft whichbecame obsolete, along with an increase in fixed assets relating to the U.S.retail segment in the first three months of 2005 including costs associatedwith the expansion of the North American Retail Headquarters to accommodate theintegration of Cole’s home office operations. The expected aggregate cost ofthe home office expansion is U.S. $12.8 million and it is expected to becompleted in 2006. We will pay for these future capital expenditures with ourcurrent available borrowing capacity and available cash.

 

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**ITEM 6. DIRECTORS, SENIOR****MANAGEMENTAND EMPLOYEES**

 

**Directors and Senior Management**

 

The Board of Directors ofLuxottica Group S.p.A. currently consists of 12 members.

 

Set forth below iscertain information regarding the directors and senior management of LuxotticaGroup S.p.A. as of December 31, 2004, except as otherwise specified:

 
| **Name**              | ** ** | **Age(1)** | ** ** | **Officer or  Director  Since(2)** | ** ** | **Position(1)**                                    | ** ** |
|-----------------------|------------|------------|------------|------------------------------------|------------|----------------------------------------------------|------------|
| Leonardo Del  Vecchio |       | 69         |       | 1961                               |       | Chairman of the Board  of Directors                |       |
| Luigi  Francavilla    |       | 67         |       | 1968                               |       | Deputy Chairman                                    |       |
| Andrea Guerra         |       | 39         |       | 2004                               |       | Chief Executive Officer  and Director              |       |
| Tancredi Bianchi      |       | 76         |       | 1990                               |       | Director                                           |       |
| Mario Cattaneo        |       | 74         |       | 2003                               |       | Director                                           |       |
| Enrico Cavatorta      |       | 43         |       | 1999/2003                          |       | Chief Financial Officer  and Director              |       |
| Roberto Chemello      |       | 50         |       | 1979                               |       | Head of Operations and  Director                   |       |
| Claudio Del  Vecchio  |       | 47         |       | 1978                               |       | Director                                           |       |
| Sergio Erede          |       | 64         |       | 2004                               |       | Director                                           |       |
| Sabina Grossi         |       | 39         |       | 2003                               |       | Director                                           |       |
| Gianni Mion           |       | 59         |       | 2004                               |       | Director                                           |       |
| Lucio Rondelli        |       | 80         |       | 1990                               |       | Director                                           |       |
| Frank Baynham         |       | 51         |       | 1987                               |       | Executive Vice  President—Stores, Retail N.A. |       |
| Luca Biondolillo      |       | 38         |       | 2004                               |       | Head of Communications                             |       |
| Kerry Bradley         |       | 48         |       | 1988                               |       | Chief Operating Officer  of Retail N.A.            |       |
| Tom Coleman           |       | 56         |       | 1987                               |       | C.E.O.—OPSM Group                             |       |
| Enzo Damin            |       | 47         |       | 1997                               |       | Head of Human Resources                            |       |
| Jack Dennis           |       | 59         |       | 1982                               |       | C.F.O. and C.A.O. of  Retail N.A.                  |       |
| Andrea Fiabane        |       | 42         |       | 1990                               |       | Executive Vice  President, North America           |       |
| Andrea Gallina        |       | 49         |       | 1998                               |       | Head of Manufacturing,  Italy                      |       |
| Valerio Giacobbi      |       | 40         |       | 1991                               |       | E.V.P. Retail, North  America                      |       |
| Giuseppe La  Boria    |       | 46         |       | 2001                               |       | Head of Wholesale  Europe & South         |       |
| Mario Mella           |       | 40         |       | 1990                               |       | Head of Purchasing                                 |       |
| Enrico Mistron        |       | 35         |       | 1999                               |       | Group Controller                                   |       |
| Antonio Miyakawa      |       | 38         |       | 1993                               |       | Head of Wholesale and  Marketing                   |       |
| Paolo Mollo           |       | 41         |       | 1990                               |       | Head of Supply Chain  Planning and Logistics       |       |
| Mario Pacifico        |       | 42         |       | 2003                               |       | Head of Internal  Auditing                         |       |
| Claudio Renon         |       | 52         |       | 1968                               |       | Head of Product  Development                       |       |
| Umberto Soccal        |       | 54         |       | 1988                               |       | Chief Information  Technology Officer              |       |

 

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(1)                                  Exceptas otherwise specified, all ages and positions are as of December 31,2004.

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

 

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Executive officers serveat the discretion of the Board of Directors. The independent and non-executivedirectors are Messrs. Rondelli, Bianchi, Cattaneo and Mion. Mr. Eredeand Mrs. Grossi are also non-executive directors.

 

Pursuant to Italian law,we also maintain a Board of Statutory Auditors, elected at the shareholders’meeting, composed of three experts in accounting matters who are required tohave no other affiliation with Luxottica Group S.p.A. and who must satisfycertain professional and other standards. The Board of Statutory Auditors isrequired to verify that we: (i) comply with applicable law and our bylaws;(ii) respect the principles of correct administration; (iii) maintainadequate organizational structure, internal controls and administrative and accountingsystems; and (iv) ensure that our accounting system represents the factsin a fair and true manner. Although members of the Board of Statutory Auditorsare required to attend the meetings of the Board of Directors, the ExecutiveCommittee and the shareholders, they do not vote on matters submitted to suchmeetings. 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 is Chairmanof the Board, and has been since Luxottica Group S.p.A. was formed in 1961. Mr. DelVecchio also serves as Chairman of the Board of some of our significantsubsidiaries. In 1986 the President of the Republic of Italy conferred on Mr. DelVecchio the honor of Cavaliere dell’Ordine al “Merito del Lavoro” (Knight ofthe Order for Labor Merit). Mr. Del Vecchio is currently Chairman of BeniStabili S.p.A. In May 1995, he received an honorary degree in BusinessAdministration from the Ca’ Foscari University in Venice. 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.

 

**LuigiFrancavilla** joined Luxottica Group S.p.A. in 1968 and hasbeen Deputy Chairman since 1981 and a Managing Director of Luxottica S.r.l.,our principal operating subsidiary, since 1977. He also serves as a director ofseveral of our subsidiaries. From 1972 to 1977, Mr. Francavilla wasGeneral Manager of Luxottica S.r.l. and from 1969 to 1971, he served asTechnical General Manager of Luxottica S.r.l. In April 2000, he receivedan honorary degree in Business Administration from Constantinian University.

 

**AndreaGuerra**was appointed our Chief Executive Officer on July 27,2004 and his appointment as a director was confirmed at our Ordinary andExtraordinary Meeting of shareholders held on September 14, 2004. Beforejoining Luxottica, Mr. Guerra was Chief Executive Officer of MerloniGroup.

 

**TancrediBianchi** has been a director since 1990 and has been Professorof Credit and Banking at the Bocconi University in Milan since 1978. In 1959,he qualified for University teaching and began teaching Banking Technique atthe Venice University, as well as the Pisa and Rome Universities. In recentyears he joined the Board of Directors of Montedison and until 1989 was amember of the Board of Directors of Credito Bergamasco. Until 1998, Mr. Bianchiwas Chairman of the Italian Banking Association. He is currently Chairman ofCentrobanca and of Fondo Immobiliare Polis.

 

**MarioCattaneo** was elected as a director at our annual meeting ofshareholders held on June 25, 2003. Mr. Cattaneo is professor ofCorporate Finance at the Catholic University of Milan. From 1991 to 1999 he wasStatutory Auditor of the Bank of Italy. He is currently a member of the Boardof Directors of Eni S.p.A., UniCredito Italiano S.p.A. and Banca Lombarda ePiemontese S.p.A.. He is also Chairman of the Board of Directors of CBI FactorS.p.A. Mr. Cattaneo is a member of the Board of Statutory Auditors ofseveral insurance companies.

 

**EnricoCavatorta** has been Chief Financial Officer since he joinedLuxottica Group S.p.A. in 1999 and was elected as a Director at our annualmeeting of shareholders held on June 25, 2003. He also serves as Chairmanor Director of many of our subsidiaries. Prior to joining Luxottica GroupS.p.A., Mr. Cavatorta was with Piaggio S.p.A., most recently as GroupController, Director, 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, most recentlyas Controller. Mr. Cavatorta, 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.

 

**RobertoChemello** joined Luxottica Group S.p.A. in 1979, is currentlythe Head of Operations and was our Chief Executive Officer from 1985 to 2004.He also serves as Chairman or as a director of several of our subsidiaries.Prior to 1985, Mr. Chemello was our Chief Financial Officer. Mr. Chemellograduated with a degree in Business Administration from the Ca’ FoscariUniversity in Venice.

 

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**ClaudioDel Vecchio**, a son of Leonardo Del Vecchio, joined LuxotticaGroup S.p.A. in 1978 and has been a director since 1981. From 1979 to 1982, hemanaged our Italian and German distribution operations. He also serves as adirector of some of our subsidiaries. Claudio Del Vecchio is Chairman and ChiefExecutive Officer of Retail Brand Alliance, Inc., the owner of BrooksBrothers, Inc. and other clothing apparel companies.

 

**SergioErede**was elected as a director at our Ordinary andExtraordinary Meeting of shareholders held on September 14, 2004. He is anattorney and co-founder of the law firm Bonelli–Erede–Pappalardo. He is amember of the Board of Directors of Autogrill, Carraro and Marzotto andChairman of the Board of Directors of Interpump and Galbani.

 

**SabinaGrossi** joined Luxottica Group S.p.A. in 1996 as Head ofInvestor Relations and was elected as a director at our annual meeting of shareholdersheld on September 14, 2004. Prior to joining Luxottica Group S.p.A., shewas a financial analyst with Caboto Sim S.p.A. From 1991 to 1993, Ms. Grossiwas an associate professor in the school of engineering of the La SapienzaUniversity in Rome, where she taught undergraduate courses as well as publishedpapers on mathematics and statistics. Ms. Grossi, who is a C.P.A. inItaly, graduated with the highest honors from the LUISS University in Rome witha bachelor’s degree in Business Administration.

 

**GianniMion**was elected as a director at our Ordinary andExtraordinary Meeting of shareholders held on September 14, 2004. He ismember of the Board of Directors of Benetton Group, Autogrill, Autostrade,Olimpia and Telecom Italia.

 

**LucioRondelli** has been a director since 1990. Mr. Rondelliwas the Chairman of UniCredito Italiano S.p.A. until 2001, having held variouspositions with the bank continuously from 1947. Mr. Rondelli is currentlya member of the Board of Directors of Spafid, F.P., ISPI (Institute for theStudy of International Politics), Istituto Europeo di Oncologia and theChairman of Assiparos g.p.a. In 1976 he received the honor of Cavaliere di GranCroce dell’Ordine (Knight of the Great Cross Order) for merit from the Republicof Italy, and in 1986 the President of the Republic of Italy conferred on himthe honor of Cavaliere dell’Ordine al “Merito del Lavoro” (Knight of the Orderfor Labor Merit).

 

**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.

 

**LucaBiondolillo** joined Luxottica Group S.p.A. in March 2004as Head of Communications. Mr. Biondolillo was previously a vice presidentwith JPMorgan Chase in New York, where he was responsible for US-basedrelationships with the Bank’s American Depositary Receipts (ADR) clients inEurope and Asia. Mr. Biondolillo previously served as a partner withBreakstone & Ruth, a New York-based financial and media communicationsspecialist firm, and as vice president within the financial communications andinvestor relations practice of Golin/Harris, a leading public relations firmand a member of the Interpublic Group of Companies (IPG). He holds a Bachelorin Business Administration from Bernard M. Baruch College, City University ofNew York, and he is a member of the U.S. National Investor Relations Institute(NIRI) and the UK Investor Relations Society (IRS).

 

**Kerry Bradley**has been Chief Operating Officer of Retail North America since 2002, prior towhich he served as Executive Vice President of LensCrafters since June of1998. Mr. Bradley is responsible for all LensCrafters, Sunglass Hut, Coleand EyeMed sales, marketing and operations. Mr. Bradley has held variousother senior executive roles since joining LensCrafters in 1988. Mr. Bradleyhas a Master’s degree in Business from the University of Edinburgh, Scotlandand a B.S. degree in Business from Auburn University in Alabama.

 

**TomColeman** has been Chief Executive Officer of OPSM GroupLimited since 2003, which was acquired by Luxottica in 2003. Mr. Colemanis responsible for all activities of the OPSM Group which has stores inAustralia, New Zealand, Hong Kong, Singapore and Malaysia. Prior to this heserved as Executive Vice President of LensCrafters since 1997. Mr. Colemanhas held various other senior executive roles since joining LensCrafters in1987.

 

**EnzoDamin** has been Head of Human Resources since 1997. Prior tojoining Luxottica Group S.p.A., he was a Junior Consultant for AssociazioneIndustriali Bresciana, Human Resources Manager for various divisions of LaRinascente Department Stores Group and for BIC Italy. Mr. Damin graduatedwith a degree in Law from Parma University.

 

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**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. Dennisgraduated with a degree in Accounting from the University of Kentucky.

 

**AndreaFiabane** has been Executive Vice President North America since2001. Prior to assuming his current position, he was Country Manager since 1990and then Regional Manager. Mr. Fiabane graduated with a degree in BusinessAdministration from the Ca’ Foscari University in Venice.

 

**AndreaGallina** has been with Luxottica Group S.p.A. since 1998.Before joining Luxottica Group S.p.A., he was the Manufacturing Director ofAprilia, a world leader in motorcycle production. He is currently operating asHead of Manufacturing for our Italian production facilities.

 

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

 

**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.

 

**MarioMella** joined Luxottica Group S.p.A. in 1990 as a member ofour administrative department. Mr. Mella has been Chief AdministrativeOfficer of the Wholesale Division since 1993 and General Affairs Manager since2001. He is currently Head of Purchasing.

 

**Enrico Mistron**joinedLuxottica Group S.p.A. in 1995 as Financial Analyst. Since joining us, he hashandled various assignments in the Finance Department including mergers andacquisitions. Mr. Mistron earned a degree with honors in BusinessAdministration from the Ca’ Foscari University in Venice.  After graduation, Mr. Mistron wasinvolved in some research assignments for the Department of Economics at Ca’Foscari University in Venice and attended a course at SDA Bocconi in CorporateFinance. Mr. Mistron’s area of expertise is Economics and BusinessAdministration. Presently, he is Group Controller of the Luxottica Group.

 

**AntonioMiyakawa** is currently the Executive Vice President of theWholesale Division for Luxottica Group S.p.A., a position he held since 2003.Previously he was President of our Asian operations, a position he has heldsince 1999. Prior to this he served as Executive Vice President of Luxottica’sJapanese operations. Prior to joining Luxottica Group S.p.A., Mr. Miyakawawas a junior consultant for Compact S.r.l. (an Italian consulting firm) workingon various Luxottica matters.

 

**Paolo Mollo**joined Luxottica Group S.p.A. in 1990 as a member of our finance department. Mr. Mollohas been Production Planning Manager since 1993 and Logistics Manager since2000. Mr. Mollo graduated with a degree in Business Administration fromthe Ca’ Foscari University in Venice.

 

**Mario Pacifico**  has been Head of InternalAuditing since he joined Luxottica Group S.p.A in 2003. Prior to joiningLuxottica Group S.p.A., he was VP of Internal Auditing of Prada Group. From1990 to 2000, Mr. Pacifico was Controller of Eni’s upstream ItalyDivision, Chief Financial Officer of Agip Trading B.V. and an Audit Manager inAgip S.p.A. Mr. Pacifico graduated from Luigi Bocconi University in Milanwith a degree in Business Administration and Economics.

 

**ClaudioRenon** has been Head of Product Development since 1990. Beforethat time, Mr. Renon served in various capacities for Luxottica GroupS.p.A. since 1968.

 

**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.

 

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**Compensation**

 

Set forth below isinformation regarding total cash compensation paid to the members of our Boardof Directors and our Board of Statutory Auditors for services rendered toLuxottica Group S.p.A. and our subsidiaries during 2004:

 
| **Name**                                                           | ** ** | **Base Compensation  (Euro)** | ** ** | **Other  Compensation  (Euro)** | ** ** | **Total Cash  Compensation  (Euro)** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------|------------|---------------------------------|------------|--------------------------------------|------------|
| Leonardo Del Vecchio

*Chairman of the Board of  Directors*        |       | 138,928                       |       | 992,111                         |       | 1,131,039                            |       |
| Luigi Francavilla

*Deputy Chairman*                               |       | 138,448                       |       | 931,939                         |       | 1,070,387                            |       |
| Andrea Guerra

*Chief Executive Officer since  July 27, 2004* |       | 307,536                       |       | 221,521                         |       | 529,057                              |       |
| Tancredi Bianchi

*Director*                                       |       | 81,706                        |       | —                          |       | 81,706                               |       |
| Mario Cattaneo*Director*                                           |       | 71,706                        |       | —                          |       | 71,706                               |       |
| Enrico Cavatorta

*Director*                                       |       | 71,706                        |       | 384,336                         |       | 456,042                              |       |
| Roberto Chemello*Director*                                         |       | 87,354                        |       | 880,207                         |       | 967,561                              |       |
| Claudio Del Vecchio*Director*                                      |       | 71,706                        |       | 294,097                         |       | 365,803                              |       |
| Sergio Erede*Director since September 14, 2004*               |       | 27,066                        |       | —                          |       | 27,066                               |       |
| Sabina Grossi*Director*                                            |       | 79,818                        |       | 118,858                         |       | 198,676                              |       |
| Gianni Mion*Director since September 14, 2004*                |       | 27,066                        |       | —                          |       | 27,066                               |       |
| Lucio Rondelli*Director*                                           |       | 102,354                       |       | —                          |       | 102,354                              |       |
| Giancarlo Tomasin*Chairman of the Board of Statutory Auditors*     |       | 80,150                        |       | —                          |       | 80,150                               |       |
| Mario Medici*Member of the Board of Statutory Auditors*            |       | 53,333                        |       | 16,700                          |       | 70,033                               |       |
| Walter Pison*Member of the Board of Statutory Auditors*            |       | 54,173                        |       | 63,800                          |       | 117,973                              |       |

 

Aggregate compensationpaid by us to our senior management (excluding directors) as a group (17people) was approximately Euro 6.1 million in 2004, of which approximately Euro1.0 million represented provision for termination indemnities and socialsecurity charges required by Italian law. Members of this group were alsogranted in 2004 options to purchase an aggregate of 634,500 of our ordinary sharesat an exercise price of Euro 13.79 per share. These options expire on January 31,2013. Additionally, in 2004 certain members of this group were granted optionsto purchase our ordinary shares under two separate grants, each of whichprovided for the options to vest only if certain economic or financialconditions were met in the future. In September 2004, our Chairman andmajority shareholder allocated 9,600,000 of our shares that he holds to a stockoption plan for top management. The members of this management group received2,400,000 options to purchase our shares exercisable at Euro 13.67. The optionsvest only upon meeting certain economic objectives and, if vested, terminate in2014. In October 2004, under an incentive plan covering 1,000,000 ordinaryshares, members of this management group received 680,000 options to purchaseshares exercisable at a price of U.S. $18.59 per share. These options becomeexercisable upon the meeting of certain financial performance measures over theperiod ending December 2006.

 

The aggregate amount setaside or accrued during the year ended December 31, 2004 to providepension and retirement benefits for our directors who are also members of ourmanagement was Euro 203,000. Our directors who are not members of management donot receive such benefits.

 

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**Employees**

 

As of December 31,2004, we employed approximately 55,000 employees worldwide, of whomapproximately 40,800 were employed in the United States and 5,800 were employedin Italy. As of such date, about 100 employees were in management positions,approximately 8,800 were employed in our manufacturing and wholesale segmentand approximately 46,100 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 barginingagreements described below, none of our employees in the United States arecovered by collective bargaining agreements. We have enjoyed generally goodrelations with our employees.

 

Employment agreements inItaly are generally collectively negotiated between the national association ofcompanies within a particular industry and the respective national unions.Individual companies must enter into contracts with their employees based onthe relevant collective agreement. The agreement for optical workers, which ispart of the national textile agreement, covers approximately 5,590 of ouremployees. This agreement was renewed in May 2004. We expect an averagewage increase rate of three percent per year under the new agreements. Theagreement for mechanical workers, which covers approximately 210 of ouremployees, was renegotiated in 2002. In addition to the national collective bargainingagreement for workers, we typically enter into separate, local contracts withlabor unions representing our employees. In December 2002, we renewed alocal agreement with optical workers, supplementing the terms of the nationaltextile contract. This new agreement, covers approximately 5,590 employees andprovides for a variable wage related to our financial results, instead of anincreasing wage base. Moreover, we have decided to increase the number ofpart-time positions. We have also recently established a regular long-termtraining program which is aimed at a large number of employees. In 2003, weextended the training program to all middle management in Italy.

 

In November 2004, anagreement with the local union representing employees at IC Optics S.p.A. wassigned to provide an indemnity fund for all the employees until December 2005,which includes those workers who still depend from this indemnity.

 

Italian law providesthat, upon termination of employment, employees are entitled to receive certaincompulsory separation payments based on their compensation levels and length ofemployment. As of December 31, 2004, we had reserved Euro52.7 million for such separation payments in our consolidated financialstatements.

 

Pearle Vision currently has two collective bargainingagreements 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 16 Pearle Vision employees holding the positions of LabAssociate, Lead Lab Associate, Sales Associate and Optician.  The other collective bargaining agreement,between Pearle Vision and the Local 108, Retail, Wholesale and Department StoreUnion, is set to expire December 31, 2006 (the “103 CBA”).  The 103 CBA covers 79 Pearle Vision employeesholding the positions of Lab Associate, Lead Lab Associate, Sales Associate andOptician.

 

**Share Ownership**

 

Set forth below iscertain information concerning the beneficial ownership of our ordinary sharesas of June 15, 2005, 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 15, 2005** | ** ** | **Percentage  Ownership** | ** ** |
|-----------------------|------------|------------------------|------------|--------------------------------------------|------------|---------------------------|------------|
| Leonardo Del  Vecchio |       | Luxottica Group S.p.A. |       | 314,803,339                                | (1)        | 69.97                     | %          |

 

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(1)                                  Includes78,839,690 shares held of record by Delfin S.r.l., 65,553,649 shares heldof record by La Leonardo Finanziaria S.r.l. and 170,410,000 shares held ofrecord by Leoinvest S.r.l.. Delfin S.r.l., La Leonardo Finanziaria S.r.l. andLeoinvest S.r.l. are entities established and controlled by Mr. DelVecchio, and Mr. Del Vecchio holds voting and investment power over theshares held by such entities.

 

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Except as otherwiseindicated above, each of our directors and our executive officers owns lessthan one percent of our outstanding ordinary shares.

 

In March 1998, weadopted 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 .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.

 

As of December 31,2004, there had been ten separate grants under the option plans describedabove, 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  |                                                 | 155,000    |   |
| **1999  Grant**               |       | 3,679,200                                                      |       | Euro                   | 4.38       |                | January 31, 2008  |                                                 | 165,800    |   |
| **2000  Grant**               |       | 2,142,200                                                      |       | Euro                   | 9.52       |                | January 31, 2009  |                                                 | 306,000    |   |
| **2001  Grant**               |       | 2,079,300                                                      |       | U.S. $                 | 15.20      |                | January 31, 2010  |                                                 | 285,600    |   |
| **2002  Incentive (3)**       |       | 1,170,000                                                      |       | U.S. $                 | 16.06      |                | January 31, 2010  |                                                 | 870,000    |   |
| **2002  Grant**               |       | 2,348,400                                                      |       | U.S. $                 | 17.80      |                | January 31, 2011  |                                                 | 302,700    |   |
| **2003  Grant**               |       | 2,397,300                                                      |       | Euro                   | 10.51      |                | January 31, 2012  |                                                 | 324,300    |   |
| **2004  Grant**               |       | 2,035,500                                                      |       | Euro                   | 13.79      |                | January 31, 2013  |                                                 | 846,000    |   |
| **2004  Extraordinary Grant** |       | 1,000,000                                                      |       | U.S. $                 | 18.59      |                | January 31, 2012  |                                                 | 680,000    |   |
| **2004  Incentive**           |       | 9,600,000                                                      |       | Euro                   | 13.67      |                | December 31, 2014 |                                                 | 9,600,000  |   |

 

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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 2004.

 

(3)           The performance targets for this planwere not met and therefore the options were terminated without vesting in 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 corporate governance rules forlisted companies. Under the new NYSE rules, we are permitted, as a listedforeign private issuer, to adhere to the corporate governance standards of ourhome country in lieu of certain NYSE corporate governance rules so long aswe disclose the significant ways in which our corporate governance practicesdiffer from those followed by U.S. companies under the NYSE listing standards.

 

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Our corporate governancepractices are governed principally by the Italian Code of Corporate Governanceissued by Borsa Italiana and generally by the rules and regulations ofCommissione Nazionale per le Società e la Borsa, or CONSOB, for Italiancompanies (collectively, the “Italian Corporate Governance Policies”).

 

The following is a briefsummary of the significant differences between our corporate governance practicesin accordance with the Italian Corporate Governance Policies and those followedby U.S. companies under the NYSE listing standards.

 

*Compositionof Board of Directors; Independence*

 

The NYSE listingstandards provide that the board of directors of a U.S. listed company mustconsist of a majority of independent directors and that certain committees mustconsist solely of independent directors. A director qualifies as independentonly if the board affirmatively determines that the director has no material relationshipwith the company, either directly or indirectly. The listing standardsenumerate a number of relationships that preclude independence. In addition,non-management directors of a U.S. listed company are required to meet atregularly scheduled executive sessions without management.

 

The Italian CorporateGovernance Policies recommend that an “adequate number” of non-managementdirectors serve on the board of directors of an Italian company, but do notrequire the board of directors to consist of a majority of independentdirectors. The standards for determining director independence under theItalian Corporate Governance Policies are substantially similar to the NYSElisting standards for U.S. listed companies. The Italian Corporate Governance Policiesdo not require our non-management directors to meet at executive sessionswithout management.

 

Based on standards underthe Italian Corporate Policies, our Board of Directors has determined that,among its 12 members, four directors are independent. This number ofindependent directors complies with the “adequate number” of non-managementdirectors recommended by the Italian Corporate Governance Policies. Luxottica’snon-management directors do not have regularly scheduled executive sessionswithout management.

 

*BoardCommittees*

 

The NYSE listingstandards require a U.S. listed company to have an audit committee, anominating/corporate governance committee and a compensation committee. Each ofthese committees must consist solely of independent directors and must have awritten charter that addresses certain matters specified in the listingstandards. The NYSE listing standards contain detailed requirements for theaudit committees of U.S. listed companies. Commencing on July 31, 2005,some, but not all, of these requirements will also apply to non-U.S. listedcompanies, such as us. For the time being, however, the NYSE listing standardsdo not require non-U.S. listed companies, such as us, to have an auditcommittee.

 

In anticipation of such requirement, 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 will act as the Audit Committeebeginning with the annual meeting of shareholders to be held in 2006.  Beginning on July 31, 2005 and until theannual meeting of shareholders to be held in 2006, the Board of Directors hasdetermined that “within the scope of the tasks assignable by the Board ofDirectors,” the functions of the Audit Committee will be performed by theInternal Control Committee.  Additionalinformation regarding our Internal Control Committee and Board of StatutoryAuditors is set forth below.

 

Italian law requiresneither the establishment of board committees nor the adoption of writtencommittee charters. With respect to the nomination of directors, the ItalianCorporate Governance Policies recommend that each Italian listed company filewith its registered office, at least ten days before its annual meeting ofstockholders, a list of the personal and professional qualifications of eachproposed director nominee. The Italian Corporate Governance Policies alsorecommend that, if an Italian listed company appoints a committee to select, orrecommend the selection by the board of directors of, director nominees for thenext annual meeting of stockholders, a majority of this committee be comprisedof non-management directors. Our director nominees are selected by our entireBoard of Directors, and we comply with the Italian Corporate GovernancePolicies’ recommendation that we timely file with our registered office a listof the personal and professional qualifications of each of our proposeddirector 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-management directors. In accordance with Italianlaw, our Executive 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.

 

*Internal Control Committee*

 

Our Internal Control Committee consists of threeindependent 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.  The committee reports to the Board ofDirectors at least twice a year.

 

*Board ofStatutory Auditors*

 

Our Board of StatutoryAuditors is appointed by our stockholders and serves for a period of threeyears. Italian law establishes the qualifications of candidates that may beappointed as members of the Board of Statutory Auditors, including therequirement that members not concurrently serve on the listed company’s boardof directors. Our By-Laws are required to ensure that at least one member ofthe 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.

 

The Board of StatutoryAuditors oversees our compliance with our By-laws and applicable laws and theadequacy of our internal control system and accounting and administrativesystem. The Board of Statutory Auditors is required to attend all meetings ofour stockholders and the meetings of our Board of Directors and our ExecutiveCommittee. 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*

 

The NYSE listingstandards require U.S. listed companies to adopt, and post on their websites, aset of corporate governance guidelines. The guidelines must address, amongother things, director qualification standards, director responsibilities,director access to management and independent advisers, director compensation,director orientation and continuing education, management succession, and anannual performance evaluation. In addition, the chief executive officer of aU.S. listed company must certify to the NYSE annually that he or she is notaware of any violations by the company of the NYSE’s corporate governancelisting standards. The certification must be disclosed in the company’s annualreport to stockholders. Italian law does not require any such certification bythe Chief Executive Officer.

 

Italian CorporateGovernance Policies require that listed companies annually report to theirshareholders 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*

 

The NYSE listingstandards require each U.S. listed company to adopt, and post on its website, acode of business conduct and ethics for its directors, officers and employees.There is no similar requirement or recommendation under Italian law. However,under SEC rules, all companies required to submit periodic reports to the SEC,including us, must disclose in their annual reports whether they have adopted acode of ethics for their principal executive officer and senior financialofficers. In addition, they must file a copy of the code with the SEC,post the text of the code on their website or undertake to provide a copy uponrequest to any person without charge. There is significant, though notcomplete, overlap between the code of business conduct and ethics required bythe NYSE listing standards and the code of ethics for senior financial officersrequired by the SEC’s rules.

 

Unlike the NYSE listingstandards, the Italian Corporate Governance Policies do not require us to adopta code of business conduct and ethics. In accordance with SEC rules, however,we have adopted a Code of Ethics, which contains provisions in compliance withSEC requirements. Our Code of Ethics is available on our website at *www.luxottica.com*.

 

*StockholderApproval of Equity Compensation Plans*

 

The NYSE listingstandards require U.S. listed companies to seek stockholder approval forcertain equity compensation plans. Italian law requires Italian listedcompanies to submit any capital increases of shares reserved for issuance undertheir equity compensation plans to stockholders for their approval at theannual meeting of stockholders. In accordance with the Italian CorporateGovernance Policies, our stockholders approved capital increases of sharesreserved for issuance under our existing stock option plans in 1998 and 2001.

 

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**ITEM 7. MAJOR SHAREHOLDERS****AND RELATEDPARTY TRANSACTIONS**

 

**Major Shareholders**

 

The following table setsforth, as of June 15, 2005, the beneficial ownership of 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)        | 69.97                 | %          |
| Giorgio Armani                               |       | 22,724,000                  |       | 5.05                  | %          |
| Directors and  Executive Officers as a Group |       | 322,910,443                 | (2)        | 71.77                 | %          |

 

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(1)                                Includesordinary shares held by entities controlled by Mr. Del Vecchio andordinary shares represented by ADSs over which Mr. Del Vecchio controlsthe power to vote. See Item 6—“Directors, Senior Management and Employees—ShareOwnership.”

 

(2)                                Includesordinary shares represented by ADSs owned by directors and members of seniormanagement.

 

The ordinary shares heldby Mr. Del Vecchio, Mr. Armani and our other directors and executiveofficers have the same voting rights as the shares held by other shareholders.

 

Mr. Del Vecchiobeneficially owns approximately 69.97 percent of our outstanding ordinaryshares (including any shares represented by ADSs) and serves as Chairman of ourBoard of Directors. We are not otherwise directly or indirectly owned orcontrolled by another corporation or by any foreign government.

 

To the best of ourknowledge, to date there are no arrangements which may result in a change ofcontrol of Luxottica Group S.p.A.

 

**Related Party Transactions**

 

*Fixed Assets*

* *

In January 2002, a subsidiary of ours acquiredcertain assets for Euro 28.5 million and assumed a bank loan from “PartimmoS.a.S.”, a company owned by our Chairman. The assets acquired were a building,and all improvements thereto, for a total cost of Euro 42.0 million. Werecorded these assets at their historic cost. Our headquarters are located inthis building. The bank loan acquired had an outstanding balance of Euro 20.6million on such date. In November 2004, the loan was fully repaid. In connectionwith the acquisition of this building, our subsidiary entered into an agreementleasing a portion of this building to our Chairman for Euro 0.5 millionannually. The expiration date of this lease is 2010.

 

*Investment*

* *

 Prior to 2002,a U.S. subsidiary of ours held 1,205,000 of our ordinary shares, which had beenpreviously purchased at a cost of U.S. $3.1 million (Euro 2.4 million athistorical exchange rates). These shares were sold during 2002 for U.S. $8.8million (Euro 9.3 million). An after-tax net gain of U.S. $6.5 million (Euro6.9 million) was recorded as an increase to our additional paid-in capitalbalance. Approximately 63 percent of these shares were sold to a related partywith an after-tax net gain of U.S. $ 4.3 million (Euro 4.4 million).

 

*License Agreement*

* *

 We have aworldwide exclusive license agreement to manufacture and distribute ophthalmicproducts under the Brooks Brothers name. The Brooks Brothers tradename is ownedby Retail Brand Alliance, Inc., which is controlled by Claudio DelVecchio, one of our directors. The license agreement expired on March 31,2003 and was renewed in January 2005. For the fiscal year 2004 conditionswere not changed and royalties paid to Retail Brand Alliance, Inc. forsuch agreement were Euro 1.4 million, Euro 1.1 million and Euro 0.9 million inthe years ended December 31, 2002, 2003 and 2004, respectively.

 

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In July 2004, we signed a worldwide exclusivelicense agreement to manufacture and distribute ophthalmic products under thename of Adrienne Vittadini. The Adrienne Vittadini tradename is owned by RetailBrand Alliance, Inc., which is controlled by Claudio Del Vecchio, one ofour directors. The license agreement expires on December 31, 2007. For theyear ended December 31, 2004, royalties paid to Retail Brand Alliance, Inc.for such agreement were Euro 0.1 million.

 

*Stock Incentive Plan*

* *

On September 14, 2004, our Chairman and majorityshareholder, Mr. Leonardo Del Vecchio, had allocated shares held throughLa Leonardo Finanziaria S.r.l., an Italian holding company of the Del Vecchiofamily, representing 2.11 percent (or 9.6 million shares) of the Company’scurrently authorized and issued share capital, to a stock option plan for ourtop management. The stock options to be issued under the stock option plan vestupon meeting certain economic objectives. As such, compensation expense will berecorded for the options issued to management under this plan based on themarket value of the underlying ordinary shares only when the number of sharesto be vested and issued is known.

 

**ITEM 8. FINANCIAL****INFORMATION**

 

**Financial Statements**

 

See Item 18—“FinancialStatements.”

 

**Legal Proceedings**

 

The Company and itssubsidiaries are involved in the following legal and regulatory proceedings ofwhich the timing and outcomes are inherently uncertain, and such outcomes couldhave a material adverse effect on the Company’s business, financial position oroperating results.

 

*OakleyPatent Infringement and Related Claims*

 

Luxottica Group S.p.A.and certain of our subsidiaries were named as defendants in an action filed inthe U.S. District Court for the Central District of California for patentinfringement and related claims originally commenced by Oakley, Inc. (“Oakley”)in 1998 against Bausch & Lomb Incorporated and certain of itssubsidiaries for alleged infringement of certain patents owned by Oakley.Luxottica Group S.p.A. and certain of our subsidiaries were named as defendantsbecause, in connection with our acquisition of the Ray-Ban business in 1999, weassumed certain of Bausch & Lomb’s liabilities, including thepotential liability for the alleged patent infringement. In November 2001,Oakley filed a second action in the same court naming Luxottica Group S.p.A. andcertain of our subsidiaries as defendants, alleging that the defendantspurportedly misappropriated what Oakley claimed are certain of its trade dress,allegedly consisting of sunglasses that feature coordinated colored lenses,frames and ear stems. The complaint also asserted that two colors of lenscoatings used in manufacturing by us and our subsidiaries infringe on an Oakleypatent that is also involved in the first action. In November 2001, thecourt granted a preliminary injunction that prohibits the defendants fromoffering, selling and importing sunglasses featuring the lenses having thecoating. In December 2002, the defendants filed an answer andcounterclaims, denying the allegations in Oakley’s complaint in all materialrespects. In April 2003, the parties entered into a settlement agreement,pursuant to which neither party admitted any wrongdoing, and all of the casesand counterclaims described above were dismissed with prejudice, and thepreliminary injunction described above was dissolved.

 

*SunglassHut Shareholder Lawsuit*

 

In May 2001, certainformer stockholders of Sunglass Hut International, Inc., or Sunglass Hut,commenced an action in the U.S. District Court for the Eastern District of NewYork against Luxottica Group S.p.A., its acquisition subsidiary formed toacquire Sunglass Hut and certain other defendants, on behalf of a purportedclass of former Sunglass Hut stockholders. The action alleges in the originaland in the amended complaint filed later, among other claims, that the defendantsviolated certain provisions of U.S. securities laws and rules thereunder,in connection with the acquisition of Sunglass Hut in a tender offer andsecond-step merger, by reason of entering into a consulting, non-disclosure andnon-competition agreement prior to the commencement of the tender offer withthe former chairman of Sunglass Hut, which purportedly involved payingconsideration to such person for his Sunglass Hut shares and his support of thetender offer that was higher than that paid to Sunglass Hut’s

 

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stockholders in thetender offer. The plaintiffs are seeking, among other remedies, the payment ofsuch higher consideration to all tendering shareholders, other than LuxotticaGroup S.p.A. and its affiliates.

 

Luxottica Group S.p.A.and the other defendants filed a motion to dismiss the complaint in itsentirety which, on November 26, 2003, the Court granted in part and deniedin part. The Court granted Luxottica Group S.p.A.’s motion to dismissplaintiffs’ claim under Section 10(b) of the Securities Exchange Actof 1934 and Rule 10b-5 thereunder, but denied our motion to dismiss theclaim under Rule 14d-10 relating to the consulting, non-disclosure andnon-competition agreement with Mr. Hauslein, the former Chairman ofSunglass Hut, and the claim of aiding and abetting alleged breaches by SunglassHut’s former directors of their fiduciary duties, noting that it was obligated,for the purpose of rendering its decision on the motion to dismiss, to treatall of the plaintiffs’ 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.

 

An October 31, 2005trial date has been set for this proceeding.

 

We continue to believethat the claims that were not dismissed are without merit and that our defensesare meritorious, and will continue to defend against such claims vigorously.However, we can provide no assurance as to the outcome of the case.

 

*CaliforniaVision Health Care Service Plan Lawsuit*

 

In March 2002, an individual commenced an actionin the California Superior Court for the County of San Francisco againstLuxottica Group S.p.A. and certain of our subsidiaries, including LensCrafters, Inc.and EYEXAM of California, Inc. The plaintiff, along with a secondplaintiff named in an amended complaint, seeks to certify this case as a classaction.  The claims have been partiallydismissed.  The remaining claims, againstLensCrafters, EYEXAM and EyeMed Vision Care, LLC, allege various statutoryviolations relating to the operation of LensCrafters’ stores in California,including violations of California laws governing relationships amongopticians, 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 in California.Further, LensCrafters, EYEXAM and EyeMed might be required to pay damagesand/or restitution, the amount of which might have a material adverse effect onour operating results, financial condition and cash flow.

 

*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 Pearle Vision, Inc.and Pearle Vision Care, Inc. The claims allege various statutoryviolations related to the operation of Pearle Vision Centers in Californiaincluding violations of California laws governing relationships amongopticians, 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, civil penalties and injunctive relief,including an injunction that would prohibit defendants from providing eyeexaminations 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 appellate court issued an opinion in which it stated that becauseCalifornia law prohibited defendants from providing eye examinations and otheroptometric services at Pearle Vision Centers, the trial court should have enjoineddefendants from advertising the availability of eye examinations at PearleVision 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 defendants fromadvertising these activities was stayed pending the Supreme Court’s resolutionof the issue.  The Supreme Court has notyet

 

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scheduled oral argumenton that appeal. Although we believe that Cole’s operational practices andadvertising in California comply with California law, the appellate ruling may,if unmodified by the Supreme Court, compel Cole and its subsidiaries to modifyor close their activities in California. Further, Cole and its subsidiariesmight be required to pay civil penalties, damages and/or restitution, theamount of which might have a material adverse effect on our operating results,financial condition and cash flow.

 

*Cole SECInvestigation*

 

FollowingCole’s announcement in November 2002 of the restatement of its financialstatements, the Securities and Exchange Commission (“SEC”) began an investigationinto Cole’s previous accounting.  The SECsubpoenaed various documents from Cole and deposed numerous former officers,directors and employees of Cole.  Thecourse of this investigation or other litigation or investigations arising outof the restatement of Cole’s financial statements cannot be predicted. Inaddition, under certain circumstances Cole would be obliged to indemnify theindividual current and former directors and officers who are named asdefendants in litigation or who are or become involved in an investigation.Cole is honoring its obligations to advance reasonable attorneys’ fees incurredby current and former officers and directors who are involved in the SECinvestigation subject to undertakings provided by such individuals. Cole hasinsurance available with respect to a portion of these indemnificationobligations. If the investigation develops into litigation and Cole is notsuccessful in defending against that litigation, or is obligated to indemnifyindividuals who do not succeed in defending against such litigation, there maybe a material adverse effect on our financial condition, cash flow and resultsof operations.

 

*AntitrustInvestigation by the Attorney General of the State of New York*

 

In December 2002, we were informed that theAttorney General of the State of New York had begun an investigation into theCompany’s pricing and distribution practices relating to sunglasses underapplicable state and U.S. federal antitrust laws.  The office of theAttorney General recently advised the Company that it has closed itsinvestigation without taking any action whatsoever against the Company.

 

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

 

On August 29, 2003,the Securities Appellate Tribunal, or SAT, in India upheld the order of theSecurities 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 19 million,including stipulated interest increments.

 

*ColeNational Shareholder Class Action*

 

On July 14, 2004, a shareholder of Cole filed ashareholders’ class action complaint against Cole, its directors and theCompany in the Delaware Chancery Court, known as Pfeiffer v. Cole NationalCorp., et al., Civil Action No. 569-N. The complaint alleges, among otherthings, that the individual defendants breached their fiduciary duties asdirectors and/or officers to Cole by causing Cole to enter into an agreement tobe acquired by the Company for $22.50 per share “without having exposed thecompany to the marketplace through fair and open negotiations with allpotential bidders and/or an active market check or open auction for sale of thecompany.” The complaint seeks preliminary and permanent injunctive reliefagainst the merger, rescission of the merger if it is consummated, and/ordamages and other associated relief. No answer has yet been served to thiscomplaint. The Company believes that the action is without merit.

 

It is the opinion ofmanagement that the outcome of existing claims against us will not have amaterial adverse effect on our consolidated financial position or results ofoperations. However, the outcome of these litigation claims is inherentlyuncertain, and there can be no assurance that one or more of these actions, ifadversely determined, will not have a material adverse effect on our business,results of operations and financial condition. In addition, we may be subjectto material claims,

 

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judgments or proceedingsin the future which, if adversely determined, may have a material adverseeffect on our business, results of operations and financial condition. See Item3—”Key Information—Risk Factors—Our business could be adversely affected bylegal proceedings to which we are, or may become, a party.”

 

**Dividend Distributions**

 

See Item 3—“KeyInformation—Dividends” and Item 10—“Additional Information.”

 

**Significant Changes**

 

Except as otherwiseindicated above, no significant changes have occurred since the date of ourannual financial statements included in this Form 20-F.

 

**ITEM 9.  THEOFFER****AND LISTING**

 

Our ordinary shares wereapproved for trading on the Italian Stock Exchange on December 4, 2000.Our ADSs were admitted for trading on the New York Stock Exchange on January 24,1990. Our ADSs are evidenced by ADRs issuable by The Bank of New York, asdepositary, pursuant to a Deposit Agreement.

 

The table below setsforth, for the periods indicated, high and low closing prices of the ADSs onthe New York Stock Exchange (in U.S. dollars) and ordinary shares on theItalian Stock Exchange (in Euro). All amounts are adjusted to reflect thetwo-for-one stock split which occurred in 2000.

 
| ** **         | ** ** | **New York Stock Exchange** | ** ** | **Italian Stock Exchange** | ** ** |
|--------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **         | ** ** | **(in U.S. $)**             | ** ** | **(in Euro)**              | ** ** |
| ** **         | ** ** | **High**                    | ** ** | **Low**                    | ** ** | **High** | ** ** | **Low** | ** ** |
|               |       |                        |       |                       |       |   |   |   |   |
| **2000**           |       | 17.00                       |       | 7.97                       |       | 17.62 |   | 15.24 |   |
| **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 |   |
| First Quarter      |       | 14.05                       |       | 10.23                      |       | 13.48 |   | 9.25 |   |
| Second Quarter     |       | 14.11                       |       | 10.69                      |       | 12.37 |   | 9.85 |   |
| Third Quarter      |       | 15.48                       |       | 13.73                      |       | 13.96 |   | 11.67 |   |
| Fourth Quarter     |       | 18.15                       |       | 14.40                      |       | 14.82 |   | 12.35 |   |
| **2004**           |       |                        |       |                       |       |   |   |   |   |
| First Quarter      |       | 17.85                       |       | 15.18                      |       | 14.08 |   | 12.44 |   |
| Second Quarter     |       | 16.90                       |       | 15.18                      |       | 13.98 |   | 12.83 |   |
| Third Quarter      |       | 17.85                       |       | 16.30                      |       | 14.55 |   | 13.36 |   |
| Fourth Quarter     |       | 20.39                       |       | 17.99                      |       | 15.40 |   | 14.38 |   |
| December 2004 |       | 20.39                       |       | 19.22                      |       | 15.03 |   | 14.40 |   |
| **2005**           |       |                        |       |                       |       |   |   |   |   |
| January 2005  |       | 21.67                       |       | 20.06                      |       | 16.61 |   | 15.13 |   |
| February 2005 |       | 21.99                       |       | 20.55                      |       | 17.02 |   | 15.76 |   |
| March 2005    |       | 21.30                       |       | 20.40                      |       | 16.22 |   | 15.45 |   |
| April 2005    |       | 21.08                       |       | 19.69                      |       | 16.51 |   | 15.33 |   |
| May 2005      |       | 20.75                       |       | 19.78                      |       | 16.91 |   | 15.43 |   |

 

The high and low closingprices of the ADSs on the New York Stock Exchange for the first quarter of 2005were U.S. $21.99 and U.S. $20.06, respectively. The high and low closing pricesof the ordinary shares on the Italian Stock Exchange for the first quarter of2005 were Euro 17.02 and Euro 15.13, respectively.

 

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**ITEM 10. ADDITIONAL****INFORMATION**

 

**Memorandum and Articles ofAssociation as of December 31, 2004**

 

*Our Objectives*

 

Our Articles ofAssociation provide that Luxottica Group S.p.A.’s principal objectives are,among other things, (i) the ownership and management of other companies orentities both in Italy and abroad, (ii) financing and managerialcoordination 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*

 

The Board of Directors isinvested with the fullest powers for ordinary and extraordinary management ofthe company, except for the acts that the law reserves for shareholders’meetings. Compensation of the directors is determined by our Board of Directorsand approved by the ordinary shareholders at the annual meeting of shareholders.

 

Directors are not required to hold ordinary shares ofLuxottica Group S.p.A. as a qualification for office.

 

**Rights Attaching to OrdinaryShares**

 

*Dividends*

 

We are required to pay anannual dividend on the ordinary shares if approved by a majority ofshareholders at the annual general meeting that must be held within 180 daysafter the end of each year. Before dividends may be paid with respect to theresults of any year, an amount equal to five percent of our net income for suchyear must be set aside to the legal reserve until the reserve, includingamounts set aside during prior years, is equal to at least one-fifth of thenominal value of our issued share capital. See Item 3—“KeyInformation—Dividends.”

 

Future determinations asto dividends will depend upon, among other things, our earnings, financialposition and capital requirements, applicable legal restrictions and such otherfactors as the Board of Directors and shareholders may determine. Dividends areusually paid in accordance with the dates set annually by Borsa Italiana S.p.A.Dividends which are not collected within five years of the date on which theybecome payable are forfeited. Dividends are paid to those persons who hold theordinary shares through an intermediary on a dividend payment date declared atthe shareholders’ meeting. The intermediary, upon request by the shareholder,issues a certified statement of account allowing the shareholder to collect thedividends.

 

If dividends are notdistributed and an appropriate reserve is created, the shareholders can adopt aresolution, at an extraordinary meeting, to convert such reserve into capital.In this case, the shares resulting from the increase are attributable to theshareholders in proportion to their ownership before the increase.

 

*Notification of the Acquisition of Shares andVoting Rights*

 

Pursuant to Italiansecurities laws and CONSOB (the Italian securities regulatory authority)implementing regulations thereof, any person acquiring any interest in excessof two percent in the voting shares of a listed company must give noticeto CONSOB and the company whose shares are acquired. The voting rightsattributable to the shares in respect of which such notification has not beenmade may not be exercised. Any resolution taken in violation of the foregoingmay be annulled if the resolution would not have been passed in the absence ofsuch votes.

 

In addition, any personwhose aggregate shareholding in a listed company exceeds or falls belowtwo percent, five percent, 7.5 percent, ten percent and successivepercentage multiples of five, respectively, of the listed company’s votingshare capital is obligated to notify CONSOB and the listed company whose sharesare acquired or disposed. For the purpose of calculating these ownership thresholds,shares owned by any person, irrespective of whether the relative voting rightsare exercisable by such person or by a third party, are taken intoconsideration and, except in certain circumstances, account should also betaken of shares held through, or shares the voting rights of which areexercisable by, subsidiaries, fiduciaries or intermediaries. For the purpose ofcalculating 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

 

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exercise of a warrant orconversion right which is exercisable within 60 days, should also be takeninto account. The notification obligation is to be repeated when such person,upon the exercise of the right referred to in (i) or (ii) above,acquires or disposes of shares which causes his aggregate ownership in thelisted company to exceed or fall below the relevant thresholds. Notificationshould be made (except in certain circumstances) within five trading days ofthe event that gives rise to the notification obligation.

 

Cross ownership between listed companies may notexceed two percent of their respective voting shares and cross ownershipbetween a listed company and an unlisted company may not exceed two percent ofthe voting shares of the listed company and ten percent of the voting shares ofthe unlisted company. If the relevant threshold is exceeded, the company whichis the latter to exceed such threshold may not exercise the voting rightsattributable to the shares in excess of the threshold and must sell the excessshares within a period of twelve months. If the company does not sell theexcess shares within twelve months, it may not exercise the voting rights inrespect of its entire shareholding. If it is not possible to ascertain which isthe later company to exceed the threshold, subject to any different agreementbetween the two companies, the limitation on voting rights and the obligationto sell the excess shares will apply to both of the companies concerned. Thetwo percent limit for cross ownership is increased to five percent on thecondition that such limit is only exceeded by the two companies concernedfollowing an agreement authorized in advance by an ordinary shareholders’meeting of each of the two companies. Furthermore, if a party holds an interestin excess of two percent of a listed company’s share capital, such listedcompany or the party which controls the listed company may not purchase aninterest above two percent in a listed company controlled by the first party.In case of non-compliance, voting rights attributable to the shares held inexcess may not be exercised. If it is not possible to ascertain which is thelater party to exceed the limit, the limitation on voting rights will, subjectto different agreement between the two parties, apply to both. Any shareholders’resolution taken in violation of the limitation on voting rights may beannulled by the relevant court if the resolution would not have been passed inthe absence of such votes. The foregoing provisions in relation to crossownership do not apply when the thresholds are exceeded following a publictender offer aimed at acquiring at least 60 percent of the company’sshares.

 

The validity of anyagreement which governs the voting rights of the shares of a listed company orof its parent company is subject to the notification of such agreement toCONSOB, the publication of a summary of such agreement in the press and thefiling of the agreement with the Register of Enterprises, in each case, withinfive days, ten days and 15 days, respectively, of the date of theagreement. Failure to comply with the foregoing requirements will render theagreement null and void and the voting rights of the relative shares cannot beexercised.

 

The agreements subject tothe above include those which: (i) regulate the exercise of, or priorconsultation for the exercise of voting rights in, a listed company or itscontrolling company; (ii) contain limitations on the transfer of shares orsecurities which grant the right to purchase or subscribe for shares; (iii) providefor the purchase of shares or securities mentioned in (ii); or (iv) haveas their object or effect the exercise (including joint exercise) of a dominantinfluence over the company.

 

Any agreement of thenature described above can have a legal maximum term of three years (and may berenewed for an additional three-year term at its expiration), and if executedfor an unlimited term shall otherwise expire three years after its execution.Any such agreement executed for an unlimited term can be terminated by a partyupon six months’ prior notice. In the case of a public tender offer, shareholderswho intend to participate in the tender offer may withdraw from the agreementwithout notice. CONSOB Regulation 11971/99 contains provisions whichgovern the method and content of the notification and publication of theagreements as well as any subsequent amendments thereto.

 

*General Meetings*

 

Meetings of theshareholders may be held at our executive offices in Italy, in any country inthe European Union and in the U.S., following publication of notice of themeeting including the agenda in the “Gazzetta Ufficiale” at least 30 daysbefore the date fixed for the meeting. The Bank of New York will mail toall record holders of ADRs a notice containing a summary of the information containedin any notice of a shareholders’ meeting received by The Bank of New York.See “—Documents on Display.”

 

Meetings of shareholdersmay be either ordinary meetings or extraordinary meetings. Shareholders’meetings may be called by the Board of Directors or the Board of StatutoryAuditors. In the case of a listed company in Italy, Decree n. 58/98provides that shareholders’ meetings must be convened upon the request ofholders of ten percent of the issued and outstanding share capital within30 days following receipt of such a request, provided that the requestcontains a summary of the matters to be discussed. The Board of Directors may,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.

 

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Holders of ordinaryshares are entitled to attend and vote at ordinary and extraordinaryshareholders’ meetings. Each holder is entitled to cast one vote for eachordinary share held. Votes may be cast personally or by proxy, in accordancewith applicable Italian regulation. However, the voting rights of ordinaryshares held in breach of applicable law may in some cases not be exercised.

 

Ordinary shareholders’meetings must be convened at least once a year to approve the annual financialstatements of Luxottica Group S.p.A., which meeting must be convenedwithin four months (or, under certain circumstances, six months) after the endof the financial year to which such financial statements relate. At ordinaryshareholders’ meetings, shareholders resolve upon dividend distribution, ifany, appoint the Directors, Statutory Auditors and external auditors, determinetheir remuneration and vote on business matters submitted by the Directors.

 

The quorum required, inperson or by proxy, for an ordinary meeting, upon first notice is at least50 percent of the total number of issued and outstanding ordinary shares,while on second call there is no quorum requirement. Resolutions at ordinarymeetings may be adopted, in first and second calls, by a simple majority ofordinary shares represented at such meeting.

 

Extraordinary meetings ofshareholders may be called to vote upon, among other things, proposedamendments to the by-laws, capital increases, mergers, spin-offs, issuance ofdebentures, appointment of receivers and similar extraordinary actions.Pursuant to Decree n. 58/98, extraordinary shareholders’ meetingsshall be properly convened when, in the case of the first meeting, shareholdersrepresenting more than one-half of our share capital are present at themeeting, 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.

 

The meeting notice periodof 30 days is reduced to, respectively, 20 days with respect tomeetings convened at the request of minority shareholders and meetings convenedto resolve upon Luxottica Group S.p.A.’s dissolution, and 15 days formeetings convened pending a public tender offer launched with respect to ourordinary shares. The notice may specify a date for a second meeting in theevent that a quorum is not obtained at the first meeting. Notice of any meetingon third notice, which must be held within 30 days from the previouslyadjourned meeting, must be published at least eight days prior to the date ofthe 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.

 

To attend anyshareholders’ meeting, a holder of ordinary shares must, at least five daysprior to the date fixed for the meeting, deposit a certified statement ofaccount which evidences its ownership of the ordinary shares at our offices orwith such agent banks as may be specified in the notice of meeting in exchangefor an admission ticket and proxy form for the meeting. Such statements may beobtained by beneficial owners of the ordinary shares through the intermediariesassociated with Monte Titoli (or such authorized centralized securities custodyand administration system with which their accounts are held). Alternatively,beneficial owners may instruct the relevant intermediary to procure theadmission tickets and proxy forms.

 

Shareholders may appointproxies by completing the form attached to the admission ticket. Directors,Statutory Auditors, external auditors or our employees as well as employees ofcompanies controlled by us may not vote as proxies for shareholders and any oneproxy cannot represent more than 100 shareholders of LuxotticaGroup S.p.A.

 

Pursuant to Decree n. 58/98,proxies may be solicited by an intermediary (for example, banks or investmentfirms) on behalf of a qualified soliciting stakeholder (generally, one or moreshareholders who own, and have owned for more than six months, at least onepercent (or such lesser percentage determined by CONSOB) of our voting capitaland who has been registered in our shareholders’ register as a holder of suchshares for at least six months).

 

Proxies may be collectedby a shareholders’ association provided that such association has been formedby certified private agreement, does not carry out business activities and ismade up of at least 50 individuals each of whom owns no more than0.1 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.

 

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Our by-laws do notcontain any limitations on the voting rights in respect of ordinary shares heldby any shareholder. Resolutions adopted at a shareholders’ meeting are bindingon all shareholders. However, each absent or dissenting shareholder (as well asany Director or Statutory Auditor) has the right, under Italian law, to ask acourt to annul resolutions taken in violation of applicable laws or theby-laws. In addition, in a limited number of cases (including the merger of alisted 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.

 

*Preemptive Rights*

 

Pursuant to Italian law,holders of ordinary shares are entitled to subscribe for issuances of shares,debentures convertible into shares and rights to subscribe for shares inproportion to their holdings, unless such preemptive rights are waived orlimited by a shareholders’ resolution adopted by the affirmative vote ofholders of more than 50 percent of the ordinary shares and such waiver orlimitation is in the interest of Luxottica Group S.p.A. It is likely that thepreemptive rights generally available to holders of ordinary shares may not befully available to holders of ADRs. See “ —Description of American DepositaryReceipts—Share Dividends and Other Distributions.”

 

Pursuant to Decree n.58/98, in the event that: (i) the newly issued shares are offered forsubscription to our employees or employees of our subsidiaries; and (ii) thenew shares to be issued by us for subscription by the aforementioned parties donot exceed one percent of our share capital, the resolution excludingpreemptive rights is to be approved by shareholders representing the majorityrequired for extraordinary meetings. If the aforementioned conditions are notsatisfied, the resolution excluding the preemptive rights must be approved by shareholdersrepresenting more than 50 percent of our share capital, even if theresolution is taken at a meeting held on second or third notice.

 

*Preferential Shares*

 

Under Italian law, acompany such as ours may issue shares that have a preference over ordinaryshares with respect to the distribution of dividends or surplus assets. Atpresent, we have no such preferential shares outstanding and any issuance ofsuch shares would be subject to approval by a majority of shareholders.

 

*Rights on Liquidation*

 

On a liquidation orwinding-up of the company, subject to the preferential rights of holders of anyoutstanding preferential shares, holders of ordinary shares will be entitled toparticipate in any surplus assets remaining after payment of the creditors. Sharesrank *pari passu* among themselves inliquidation.

 

*Purchase of Shares by LuxotticaGroup S.p.A.*

 

We may purchase up to tenpercent of our ordinary shares, subject to certain conditions and limitationsprovided by Italian law, including that the purchase be approved byshareholders. Shares may only be purchased out of profits available fordividends 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.

 

Decree n. 58/98 providesthat the purchase by a listed company of its own shares and the purchase ofshares of a listed company by its subsidiary must take place by way of a publicoffer or on the market in a manner agreed with Borsa Italiana S.p.A. whichmust ensure the equality of treatment among shareholders, subject to certainlimitations. The foregoing does not apply to shares being purchased by a listedcompany from its employees or employees of its parent company or subsidiaries.

 

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*Minority Shareholders’ Rights*

 

Each absent or dissentingshareholder may, within three months, ask a court to annul shareholders’resolutions taken in violation of applicable laws or our by-laws. Eachshareholder may bring to the attention of the Board of Statutory Auditors factsor acts which are deemed wrongful. Pursuant to Decree n. 58/98, ifsuch 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.

 

Shareholders representingmore than five percent of our share capital have the right to report majorirregularities to the relevant court. In addition, shareholders representing atleast five percent of our share capital who have been registered asshareholders for at least six months may initiate a liability suit against theDirectors, Statutory Auditors and general managers of LuxotticaGroup S.p.A. We may waive or settle the suit only if less than fivepercent of the shareholders vote against such waiver or settlement. 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 such costsagainst the relevant Directors, Statutory Auditors or general managers, or (ii) suchcosts cannot be recovered from such Directors, Statutory Auditors or generalmanagers. In compliance with decree n. 58/98, our by-laws giveminority shareholders the right to appoint one Statutory Auditor and oneAlternate Auditor to the Board of Statutory Auditors. See Item 6—“Directors,Senior Management and Employees—Directors and Senior Management.”

 

*Italian Tender Offer Rules*

 

Under Decree n. 58/98, apublic tender offer is required to be made by any person that through sharepurchases holds more than 30 percent of the voting stock of an Italianlisted company. The public tender offer must cover the whole voting stock ofthe company. Similarly, under CONSOB rules, a public tender for the entirevoting stock of a listed company must be made by any person who currently ownsmore than 30 percent of the voting stock of a company (but does notexercise majority voting rights at an ordinary shareholders’ meeting) andpurchases or acquires through the exercise of subscription or conversion rightsduring a 12-month period more than three percent of the ordinary capital.The offer must be launched within 30 days from the date on which therelevant threshold was exceeded, and must be made at a price not lower than theaverage of the weighted average of the market price for the shares in theprevious 12 months, and the highest price paid for the shares by the offerorduring the same period.

 

CONSOB regulates theseprovisions in greater detail through a number of exemptions from the duty tolaunch 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.

 

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*Derivative Suits*

 

Under Italian law, actionagainst members of the Board of Directors, members of the Board of StatutoryAuditors and General Managers of a company may be brought on behalf of thecompany if authorized by a resolution adopted at an ordinary meeting ofshareholders. In respect of listed companies, the Testo Unico provides for anew form of shareholders’ action against members of a board of directors, whichmay be brought by holders of at least five percent of the outstanding shareswho have been registered in the shareholders’ register for at least six months.We are allowed to not commence, or to settle, the suit provided thatshareholders representing at least five percent of the issued and outstandingshares do not vote against a resolution to this effect. We will reimburse thelegal costs of such action in the event that the claim of such shareholders issuccessful and (i) the court does not award these costs as part of thejudgment against the relevant Directors, Statutory Auditors or general managersor (ii) these costs cannot be recovered from such Directors, StatutoryAuditors or general managers. In addition, Italian law permits a shareholderacting alone to bring an action against members of a board or directors in theevent that such shareholder has suffered damages directly related to negligenceor willful misconduct.

 

*No Limitation of Ownership*

 

Neither Italian law norany of our constituent documents impose any limitations on the right ofnon-resident or foreign shareholders to hold or exercise voting rights on ourordinary shares or the ADSs.

 

**Description of AmericanDepositary Receipts**

 

The following is asummary of certain provisions of the Deposit Agreement, dated as of January 22,1990, as amended and restated as of July 9, 1992, March 27, 1998, June 23,2000 and July 16, 2001, among The Bank of New York, as depositary,the holders from time to time of ADRs issued thereunder and us. This summarydoes not purport to be complete and is qualified in its entirety by referenceto the Deposit Agreement, a copy of which has been filed as an exhibit to thisannual report. For more complete information, the entire agreement should beread. Copies of the Deposit Agreement are available for inspection at theprincipal Corporate Trust Office of The Bank of New York at 101 Barclay Street,New York, New York 10286.

 

ADRs are issued by TheBank of New York. Each ADR evidences an ownership interest in a number ofAmerican Depositary Shares, each of which represents one ordinary share that wedeposit with UniCredito Italiano, as custodian under the Deposit Agreement.Each ADR will also represent securities, cash or other property deposited withThe Bank of New York but not distributed to ADR holders. The Bank ofNew York’s Corporate Trust Office is located at 101 Barclay Street,New York, New York 10286, and its principal executive office islocated at One Wall Street, New York, New York 10286.

 

*Share Dividends and Other Distributions*

 

The Bank of New York hasagreed to pay to ADR holders the cash dividends or other distributions it orthe custodian receives on ordinary shares or other deposited securities, afterdeducting its fees and expenses.

 

*Cash*

 

The Bank of New York convertsany cash dividend or other cash distribution we pay on the ordinary shares intoU.S. dollars, if it can do so on a reasonable basis and can transfer the U.S.dollars to the United States. If it is not possible for The Bank ofNew York to convert foreign currency in whole or in part into U.S.dollars, or if any approval or license of any government is needed and cannotbe obtained, The Bank of New York may distribute the foreign currency to, or inits discretion may hold the foreign currency uninvested and without liabilityfor interest for the accounts of, ADR holders entitled to receive the same.

 

*Shares*

 

The Bank of New Yorkwill, unless otherwise requested by us, distribute new ADRs representing anyshares we may distribute as a dividend or free distribution. The Bank of NewYork will only distribute whole ADRs. It will sell shares which would requireit to issue a fractional ADR and distribute the net proceeds in the same way asit does with dividends or distributions of cash. If The Bank of New York doesnot distribute additional ADRs, each ADR will also represent the additionaldeposited shares.

 

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*Rights toReceive Additional Shares*

 

If we offer holders ofour ordinary shares any rights to subscribe for additional ordinary shares orany other rights, The Bank of New York may make these rights available to ADRholders. We must first instruct The Bank of New York to do so and furnish itwith satisfactory evidence that it is legal to do so. If we do not furnish thisevidence and/or give these instructions, or if The Bank of New York determinesin its reasonable discretion that it is not lawful and feasible to make suchrights available to all or certain owners, The Bank of New York may sell therights and allocate the net proceeds to holders’ accounts. The Bank of New Yorkmay allow rights that are not distributed or sold to lapse. In that case, ADRholders will receive no value for them.

 

If The Bank of New Yorkmakes rights available to ADR holders, upon instruction from such holders itwill exercise the rights and purchase the shares on behalf of the ADR holders.

 

*Deposit, Withdrawal andCancellation*

 

ADRs may be turned in atthe Corporate Trust Office of The Bank of New York. Upon payment of its feesand expenses and of any taxes or charges, such as stamp taxes or stock transfertaxes or fees, The Bank of New York will deliver the deposited securitiesunderlying the ADRs at the office of the custodian, except that The Bank of NewYork may deliver at its Corporate Trust Office any dividends or distributionswith respect to the deposited securities represented by the ADRs, or anyproceeds from the sale of any dividends, distributions or rights, which may beheld by The Bank of New York. Alternatively, at the request, risk and expenseof the applicable ADR holder, The Bank of New York will deliver the depositedsecurities at its Corporate Trust Office.

 

*Voting Rights*

 

ADR holders may instructThe Bank of New York to vote the shares underlying ADRs but only if we ask TheBank of New York to ask for such instructions. Otherwise, ADR holders will notbe able to exercise their right to vote unless such holders withdraw theordinary shares underlying the ADRs. However, an ADR holder may not know abouta meeting at which such holder may be entitled to vote enough in advance towithdraw the shares.

 

If we ask forinstructions of an ADR holder, The Bank of New York will notify the ADR holderof the upcoming vote and arrange to deliver voting materials. The materialswill (1) describe the matters to be voted on and (2) explain how ADRholders, on a certain date, may instruct The Bank of New York to vote theshares or other deposited securities underlying the ADRs as directed. Forinstructions to be valid, The Bank of New York must receive them on or beforethe date specified. The Bank of New York will try, as far as practical, subjectto Italian law and the provisions of our articles of association, to vote or tohave its agents vote the shares or other deposited securities as instructed bythe ADR holder. The Bank of New York 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.

 

The Bank of New Yorkshall fix a record date whenever:

 

•                  any cash dividend or distribution shall becomepayable;

 

•                  any distribution other than cash shall be made;

 

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•                  rights shall be issued with respect to the depositedsecurities;

 

•                  The Bank of New York, for any reason, causes achange in the number of ordinary shares that are represented by each ADS; or

 

•                  The Bank of New York receives notice of any meetingof holders of ordinary shares or other deposited securities.

 

The purpose of fixing arecord date is to determine which 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.

 

**Material Contracts**

 

The contracts describedbelow have been entered into by Luxottica Group S.p.A. and/or its subsidiariessince January 1, 2002 and, as of the date of this annual report, containprovisions under which we or one or more of our subsidiaries has an obligationor entitlement which is or may be material to us. This discussion is notcomplete and should be read in conjunction with the agreements described below,each of which has been filed with the SEC as an exhibit to this annual report.

 

*Credit Agreements and OtherFinancing Agreements*

 

*The U.S.$350 Million Credit Facility and the Convertible Swap Step-Up*

 

To refinance previouslyissued Eurobonds, in June 2002, U.S. Holdings, a U.S. subsidiary, enteredinto a U.S. $350 million credit facility with a group of four Italianbanks led by UniCredito Italiano S.p.A. The new credit facility is guaranteedby Luxottica Group S.p.A. and matures in June 2005. The term loan portionof the credit facility provides U.S. $200 million of borrowing andrequires equal quarterly principal installments beginning in March 2003.The revolving loan portion of the credit facility allows for maximum borrowingsof U.S. $150 million; the revolving loan was partially drawn as of December 31,2004, with outstanding borrowings of U.S. $130.0 million. Interest accruesunder the credit facility at LIBOR (as defined in the agreement) plus0.5 percent (2.920 percent on the term loan portion and 2.917 percent onthe revolver portion on December 31, 2004) and the credit facility allowsU.S. Holdings to select interest periods of one, two or three months. Underthis credit facility, U.S. $170 million was outstanding as of December 31,2004. The credit facility contains certain financial and operating covenants.We were in compliance with those covenants as of December 31, 2004.

 

In July 2002, U.S.Holdings entered into a Convertible Swap Step-Up (“2002 Swap”). The beginningand maximum notional amount of 2002 Swap is U.S. $275 million, which willdecrease 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 are settled net every three monthsuntil the final expiration of the 2002 Swap on June 17, 2005. The 2002Swap does not qualify for hedge accounting under SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities,” as amended, and, as such,is marked to market with the gains or losses from the change in value reflectedin current operations. Gains of Euro 635,000 and Euro 1,491,000 are included incurrent operations in 2003 and 2004, respectively.

 

*The Euro650 Million Credit Facility and the Intesa Swaps*

 

In December 2002, we entered into a new unsecuredcredit facility with Banca Intesa S.p.A. The new unsecured credit facilityprovides borrowing availability of up to Euro 650 million. The facilityincludes a Euro 500 million term loan, which required a balloon payment of Euro200 million in June 2004 and repayment of equal quarterly installments ofprincipal of Euro 50 million subsequent to that date. Interest accrues on theterm loan at Euribor as defined in the agreement plus 0.45 percent (2.628percent on December 31, 2004). The revolving portion provides borrowingavailability of up to Euro 150 million which can be borrowed and repaid untilfinal maturity. At December 31, 2004, Euro 75 million had been drawn underthe revolving

 

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portion. Interest accrueson the revolving loan at Euribor as defined in the agreement plus 0.45 percent(2.623 percent on December 31, 2004). The final maturity of alloutstanding principal amounts and interest is December 27, 2005. TheCompany has the option to choose interest periods of one, two or three months.The credit facility contains certain financial and operating covenants. We werein compliance with these covenants as of December 31, 2004.

 

In December 2002, weentered into two interest rate swap transactions (the “Intesa Swaps”) beginningwith an aggregate maximum notional amount of Euro 250 million, which willdecrease by Euro 100 million on June 27, 2004 and by Euro25 million during each subsequent three-month period. These Intesa Swapswill expire on December 27, 2005. The Intesa Swaps were entered into as acash flow hedge of a portion of the Banca Intesa Euro 650 millionunsecured credit facility discussed above. The Intesa Swaps exchange thefloating rate based on Euribor to a fixed rate of 2.985 percent.

 

*The U.S. $300 Million Senior Unsecured GuaranteedNotes 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 these covenants as of December 31, 2004.

 

In connection with theissuance of the Notes, U.S. Holdings entered into three interest rate swapagreements with Deutsche Bank AG (the “DB Swap”). The three separate agreementsnotional amounts and interest payment dates coincide with those of the Notes.The DB Swap exchanges the fixed rate of the Notes to a floating rate of the six-monthLIBOR rate plus 0.6575 percent for the Series A Notes and to afloating rate of the six-month LIBOR rate plus 0.73 percent for the Series Band Series C Notes. These swaps are treated as fair value hedges of therelated debt and qualify for the shortcut method of hedge accounting (assumingno ineffectiveness in a hedge in an interest rate swap). Thus the interestincome/expense on the swaps is recorded as an adjustment to the interestexpense on the debt effectively changing the debt from a fixed rate of interestto the swap rate.

 

*The Euro200 Million Credit Facility with Banca Intesa*

 

On September 30,2003, we entered into a five-year credit facility with Banca Intesa SpA of Euro200 million, the proceeds of which had been used to finance partially theacquisition of 82.57 percent of the ordinary shares of OPSM and all of OPSM’sperformance rights and options. The aggregate purchase price was AUD $442.7million (Euro 253.7 million) including acquisition expenses.The new creditfacility includes a Euro 150 million term loan, which will require repayment ofequal semi-annual installments of principal of Euro 30 million starting September 30,2006 until the final maturity date. Interest accrues on the term loan atEuribor (as defined in the agreement) plus 0.55 percent (2.729 percent on December 31,2004). The revolving loan provides borrowing availability of up to Euro 50million, and amounts borrowed under the revolving portion can be borrowed andrepaid until final maturity. At December 31, 2004, Euro 25 million hadbeen drawn from the revolving portion. Interest accrues on the revolving loanat Euribor (as defined in the agreement) plus 0.55 percent (2.697 percent on December 31,2004). The final maturity of the credit facility is September 30, 2008. TheCompany can select interest periods of one, two or three months. The creditfacility contains certain financial and operating covenants. The Company was incompliance with those covenants as of December 31, 2004.

 

*New Euro740 Million and U.S. $325 Million Credit Facility*

 

On June 3, 2004, weentered into a new five-year credit facility with a group of banks for anaggregate of Euro 740 million and an aggregate of U.S. $325 millionin favor of Luxottica Group S.p.A. and our subsidiary U.S. Holdings. The newcredit facility consists of three tranches: Tranche A is an amortizingterm loan of Euro 405 million that is to be used to refinance LuxotticaGroup S.p.A.’s existing debt as it matures and for other general corporatepurposes and will require nine equal quarterly installments of Euro45 million beginning in June 2007; Tranche B is a term loan of U.S.$325 million that is to be used by U.S. Holdings to finance theacquisition of Cole and will mature in June 2009; and Tranche C is arevolving credit facility equivalent to Euro 335 million, available inEuro or U.S.$, in favor of both Luxottica Group S.p.A. and U.S. Holdings, thatis to be used for

 

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general corporatepurposes and will mature in June 2009. At December 31, 2004, U.S.$280 million (Euro 206.8 million) had been drawn from Tranche C by U.S.Holdings to finance the repayment of the existing Cole notes. We may selectinterest periods of one, two, three or six months with interest accruing on Euro-denominatedloans based on the corresponding EURIBOR rate, plus a margin, and U.S. dollar-denominatedloans based on the corresponding LIBOR rate, plus a margin of between 0.40percent and 0.60 percent based on the “Net Debt/EBITDA” ratio, as defined in theagreement. The interest rate on December 31, 2004 was 2.628 percent forTranche A, 2.456 percent for Tranche B and 2.889 percent on Tranche C. The newcredit facility also contains certain financial and operating covenants. Wewere in compliance with those covenants as of December 31, 2004. TheMandated Lead Arrangers and Bookrunners are ABN AMRO, Banca Intesa S.p.A., Bankof America, Citigroup Global Market Limited, HSBC Bank plc, Mediobanca – Bancadi Credito Finanziario S.p.A., The Royal Bank of Scotland plc and UniCreditBanca Mobiliare S.p.A. Unicredito Italiano S.p.A. – New York Branch andUnicredit Banca d’Impresa S.p.A. act as Facility Agents. Under this creditfacility, Euro 852 million was outstanding as of December 31, 2004.

 

*The OPSMCredit Facility*

 

In August 2004,OPSM, an indirectly owned subsidiary, renegotiated the recently expiredmulticurrency (AUD $/ HK $) loan facility with Westpac Banking Corporation. Thecredit facility has a maximum available line of AUD $100 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 31,2004, the interest rate was 5.85 percent and the facility was utilized for anamount of AUD $26.7 million. The final maturity of all outstanding principalamounts and interest is August 31, 2006. OPSM has the option to chooseweekly or monthly interest periods. The credit facility contains certainfinancial and operating covenants. OPSM was in compliance with these covenantsas of December 31, 2004.

 

*Cole National Merger Agreement*

 

On January 23, 2004,as amended as of June 2, 2004 and July 15, 2004, the Company and Coleentered into a definitive merger agreement with the unanimous approval of theBoards of Directors of both companies. On October 4, 2004, ColoradoAcquisition Corp. consummated its merger with Cole. As a result of the merger,Cole became 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 U.S. $500.6 million. Inconnection with the merger, the Company assumed outstanding indebtedness withan approximate aggregate principal balance of U.S. $283.7 million.

 

**Italian Exchange Controls**

 

The following is asummary of relevant Italian laws in force as at the date of this annual reportbut does not purport to be a comprehensive description of all exchange controlconsiderations that may be relevant.

 

There are no exchangecontrols in Italy. Residents and non-residents of Italy may effect anyinvestments, disinvestments and other transactions that entail a transfer ofassets to or from Italy, subject only to the reporting, record-keeping anddisclosure requirements described below. In particular, residents of Italy mayhold foreign currency and foreign securities of any kind, within and outsideItaly, while non-residents may invest in Italian securities without restrictionand may export from Italy cash, instruments of credit or payment andsecurities, whether in foreign currency or Euro, representing interest,dividends, other asset distributions and the proceeds of dispositions.

 

Updated reporting andrecord-keeping requirements are contained in recent Italian legislation whichimplements a European Union directive regarding the free movement of capital.Such legislation requires that transfers into or out of Italy of cash orsecurities in excess of Euro 12,500 be reported in writing to the *Ufficio Italiano Cambi* (the Italian Exchange Office) byresidents or non-residents that effect such transfers directly, or by banks,securities dealers or “*Poste Italiane S.p.A.*” (Italian Mail) or otherintermediaries that effect such transactions on their behalf. In addition,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.

 

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Individuals, non-profitentities and certain partnerships that are resident in Italy must disclose ontheir annual tax declarations all investments held outside Italy and financialassets held at the end of a taxable period, as well as the total amount oftransfers 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.

 

There can be no assurancethat the present regulatory environment in or outside Italy will continue orthat particular policies presently in effect will be maintained, although Italyis required to maintain certain regulations and policies by virtue of itsmembership in the European Union and other international organizations and itsadherence to various bilateral and multilateral international agreements.

 

**Taxation**

 

The following summarycontains a description of the principal United States federal and Italianincome tax consequences of the ownership and disposition of ADSs or ordinaryshares by U.S. holders (as defined below) resident in the United States for taxpurposes. The following description does not purport to be a complete analysisof all possible tax considerations that may be relevant to a U.S. tax residentholder of ADSs or ordinary shares, and U.S. tax resident holders are advised toconsult their advisors as to the overall consequences of their individualcircumstances. In particular, this discussion does not address all material taxconsequences of owning ordinary shares or ADSs that may apply to specialclasses of holders, some of whom may be subject to different rules, including:

 

•                  Partnershipsand other pass-through entities;

 

•                  tax-exempt entities;

 

•                  certain 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”).

 

In addition, thefollowing summary does not discuss the tax treatment of ordinary shares or ADSsthat are held in connection with a permanent establishment or fixed basethrough which a U.S. holder carries on business or performs personal servicesin Italy.

 

Furthermore, certainpersons that may not be U.S. holders but who may otherwise be subject to UnitedStates federal income tax liability will also be subject to United Statesfederal 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.

 

This discussion is basedon the tax laws of Italy and of the United States, including the Code, itslegislative history, existing and proposed regulations, and published rulingsand court decisions, as currently in effect, as well as on the currentlyapplicable Convention Between the United States of America and Italy for theAvoidance of Double Taxation with respect to

 

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Taxes on Income and thePrevention of Fraud or Fiscal Evasion (the “Treaty”) and the Convention Betweenthe United States of America and the Italian Republic for the Avoidance ofDouble Taxation and the Prevention of Fiscal Evasion with respect to Taxes onEstates and Inheritances (the “Estate Tax Convention”). These laws are subjectto 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.

 

In addition, this section isbased in part upon the representations of the depositary and the assumptionthat each obligation in the Deposit Agreement and any related agreement will beperformed in accordance with its terms.

 

This discussion addressesonly Italian income taxation, gift and inheritance taxation and capital gainstaxation and United States federal income and estate taxation.

 

For purposes of thecurrent Treaty, the Estate Tax Convention and the Code, U.S. holders of ADSswill be treated as the owners of the underlying ordinary shares represented bysuch ADSs. Exchanges of ordinary shares for ADSs and ADSs for ordinary sharesgenerally will not be subject to Italian tax or United States federal incometax.

 

*Italian Tax Law*

 

*Withholdingor Substitute Tax on Dividends.*  In general, dividends paid by Italiancorporations to non-Italian resident beneficial owners without a permanent establishmentin Italy to which ordinary shares or ADSs are effectively connected, aresubject to final Italian withholding tax at the rate of 27 percent, unlessreduced by an applicable double taxation treaty. Reduced rates (normally15 percent) of withholding tax on dividends apply to non-residentbeneficial owners of ordinary shares or ADSs who are entitled to and timelycomply with procedures for claiming benefits under an applicable income taxtreaty entered into by Italy. Italy has concluded income tax treaties with over60 foreign countries, including all European Union member states, Argentina,Australia, Brazil, Canada, Japan, New Zealand, Norway, Switzerland, theUnited States and some countries in Africa, the Middle East and East Asia. Itshould be noted that in general the income tax treaties are not applicable ifthe beneficial owner is a tax-exempt entity or, with a few exceptions, apartnership or a trust.

 

Under the Treaty, Italian withholding tax at a reducedrate of 15 percent will generally apply to dividends paid by an Italiancorporation to a U.S. resident entitled to Treaty benefits who timely complieswith the procedures for claiming such benefits, provided the dividends are noteffectively connected with a permanent establishment in Italy through which theU.S. resident carries on a business or with a fixed base in Italy through whichthe U.S. resident performs independent personal services. The foregoingtreatment will not be changed by the dividend article of the New Treaty.

 

Under Italian law, ingeneral, shares of Italian companies listed on the Italian Stock Exchange haveto be registered in the centralized deposit system managed by *Monte Titoli*. With respect to dividends paid by Italiancorporations listed in Italy (such as Luxottica Group S.p.A.) to non-Italianresident beneficial owners, without a permanent establishment in Italy to whichADSs or ordinary shares are effectively connected, on shares held in the *Monte Titoli* system (including our shares), instead of the27 percent final withholding tax mentioned above, a substitute tax willapply at the same rate (which rate may, however, be reduced under an applicabledouble tax treaty) and conditions as the above-mentioned withholding taxes.This substitute tax will be levied by the Italian authorized intermediary thatparticipates 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.

 

Since the ordinary sharesare registered in the centralized deposit system managed by *Monte Titoli*, the substitute tax regime will apply todividends paid by Luxottica Group S.p.A., instead of the withholding taxregime.

 

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For a non-Italian resident beneficial ownerof the ordinary shares or ADSs to obtain a reduced rate of substitute tax ondividends pursuant to an applicable income tax treaty entered into by Italy,including the Treaty, the following procedure must be followed. Theintermediary with which the shares are deposited must timely 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.

 

The intermediary must keep the foregoingdocumentation for the entire period in which the Italian tax authorities areentitled to issue an assessment with respect to the tax year in which thedividends are paid and, if an assessment is issued, until the assessment issettled. If the intermediary with which the shares are deposited is notresident in Italy, the aforesaid duties and obligations must be carried out by (i) abank or an investment services company that is a resident in Italy or (ii) apermanent establishment in Italy of a non-resident bank or investment servicescompany, appointed by the foreign intermediary as its fiscal representative inItaly.

 

As an alternative to the application of themore favorable treaty rate of substitute tax on dividends or where an incometax treaty does not apply, under domestic Italian law non-resident shareholderscan claim a refund of an amount up to four-ninths of the 27 percentsubstitute tax on dividend income from Italian tax authorities provided that (i) theyimplement an *ad hoc* refund procedure inaccordance with the terms and conditions established by law, and (ii) theyprovide evidence that this dividend income was subject to income tax in theircountry of residence in an amount at least equal to the total refund claimed.Beneficial owners of ordinary shares or ADSs should contact their tax advisorsconcerning the possible availability of these refunds, the payment of which isnormally subject to extensive delays.

 

Distributions of newly issued ordinary sharesto beneficial owners with respect to their shares or ADSs that are made as partof a pro rata distribution to all shareholders based on a gratuitous increaseof the share capital through transfer of reserves or other provisions to sharecapital generally will not be subject to Italian tax. However, distributions ofdividends in kind will be subject to withholding tax.

 

*Tax on Capital Gains.*  Upon disposal of ordinary shares or ADSs ofan Italian 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-residentshareholders without a permanent establishment in Italy to which the ordinaryshares or ADSs are effectively connected on the disposal of “non-qualified”shareholdings in Italian resident corporations the stock of which is listed ona regulated market (such as Luxottica Group S.p.A.) even when suchshareholdings are held in Italy. Non-Italian residents who dispose of shares orADSs may be required to timely provide a self-declaration not to be resident inItaly for tax purposes, in order to benefit from this exemption. Upon disposalof a “qualified” shareholding, non-resident shareholders are in principlesubject to Italian ordinary taxation on 40% of the capital gain realized.

 

The above is subject to any provisions of anincome tax treaty entered into by the Republic of Italy, if the income taxtreaty provisions are more favorable. The majority of double tax treatiesentered into by Italy, in accordance with the OECD Model tax convention,provide that capital gains realized from the disposition of Italian securitiesare subject to CGT only in the country of residence of the seller. Therefore,the capital gains realized by a non-Italian resident entitled to the benefitsof a treaty entered into by Italy in accordance with the OECD Model in respectof taxation of capital gains from the disposition of Italian securities willnot be subject to Italian CGT, regardless of whether the shareholding disposedof is qualified or non-qualified.

 

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Non-Italian residents whodispose of shares or ADSs may be required to timely provide appropriate documentationestablishing that the conditions of non-taxability of capital gains realizedpursuant to the applicable income tax treaties have been satisfied.

 

Under the Treaty, a person who is considereda U.S. resident for purposes of the Treaty and is fully entitled to benefitsunder the Treaty will not incur Italian capital gains tax on disposal ofordinary shares or ADSs, unless the ordinary shares or ADSs form part of abusiness property of a permanent establishment of the holder in Italy orpertain to a fixed base available to a holder in Italy for the purpose ofperforming independent personal services. U.S. residents who sell ordinaryshares or ADSs may be required to timely produce appropriate documentationestablishing that the above-mentioned conditions for non-taxability of capitalgains under the Treaty have been satisfied. Such treatment will not be changedby the capital gains provisions of the New Treaty.

 

*Transfer Tax.*  An Italian transfer tax is normally payableon the transfer of shares in an Italian company by and/or to Italian residents;no general exception is provided from the transfer tax for transfers made bynon-residents of Italy. Sales of securities on a stock exchange are exempt,however, from the Italian transfer tax.

 

*Inheritance and 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.

 

However, according to the current literalinterpretation of Law No. 383, for donations to donees other than spouses,direct descendants or ancestors and other relatives within the fourth degree,if and to the extent that the value of gift attributable to each such doneeexceeds Euro 180,759.91, the gift of Shares may be subject to the ordinarytransfer taxes provided for the transfer thereof for consideration.

 

Moreover, an anti-avoidance rule isprovided by Law No. 383 for any gift of assets (such as the Shares) which,if sold for consideration, would give rise to capital gains subject to the *imposta sostitutiva* (CGT) provided for by ItalianLegislative Decree No. 461 of 21 November 1997. In particular, if thedonee sells the Shares for consideration within five years from thereceipt thereof as gift, the donee is required to pay the relevant *imposta sostitutiva* on capital gains as if the gift hasnever taken place.

 

*United States Federal Taxation*

 

For purposes of this section, a U.S. holderis an individual or entity which is a beneficial owner of shares or ADSs andis:

 

•                  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 a partnership, or an entity treated forU.S. tax purposes as a partnership, holds ordinary shares or ADSs, the taxtreatment of a partner will generally depend upon the status of the partner andthe activities of the partnership. Persons who are partners in partnershipsholding ordinary shares or ADSs should consult their tax advisors.

 

*Taxation of Dividends.*  Under the United States federal income taxlaws, a U.S. holder must include as gross income the gross amount of anydividend paid by Luxottica Group S.p.A. out of its current or accumulatedearnings and profits, as determined for United States federal income taxpurposes. Such holder must also include any Italian tax withheld from thedividend payment in this gross amount even though the holder does not in factreceive such amounts withheld. The dividend is ordinary income that must beincluded in income when the U.S. holder, in the case of ordinary shares, or thedepositary, in the case of ADSs, receives the dividend, actually orconstructively. The dividend will not be eligible for the dividends receiveddeduction generally allowed to United States corporations in respect ofdividends received from other United States corporations. The amount of thedividend distribution that must be included in income for a U.S. holder will bethe U.S. dollar value of the Euro payments made, determined at the spotEuro/U.S. dollar rate on the date the dividend distribution is includible inincome,

 

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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.

 

Subject to certain generally applicablelimitations, the Italian withholding or substitute tax imposed on dividends inaccordance with the Treaty and paid over to Italy will be creditable against aU.S. holder’s United States federal income tax liability. To the extent arefund of the tax withheld is available to the U.S. holder under Italian law orunder the Treaty, the amount of tax withheld that is refundable will not beeligible for credit against such holder’s United States federal income taxliability. See “—Italian Tax Law—Withholding or Substitute Tax on Dividends”for the procedures for obtaining a tax refund.

 

Dividends paid by foreign corporationsgenerally constitute income from sources outside the United States, butgenerally will be “passive income” or “financial services income” which aretreated separately from other types of income for purposes of computing theforeign tax credit allowable. The rules governing the foreign tax creditare complex. U.S. holders should consult their tax advisors regarding theavailability of a foreign tax credit for Italian withholding taxes imposed ondividends paid on ordinary shares or ADSs.

 

Certain dividends received by non-corporateU.S. holders in taxable years beginning before January 1, 2009 in respectof ordinary shares or ADSs will be taxed at the rate applicable to long-termcapital gains (generally at a maximum income tax rate of 15%) if the dividendsare “qualified dividends.” This reduced income tax rate is only applicable todividends paid by U.S. corporations and “qualified foreign corporations” andonly with respect to shares held by a qualified U.S. holder (i.e., anon-corporate shareholder such as an individual) for a minimum holding period(generally, more than 60 days during the 120-day period beginning60 days before the ex-dividend date). We believe that we are a “qualifiedforeign corporation” and that dividends paid by us to individual U.S. holdersof ordinary shares held for the minimum holding period should thus be eligiblefor the reduced income tax rate. See “—Passive Foreign Investment CompanyConsiderations” for a discussion of certain restrictions on “qualified foreigncorporation” 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.*

 

*Taxation of Capital Gains.*  If a U.S. holder sells or otherwise disposesof ordinary shares or ADSs and such shares constitute a capital asset in thehands of the U.S. holder, such holder will recognize capital gain or loss forUnited States federal income tax purposes equal to the difference between theU.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 a non-corporate U.S.holder, recognized in taxable years which begin before January 1, 2009, isgenerally taxed at a maximum rate of 15 percent for property held morethan one year. Additionally, gain or loss will generally be from sources withinthe United States for foreign tax credit limitation purposes.

 

*Passive Foreign Investment CompanyConsiderations.* A corporation organized outside theU.S. generally will be classified as passive foreign investment company (a “PFIC”)for U.S. federal income tax purposes in any taxable year in which either: (a) atleast 75% of its gross income is “passive income”, or (b) the averagepercentage of the gross value of its assets that produce “passive income” orare held for the production of passive income is at least 50%. Passive incomefor this purpose generally includes dividends, interest, royalties, rents andgains from commodities and securities transactions. Under a special “look-through”rule, in determining whether it is a PFIC, a foreign corporation is required totake into account a pro rata portion of the income and assets of eachcorporation in which it owns, directly or indirectly, at least a 25% interest.Where the “look-through” rule applies, there is eliminated from thedetermination of the status of the foreign corporation as a PFIC stock and debtinstruments issued by such a 25%-owned subsidiary as well as dividends andinterest received from such a 25%-owned subsidiary. Based on our auditedfinancial statements, we strongly believe that we are not a PFIC for U.S. federalincome tax purposes for 2004. Based on our audited financial statements and ourcurrent expectations regarding the value and nature of our assets and thesources and nature of our income, we do not expect to become a PFIC for U.S.federal income tax purposes for future years. Nonetheless, given that our PFICstatus will be determined by reference to the assets and income tests appliedannually, with the assets test being applied by reference to the average of thefair market value of our assets at the end of each quarter, and the income testbeing applied by reference to our income at the end of the taxable year, wecannot provide complete assurance that we will not be a PFIC for either thecurrent taxable year or for any subsequent taxable year. If we are classifiedas a PFIC in any year that a U.S. holder is a shareholder, we generally willcontinue to be treated as a PFIC for that U.S. holder in all succeeding years,regardless of whether we continue to meet the income or asset test describedabove. If we are classified as a PFIC in any year, certain materially adverseconsequences could result for U.S. holders of ordinary shares or ADSs. Suchadverse consequences could, however, be materially lessened if the U.S. holderstimely file either a qualified electing fund or a mark-to-market

 

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election. In addition, if wewere classified as a PFIC, in a taxable year in which we pay a dividend or theprior taxable year, we would not be a qualified foreign corporation (asdescribed in “—Taxation of Dividends”), and our dividends would not be eligiblefor the reduced 15% U.S. income tax rate.

 

*Although, as stated above, we stronglybelieve that we are not, and we do not expect to become, a PFIC, we suggestthat all existing and potential U.S. holders consult their own tax advisorsregarding the potential tax impact if we were determined to be a PFIC.*

 

*Backup Withholding and Information Reporting.*  In general, dividend payments or othertaxable distributions made within the United States to a U.S. holder will besubject to information reporting requirements and backup withholding tax(currently at the rate of 28 percent) if such U.S. holder is anon-corporate United States person and such holder:

 

•                  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. holder generally may obtain a refund of any amounts withheldunder the backup withholding rules that exceed his, her or its income taxliability by filing a refund claim with the Internal Revenue Service.

 

After December 31, 2010, the backupwithholding rate will increase to 31% under the sunset provisions of currentlyapplicable U.S. tax law.

 

Persons who are not United States persons maybe required to establish their exemption from information reporting and backupwithholding by certifying their status on Internal Revenue Service Form W-8BEN,W-8ECI or W-8IMY.

 

The payment of proceeds from the sale ofordinary shares or ADSs to or through a United States office of a broker isalso subject to these United States backup withholding and informationreporting rules unless the seller certifies, under penalties of perjury,that such seller is a non-U.S. person (or otherwise establishes an exemption).Special rules apply where ordinary shares or ADSs are sold through anon-U.S. office of a non-U.S. broker and the sale proceeds are paid outside theUnited States.

 

U.S. holders generally may obtain a refund of any amounts withheldunder the backup withholding rules that exceed such holder’s income taxliability by filing a timely refund claim with the IRS.

 

*Estate Tax 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.

 

**Documents on Display**

 

We are subject to the informationalrequirements of the Securities Exchange Act of 1934, applicable to foreignprivate issuers, and in accordance therewith we file reports and otherinformation with the SEC. Reports and other information filed by us areavailable for inspection and copying, upon payment of fees prescribed by theSEC, at the public reference facilities maintained by the SEC at 450 FifthStreet, N.W., Washington, DC 20549. Copies of such material are also availableby mail from the Public Reference Branch of the SEC at 450 Fifth Street, N.W.,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.

 

We furnish The Bank of New York, asdepositary with respect to the ADSs, with annual reports in English (or atranslation or summary in English of the Italian reports), which include areview of operations and annual audited consolidated financial statementsprepared in conformity with U.S. GAAP. We also furnish The Bank of New Yorkwith quarterly reports in English (or a translation or summary in English ofthe Italian reports) that include unaudited interim financial information

 

78

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prepared in conformity withU.S. GAAP. If requested by us, The Bank of New York arranges for the mailing ofsuch reports to registered holders of ADRs. We also furnish to The Bank of NewYork, in English, all notices of shareholders’ meetings and other reports andcommunications that are made generally available to our shareholders. To theextent permitted by law, The Bank of New York 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 The Bank of New York. As a foreign private issuer, we areexempt from the rules under the Securities Exchange Act of 1934prescribing the furnishing and content of proxy statements.

 

79

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**ITEM 11.QUANTITATIVE****AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

**Interest Rate Sensitivity**

 

At December 31, 2004, our interest ratesensitivity was limited to our unhedged variable rate outstanding debt underour credit facilities and bank overdraft facilities and certain fixed-rate debtthat was converted to floating rate through an interest rate swap (see below).Included in this amount are the following credit agreements: UnicreditoItaliano of U.S. $350 million (of which U.S. $170 million was outstanding), ourcredit facilities with Banca Intesa S.p.A. of Euro 650 million (of which Euro275 million was outstanding and Euro 175 million was unhedged) and of Euro 200million (of which Euro 175 million were outstanding), and our credit facilitywith a group of banks of Euro 740 million and U.S. $325 million (of which Euro612 million and U.S. $325 million was outstanding). As of such date, debt underthe UniCredito Italiano facility bore interest at LIBOR plus 0.5 percent (2.920percent for the term loan and 2.917 percent for the revolving loan for therelevant interest period at December 31, 2004), debt under unhedged theBanca Intesa credit facility of Euro 650 million bore interest at the rate ofEuribor plus 0.45 percent (2.628 percent for the term loan and 2.623 percentfor the revolving loan for the relevant interest period at December 31,2004), debt under the Banca Intesa credit facility of Euro 200 million boreinterest at the rate of Euribor plus 0.55 percent (2.729 percent for the termloan and 2.697 percent for the revolving loan for the relevant interest periodat December 31, 2004) and debt under our credit facility with a group ofbanks bore interest at the rate of Euribor, on Euro-denominated loans, andLIBOR, on U.S. $ denominated loans, plus a margin between 0.40 percent and 0.60percent based on the “Net Debt/EBITDA” ratio as defined in the agreement (2.628percent for the term loan denominated in Euro and 2.456 percent for the termloan denominated in U.S. $ and 2.889 percent for the revolving loan for therelevant interest period at December 31, 2004). Additionally, in 2003 weissued U.S. $300 million of fixed rate senior unsecured guaranteed notesin three series. We immediately entered into three interest rate swaps to hedgesuch series of notes, thereby effectively changing the fixed rate to a variablerate of six-month LIBOR plus a spread of 0.6575 percent or0.73 percent depending on the series. This Swap has effectively increasedour exposure to interest rate fluctuations. However, the effect of a tenpercent change in interest rates (upward or downward) at December 31, 2004would not have had a material effect on our future annual pretax earnings andcash flows. This was calculated by us, based on our expected future pretaxearning and cash flows with an interest rate adjustment of ten percent aboveand below the rates in effect as of December 31, 2004. We calculated thiseffect both on a single year basis and an accumulated basis using a presentvalue calculation. For U.S.$-denominated activities, we used an exchange rateof Euro 1.00 = U.S. $1.30.

 

We monitor our exposure to interest ratefluctuations and may enter into hedging arrangements to mitigate our exposureto increases in interest rates if we believe it is prudent to do so. We havesix interest rate derivatives outstanding as of December 31, 2004:

 

•                  We have an outstanding Convertible Swap Step-up (“Swap”)with an initial notional amount of U.S. $275 million. This Swap converts aportion of the U.S. $350 million UniCredito loan to a mixed position rateagreement. This Swap allows our U.S. subsidiary to pay a fixed rate of interestif LIBOR remains under certain thresholds and for our U.S. subsidiary toreceive an interest payment of three-month LIBOR as defined in the agreement.This instrument does not qualify as a hedge for the debt and as such thechanges in its fair value are recorded in the statement of operations in theperiod they occur;

 

•                  In December 2002, we entered into two interestrate swap transactions (the “Intesa Swaps”) beginning with an aggregate maximumnotional amount of Euro 250 million, which decreased by Euro100 million on June 28, 2004 and will decrease by Euro25 million in each subsequent three-month period. These Intesa Swaps willexpire 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 disclosed above. The Intesa Swaps exchange the floating ratebased on Euribor to a fixed rate of 2.985 percent per annum;

 

•                  In September 2003, we 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 Senior Unsecured Guaranteed Notes issued on the same date. The DBSwap exchanges the fixed rate of the Notes to a floating rate of the six-monthLIBOR rate plus 0.6575 percent for the Series A Notes and to afloating rate of the six month LIBOR rate plus 0.73 percent for the Series Band Series C Notes. These swaps are treated as fair value hedges of therelated debt and qualify for the shortcut method of hedge accounting (assumingno ineffectiveness in a hedge in an interest rate swap). Thus the interestincome/expense on the swaps is recorded as an adjustment to the interestexpense on the debt effectively changing the debt from a fixed rate of interestto the swap rate.

 

80

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**Foreign Exchange Sensitivity**

 

Our manufacturing subsidiaries are mainlylocated in Italy and our sales and distribution facilities are maintainedworldwide. As such, we are vulnerable to foreign currency exchange ratefluctuations in two principal areas:

 

1.                                            Weincur most of our manufacturing costs in Euro and receive a significant portionof our revenues in other currencies; and

 

2.                                            Differencesbetween the functional currency of certain subsidiaries and the Euro as thereporting currency.

 

In the first case, a strengthening of theEuro relative to other currencies in which we receive revenues could negativelyimpact the demand for our products and/or reduce our gross margins. Inaddition, 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 this area.We will, if we believe it is necessary, enter into foreign exchange contractsto hedge certain of these transactions, which could include sales, receivablesand/or payables balances.

 

Effective January 1, 2001, we adopted SFAS 133. SFAS 133, asamended and interpreted, establishes accounting and reporting standards forderivative instruments, including certain derivative instruments embedded inother contracts, and for hedging activities.

 

SFAS 133 requires that all derivatives,whether designed in hedging relationship or not, be recorded on the balancesheet at fair value regardless of the purpose or intent for holding them. If aderivative is designated as a fair-value hedge, changes in the fair value ofthe derivative and the related change in the hedge item are recognized inoperations. If a derivative is designated as cash-flow hedge, changes in thefair value of the derivative are recorded in other comprehensive income (“OCI”)in the consolidated statement of shareholders’ equity and are recognized in theconsolidated statements of income when the hedged item affects operations. Fora derivative that does not qualify as hedge, changes in fair value arerecognized in operations.

 

From time to time, we use derivativefinancial instruments, principally interest rate and currency swap agreements,as part of our risk management policy to reduce our exposure to market risksfrom changes in foreign exchange rates. As of December 31, 2004, we had a single AUD $10,000,000 short-term(less than thirty days to maturity) forward Euro/AUD contract. We may enterinto other derivative financial instruments when we assess that the risk can behedged effectively.

 

In the second case, a substantial portion ofrevenues and costs are denominated in various currencies other than Euro. Thefollowing table provides information about our revenues and costs denominatedin various currencies for the year ended December 31, 2004:

 
| ** **         | ** ** | **U.S. Dollars** | ** ** | **Euro** | ** ** | **Other** | ** ** | **Total** | ** ** |
|--------------------|------------|------------------|------------|----------|------------|-----------|------------|-----------|------------|
| Revenues           |       | 63               | %          | 18       | %          | 19        | %          | 100       | %          |
| Operating expenses |       | 58               | %          | 26       | %          | 16        | %          | 100       | %          |

 

Because a large portion of our revenues andexpenses are denominated in U.S. dollars, fluctuations in the exchange ratebetween the U.S. dollar and the Euro, our reporting currency, could have amaterial effect on our reported financial position and results of operations.In addition, a significant change in the mix of revenues or expenses between oramong geographic or operating segments could increase or decrease our exposureto other currency exchange rate fluctuations. We will continue to monitor ourexposure to exchange rate fluctuations and enter into hedging arrangements ifand to the extent we believe it to be appropriate.

 

The acquisitions of Sunglass Hut in 2001,OPSM in 2003 and Cole in 2004 have further increased our exposure to fluctuationsin currency exchange rates. The majority of the operations, assets andliabilities of Sunglass Hut and Cole are denominated in U.S. dollars while forOPSM the operations, assets and liabilities are mostly denominated inAustralian dollars.

 

**ITEM 12.DESCRIPTION****OF SECURITIES OTHER THANEQUITY SECURITIES**

 

None.

 

81

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**PART II**

 

**ITEM 13.DEFAULTS****, DIVIDEND ARREARAGES ANDDELINQUENCIES**

 

None.

 

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

 

None.

 

**ITEM 15.CONTROLS****AND PROCEDURES**

 

(a)*           Disclosure Controls andProcedures*

 

As of the endof the period covered by this annual report (the “Evaluation Date”) weperformed an evaluation, under the supervision and with the participation ofour management pursuant to Rule 13a-15 of the Securities Exchange Act of1934, as amended (the “Exchange Act”), of the effectiveness of our disclosurecontrols and procedures. Based upon this evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that, as of the Evaluation Date,our disclosure controls and procedures were effective at the reasonableassurance level.

 

(b)           Notapplicable.

 

(c)           Notapplicable.

 

(d)*           Changes in Internal Control over Financial Reporting*

 

During theperiod covered by this annual report, there were no changes in our internalcontrol over financial reporting that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

**ITEM 16.[RESERVED****]**

 

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

 

Our Board of Directors has determined thatEnrico Cavatorta, one of its members, qualifies as an “audit committeefinancial expert,” as defined in SEC rules. We have an Internal ControlCommittee composed of three Independent Directors, two of whom (Mr. LucioRondelli, Chairman, and Mr. Tancredi Bianchi) so far have been appointedby the Board of Directors.

 

**Item 16B.Code****of Ethics**

 

The Board of Directors adopted a Code ofEthics applicable, as may be amended from time to time, to our principalexecutive officer, principal financial officer and all of our other managementemployees We will provide a copy of our Code of Ethics upon request and withoutcharge. You may also obtain a copy of our Code of Ethics on our website atwww.luxottica.com.

 

**Item 16C.Principal****Accountant Fees andServices**

 

Deloitte & Touche S.p.A., orDeloitte & Touche, was engaged as our independent registeredaccounting firm to audit our consolidated financial statements for the yearsended December 31, 2003 and 2004. Due to the nature of our operations,numerous Deloitte & Touche entities and affiliates perform numerousother accounting, tax and consulting tasks for us around the world. The Boardof Directors is the corporate body competent to pre-approve, with the favorableopinion of the Internal Control Committee, all audit services for the annualaudit of Luxottica Group S.p.A.’s own financial statements and for the audit ofthe consolidated financial statements of Luxottica Group S.p.A. and itssubsidiaries, and to pre-approve all permissible non-audit services permissiblefor all entities in the group, although pre-approval of such services may notalways be possible based on the nature of the service. Each pre-approval istypically given for a one-year period and is detailed by category and budgetedcost. Updates on audit and non-audit services to be provided by Deloitte &Touche are provided to the Board quarterly.

 

82

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The following table sets forth the aggregatefees billed to us by Deloitte & Touche for 2003 and 2004:

 
| **Thousands of  Euro**                                                            | ** ** | **2003  Fees** | ** ** | **2004  Fees** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------|------------|----------------|------------|
| Audit fees (including annual audit and  semi-annual reviews)                      |       | 2,007          |       | 2,294          |       |
| Audit related fees (including benefit plan  audits and acquisition due diligence) |       | 1,105          |       | 697            |       |
| Tax fees (including compliance and  planning)                                     |       | 1,368          |       | 2,877          |       |
| All other fees (including royalty audits)                                         |       | 87             |       | 148            |       |
| Total fees                                                                        |       | 4,567          |       | 6,016          |       |

 

Our Board of Directors has approved all ofthe audit and non-audit fees of Deloitte & Touche for the year 2004 inaccordance with the pre-approval policy set forth above. The percentage ofaudit work performed by persons other than full-time permanent employees ofDeloitte & Touche is less than 50%.

 

**Item 16D.Exemptions****from the Listing Standardsfor Audit Committees**

 

Not applicable.

 

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

 

Not applicable.

 

83

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**PART III**

 

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

 

Not applicable.

 

**ITEM 18.**               **FINANCIALSTATEMENTS**

 
| **Index to Consolidated Financial Statements**                                                                  |   |
|-----------------------------------------------------------------------------------------------------------------|--------|
| Report of Independent Registered Public Accountants                                                             |   |
| Consolidated Balance Sheets, December 31, 2003 and 2004                                                    |   |
| Statements of Consolidated Income for the  Years Ended December 31, 2002, 2003 and 2004                    |   |
| Statements of Consolidated Shareholders’ Equity  for the Years Ended December 31, 2002, 2003 and 2004 |   |
| Statements of Consolidated Cash Flows for  the Years Ended December 31, 2002, 2003 and 2004                |   |
| Notes to Consolidated Financial Statements                                                                      |   |
| **Consolidated Financial Statement Schedules**                                                                  |   |
| Schedule II-Valuation and Qualifying  Accounts/Allowance for Doubtful Accounts                             |   |

 

84

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|        |                          |
|--------|-------------------------------|
|   |                          |
|   | Deloitte  & Touche S.p.A. |
|   | Piazza San  Vito, 37          |
|   | 31100  Treviso                |
|   | Italia                        |
|   |                          |
|   | Tel: +39  0422 5875           |
|   | Fax: +39  0422 579471         |
|   | www.deloitte.it               |

 

 

**REPORT OFINDEPENDENT****REGISTERED PUBLICACCOUNTING FIRM**

 

**LUXOTTICAGROUP S.p.A**.

 

We have audited theaccompanying consolidated balance sheets of Luxottica Group S.p.A. (an Italiancorporation) and Subsidiaries (collectively, “the Company”) as of December 31,2003 and 2004 and the related statements of consolidated income, shareholders’equity and cash flows for each of the three years in the period ended December31, 2004. Our audits also included the consolidated financial statementschedule listed in the Index at Item 18. These financial statements andfinancial statement schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements and financial statement schedule based on our audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States of America). Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement. The Company is not required to have, norwere we engaged to perform, an audit of its internal control over financialreporting. Our audits included consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on the effectivenessof the Company’s internal control over financial reporting. Accordingly, weexpress no such opinion. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of Luxottica Group S.p.A. and subsidiaries as of December31, 2003 and 2004 and the results of their operations and their cash flows foreach of the three years in the period ended December 31, 2004, in conformitywith accounting principles generally accepted in the United States of America.Also, in our opinion, such consolidated financial statement schedule, whenconsidered in relation to the basic consolidated financial statements taken asa whole, presents fairly in all material respects the information set forththerein.

 

Our audits also comprehendedthe translation of Euro amounts into U.S. dollar amounts and, in our opinion,such translation has been made in conformity with the basis stated in Note 1.Such U.S. dollar amounts are presented solely for the convenience of readers inthe United States of America.

 

 
| /s/ Deloitte  & Touche |   |
|----------------------------|--------|
|                       |
| Treviso,  Italy            |
| April 29,  2005            |

 

 
| Ancona Bari  Bergamo Bologna Brescia Cagliari Firenze Genova Milano Napoli Padova Parma  Roma Torino Treviso Verona Vicenza |   | Member of  Deloitte Touche Tohmatsu |
|-----------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|

 

Sede Legale: Via Tontona,25-20144 Milano

Capitale Sociale: sottoscrittoe versato Euro 10.327.590,00-deliberato Euro 10.850.000,00

Partita IVA/Codice Fiscale/Registrodelle Imprese Milano n. 03049560166 - R.E.A. Milano n. 1720239

 

F-1

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**LUXOTTICA GROUP S.p.A. and Subsidiaries**

 

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31, 2003 AND 2004(*)**

 

**ASSETS**

 
| ** **                                                                                                            | ** ** | **2003**       | ** ** | **2004**          | ** ** | **2004**      | ** **    |
|-----------------------------------------------------------------------------------------------------------------------|------------|----------------|------------|-------------------|------------|---------------|---------------|
| ** **                                                                                                            | ** ** | **(Euro/000)** | ** ** | **(US $/000)(1)** | ** ** |
| **CURRENT ASSETS:**                                                                                                   | ** ** | ** **     | ** ** | ** **        | ** ** | ** **    | ** **    |
| Cash and cash equivalents                                                                                             |       | 299,937        |       | 257,349           |       | $             | 348,399       |   |
| Accounts receivable                                                                                                   |       |           |       |              |       |          |          |   |
| (Less allowance for doubtful accounts,  €21.5 million in 2003, and €23.4 million in 2004; US $31.7 million) |       | 353,516        |       | 406,437           |       | 550,234       |          |
| Sales and income taxes receivable                                                                                     |       | 34,259         |       | 33,120            |       | 44,838        |          |
| Inventories                                                                                                           |       | 404,216        |       | 433,158           |       | 586,409       |          |
| Prepaid expenses and other                                                                                            |       | 50,714         |       | 69,151            |       | 93,617        |          |
| Asset held for sale—Pearle Europe                                                                                |       | —         |       | 143,617           |       | 194,429       |          |
| Deferred tax assets                                                                                                   |       | 124,451        |       | 104,508           |       | 141,483       |          |
| **Total current assets**                                                                                              | ** ** | **1,267,093**  | ** ** | **1,447,340**     | ** ** | **1,959,409** | ** **    |
| **PROPERTY, PLANT AND EQUIPMENT—net**                                                                            | ** ** | **497,435**    | ** ** | **599,245**       | ** ** | **811,258**   | ** **    |
| **OTHER ASSETS:**                                                                                                     |       |           |       |              |       |          |          |
| Goodwill                                                                                                              |       | 1,328,914      |       | 1,500,962         |       | 2,032,002     |          |
| Intangible assets—net                                                                                            |       | 764,698        |       | 972,091           |       | 1,316,017     |          |
| Investments                                                                                                           |       | 13,055         |       | 13,371            |       | 18,102        |          |
| Other assets                                                                                                          |       | 41,481         |       | 23,049            |       | 31,204        |          |
| **Total other assets**                                                                                                | ** ** | **2,148,148**  | ** ** | **2,509,473**     | ** ** | **3,397,325** | ** **    |
| **TOTAL**                                                                                                             | ** ** | **3,912,676**  | ** ** | **4,556,058**     | ** ** | **$**         | **6,167,992** | ** ** |

 

See Notes to Consolidated Financial Statements

 

----

(*)           In accordance withU.S. GAAP

(1)           Translated forconvenience at the New York City Noon Buying Rate as determined in Note 1

 

F-2

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**LIABILITIES AND SHAREHOLDERS’ EQUITY**

 

** **
| ** **                                                                                                                                                                                                                                                 | ** ** | **2003**       | ** ** | **2004**          | ** ** | **2004**      | ** **    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|------------|-------------------|------------|---------------|---------------|
| ** **                                                                                                                                                                                                                                                 | ** ** | **(Euro/000)** | ** ** | **(US $/000)(1)** | ** ** |
| **CURRENT LIABILITIES:**                                                                                                                                                                                                                                   |       |           |       |              |       |          |          |
| Bank overdrafts                                                                                                                                                                                                                                            |       | 516,905        |       | 290,531           |       | $             | 393,321       |   |
| Current portion of long-term debt                                                                                                                                                                                                                          |       | 390,935        |       | 405,369           |       | 548,789       |          |
| Accounts payable                                                                                                                                                                                                                                           |       | 178,616        |       | 222,550           |       | 301,288       |          |
| Accrued expenses                                                                                                                                                                                                                                           |       |           |       |              |       |          |          |
| Payroll and related                                                                                                                                                                                                                                        |       | 77,780         |       | 137,947           |       | 186,753       |          |
| Customers’ right of return                                                                                                                                                                                                                            |       | 7,423          |       | 8,802             |       | 11,916        |          |
| Other                                                                                                                                                                                                                                                      |       | 140,608        |       | 238,832           |       | 323,331       |          |
| Income taxes payable                                                                                                                                                                                                                                       |       | 11,011         |       | 12,722            |       | 17,223        |          |
| **Total current liabilities**                                                                                                                                                                                                                              | ** ** | **1,323,278**  | ** ** | **1,316,753**     | ** ** | **1,782,621** | ** **    |
| LONG-TERM DEBT                                                                                                                                                                                                                                             |       | 862,492        |       | 1,277,495         |       | 1,729,473     |          |
| LIABILITY FOR TERMINATION INDEMNITIES                                                                                                                                                                                                                      |       | 47,241         |       | 52,656            |       | 71,286        |          |
| DEFERRED TAX LIABILITIES                                                                                                                                                                                                                                   |       | 161,102        |       | 215,891           |       | 292,273       |          |
| OTHER LONG-TERM LIABILITIES                                                                                                                                                                                                                                |       | 124,157        |       | 173,896           |       | 235,420       |          |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                              |       |           |       |              |       |          |          |
| MINORITY INTERESTS IN CONSOLIDATED  SUBSIDIARIES                                                                                                                                                                                                           |       | 19,872         |       | 23,760            |       | 32,166        |          |
| **SHAREHOLDERS’ EQUITY:**                                                                                                                                                                                                                             |       |           |       |              |       |          |          |
| Capital stock par value €0.06-454,477,033  and 455,205,473 ordinary shares authorized and issued at December 31,  2003 and 2004, respectively; 448,042,247 and 448,770,687 shares outstanding  at December 31, 2003 and 2004, respectively; |       | 27,269         |       | 27,312            |       | 36,975        |          |
| Additional paid-in capital                                                                                                                                                                                                                                 |       | 40,423         |       | 47,167            |       | 63,855        |          |
| Retained earnings                                                                                                                                                                                                                                          |       | 1,619,312      |       | 1,812,073         |       | 2,453,184     |          |
| Accumulated other comprehensive loss, net  of tax                                                                                                                                                                                                          |       | (242,483       | )          | (320,958          | )          | (434,513      | )             |
| **Total**                                                                                                                                                                                                                                                  | ** ** | **1,444,521**  | ** ** | **1,565,594**     | ** ** | **2,119,501** | ** **    |
| Less treasury shares at cost; 6,434,786 and  6,434,786 shares at December 31, 2003 and 2004, respectively                                                                                                                                             |       | 69,987         |       | 69,987            |       | 94,748        |          |
| **Shareholders’ equity**                                                                                                                                                                                                                              | ** ** | **1,374,534**  | ** ** | **1,495,607**     | ** ** | **2,024,753** | ** **    |
| **TOTAL**                                                                                                                                                                                                                                                  | ** ** | **3,912,676**  | ** ** | **4,556,058**     | ** ** | **$**         | **6,167,992** | ** ** |

 

See Notes to Consolidated Financial Statements

 

----

(*)           In accordance withU.S. GAAP

(1)           Translated forconvenience at the New York City Noon Buying Rate as determined in Note 1

 

F-3

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**LUXOTTICA GROUP S.p.A. and Subsidiaries**

 

**STATEMENTS OF CONSOLIDATED INCOME**

**FOR THE YEARS ENDED DECEMBER 31, 2002,2003 AND 2004(*)**

 
| ** **                                                         | ** ** | **2002**       | ** ** | **2003**          | ** ** | **2004**       | ** ** | **2004**       | ** **  |
|--------------------------------------------------------------------|------------|----------------|------------|-------------------|------------|----------------|------------|----------------|-------------|
| ** **                                                         | ** ** | **(Euro/000)** | ** ** | **(US $/000)(1)** | ** ** |
| NET SALES                                                          |       | 3,201,788      |       | 2,852,194         |       | 3,255,300      |       | $              | 4,407,025   |   |
| COST OF SALES                                                      |       | (946,134       | )          | (903,617          | )          | (1,040,697     | )          | (1,408,896     | )           |
| **GROSS PROFIT**                                                   | ** ** | **2,255,654**  | ** ** | **1,948,577**     | ** ** | **2,214,603**  | ** ** | **2,998,129**  | ** **  |
| **OPERATING EXPENSES:**                                            |       |           |       |              |       |           |       |           |        |
| Selling and advertising                                            |       | (1,360,340     | )          | (1,235,757        | )          | (1,376,546     | )          | (1,863,568     | )           |
| General and administrative                                         |       | (293,806       | )          | (281,033          | )          | (345,243       | )          | (467,390       | )           |
| **Total**                                                          | ** ** | **(1,654,146** | **)**      | **(1,516,790**    | **)**      | **(1,721,789** | **)**      | **(2,330,958** | **)**       |
| **INCOME FROM OPERATIONS**                                         | ** ** | **601,508**    | ** ** | **431,787**       | ** ** | **492,814**    | ** ** | **667,171**    | ** **  |
| OTHER INCOME (EXPENSE):                                            |       |           |       |              |       |           |       |           |        |
| Interest income                                                    |       | 5,036          |       | 5,922             |       | 6,662          |       | 9,019          |        |
| Interest expense                                                   |       | (65,935        | )          | (47,117           | )          | (56,115        | )          | (75,968        | )           |
| Other — net                                                   |       | (1,167         | )          | (799              | )          | 13,792         |       | 18,672         |        |
| **Other income (expenses)—net**                               | ** ** | **(62,066**    | **)**      | **(41,994**       | **)**      | **(35,661**    | **)**      | **(48,277**    | **)**       |
| **INCOME BEFORE PROVISION FOR INCOME TAXES**                       | ** ** | **539,442**    | ** ** | **389,793**       | ** ** | **457,153**    | ** ** | **618,894**    | ** **  |
| PROVISION FOR INCOME TAXES                                         |       | (162,696       | )          | (117,328          | )          | (161,665       | )          | (218,862       | )           |
| **INCOME BEFORE MINORITY INTERESTS IN  CONSOLIDATED SUBSIDIARIES** |       | 376,746        |       | 272,465           |       | 295,488        |       | 400,032        |        |
| MINORITY INTERESTS IN INCOME OF  CONSOLIDATED SUBSIDIARIES         |       | (4,669         | )          | (5,122            | )          | (8,614         | )          | (11,661        | )           |
| **NET INCOME**                                                     | ** ** | **372,077**    | ** ** | **267,343**       | ** ** | **286,874**    | ** ** | **$**          | **388,371** | ** ** |

 

See Notes to Consolidated Financial Statements

 

----

(*)           In accordance withU.S. GAAP

(1)           Translated forconvenience at the New York City Noon Buying Rate as determined in Note 1

 

F-4

----

 
| ** **                                                      | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                      | ** ** | **2002**                          | ** ** | **2003** | ** ** | **2004** | ** ** | **2004** | ** ** |
| ** **                                                      | ** ** | **(Euro)**                        | ** ** | **(US $)(1)** | ** ** |
| **EARNINGS PER SHARE: BASIC**                                   |       | 0.82                              |       | 0.60 |   | 0.64 |   | $ | 0.87 |   |
| **EARNINGS PER SHARE: DILUTED**                                 |       | 0.82                              |       | 0.59 |   | 0.64 |   | $ | 0.86 |   |
| **WEIGHTED AVERAGE NUMBER OF SHARES  OUTSTANDING (thousands):** |       |                              |       |   |   |   |   |   |   |
| Basic                                                           |       | 453,174.0                         |       | 448,664.4 |   | 448,275.0 |   |   |   |
| Diluted                                                         |       | 455,353.5                         |       | 450,202.1 |   | 450,360.9 |   |   |   |

 

See Notes to Consolidated Financial Statements

 

----

(*)           In accordance withU.S. GAAP

(1)           Translated forconvenience at the New York City Noon Buying Rate as determined in Note 1

 

F-5

----

 

**LUXOTTICA GROUP S.p.A. and Subsidiaries**

 

**STATEMENTS OF CONSOLIDATED SHAREHOLDERS’****EQUITY**

**FOR THE YEARS ENDED DECEMBER 31, 2002,2003 AND 2004(*)**

 

 
| **(Euro/000)**                                                                              | ** ** | ** **      | ** ** | ** ** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Other  Comprehensive  Income (Loss)  Net of Tax** | ** **    | **Accumulated  Other  Comprehensive  Income (Loss)  Net of Tax** | ** ** | **Treasury  Shares Amount,  at Cost** | ** ** | **Consolidated  Shareholders’ Equity** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------|------------|------------|------------|----------------------------------|------------|------------------------|------------|-----------------------------------------------------|---------------|------------------------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------------|------------|
| **Common  Stock**                                                                           |
| **Shares**                                                                                  | ** ** | **Amount**      |
| ** **                                                                                  | ** ** | ** **      | ** ** | ** ** | ** ** | ** **                       | ** ** | ** **             | ** ** | ** **                                          | ** **    | ** **                                                       | ** ** | ** **                            | ** ** | ** **                                  | ** ** |
| **BALANCES,  JANUARY 1, 2002**                                                         | ** ** | **452,865,817** | ** ** | **27,172** | ** ** | **18,381**                       | ** ** | **1,152,508**          | ** ** | ** **                                          | ** **    | **147,116**                                                      | ** ** | **(2,334**                            | **)**      | **1,342,843**                               | ** ** |
| Exercise of stock  options                                                                  |       | 1,397,783       |       | 84         |       | 9,483                            |       |                   |       |                                                |          |                                                             |       |                                  |       | 9,567                                       |       |
| Translation  adjustment                                                                     |       |            |       |       |       |                             |       |                   |       | (202,357                                            | )             | (202,357                                                         | )          |                                  |       | (202,357                                    | )          |
| Minimum pension  liability, less taxes of Euro 15.8 million                       |       |            |       |       |       |                             |       |                   |       | (26,569                                             | )             | (26,569                                                          | )          |                                  |       | (26,569                                     | )          |
| Tax benefit on  stock options                                                               |       |            |       |       |       | 3,894                            |       |                   |       |                                                |          |                                                             |       |                                  |       | 3,894                                       |       |
| Sale of treasury  shares, net of taxes of Euro 5.5 million                        |       |            |       |       |       | 6,935                            |       |                   |       |                                                |          |                                                             |       | 2,334                                 |       | 9,269                                       |       |
| Purchase of  treasury shares                                                                |       |            |       |       |       |                             |       |                   |       |                                                |          |                                                             |       | (24,547                               | )          | (24,547                                     | )          |
| Change in fair  value of derivative instruments, net of taxes of Euro 3.6 million |       |            |       |       |       |                             |       |                   |       | 10,929                                              |          | 10,929                                                           |       |                                  |       | 10,929                                      |       |
| Dividends  declared (Euro 0.17 per share)                                              |       |            |       |       |       |                             |       | (77,211                | )          |                                                |          |                                                             |       |                                  |       | (77,211                                     | )          |
| Net income                                                                                  |       |            |       |       |       |                             |       | 372,077                |       | 372,077                                             |          |                                                             |       |                                  |       | 372,077                                     |       |
| **Comprehensive  income**                                                                   | ** ** | ** **      | ** ** | ** ** | ** ** | ** **                       | ** ** | ** **             | ** ** | **154,080**                                         |          |                                                             |       |                                  |       |                                        |       |
| **BALANCES,  DECEMBER 31, 2002**                                                       | ** ** | **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**                               | ** ** |
| **Comprehensive  income(1)**                                                                | ** ** | ** **      | ** ** | ** ** | ** ** | ** **                       | ** ** | ** **             | ** ** | **$**                                               | **282,131**   |                                                             |       |                                  |       |                                        |       |   |
| **BALANCES,  DECEMBER 31, 2004 (US $/000)(1)**                                    | ** ** | **455,205,473** | ** ** | **$**      | **36,975** | ** **                       | **$**      | **63,855**             | ** ** | **$**                                               | **2,453,184** | ** **                                                       | ** ** | ** **                            | **$**      | **(434,513**                                | **)**      | **$** | **(94,748** | **)** | **$** | **2,024,753** | ** ** |
|                                                                                             |            |                 |            |            |            |                                  |            |                        |            |                                                     |               |                                                                  |            |                                       |            |                                             |            |  |  |  |  |  |  |  |

 

See Notes to Consolidated Financial Statements

 

----

(*)           In accordance withU.S. GAAP

(1)           Translated forconvenience at the New York City Noon Buying Rate as determined in Note 1

 

F-6

----

 

**LUXOTTICA GROUP S.p.A. and Subsidiaries**

 

**STATEMENTS OF CONSOLIDATED CASH FLOWS**

**FOR YEARS ENDED DECEMBER 31, 2002, 2003AND 2004(*)**

 
| ** **                                                                             | ** ** | **2002**       | ** ** | **2003**          | ** ** | **2004**    | ** ** | **2004**    | ** **  |
|----------------------------------------------------------------------------------------|------------|----------------|------------|-------------------|------------|-------------|------------|-------------|-------------|
| ** **                                                                             | ** ** | **(Euro/000)** | ** ** | **(US $/000)(1)** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                              |       |           |       |              |       |        |       |        |        |
| **Net income**                                                                         | ** ** | **372,077**    | ** ** | **267,343**       | ** ** | **286,874** | ** ** | **$**       | **388,371** | ** ** |
| **Adjustments to reconcile net income to net  cash provided by operating activities:** |       |           |       |              |       |        |       |        |        |
| Minority interest in income of consolidated  subsidiaries                              |       | 4,669          |       | 5,122             |       | 8,614       |       | 11,662      |        |
| Depreciation and amortization                                                          |       | 145,980        |       | 134,840           |       | 152,751     |       | 206,794     |        |
| (Benefit) provision for deferred income  taxes                                         |       | (7,785         | )          | 12,865            |       | 45,414      |       | 61,481      |        |
| Gain on disposals of fixed assets—net                                             |       | (1,212         | )          | (124              | )          | —      |       | —      |        |
| Unrealized foreign exchange gain                                                       |       | —         |       | —            |       | (13,445     | )          | (18,202     | )           |
| Termination indemnities matured during the  year—net                              |       | 5,977          |       | 2,403             |       | 6,768       |       | 9,163       |        |
| **Changes in operating assets and  liabilities, net of acquisition of businesses:**    |       |           |       |              |       |        |       |        |        |
| Accounts receivable                                                                    |       | (17,522        | )          | 23,888            |       | (15,819     | )          | (21,416     | )           |
| Prepaid expenses and other                                                             |       | 56,339         |       | (43,556           | )          | 749         |       | 1,014       |        |
| Inventories                                                                            |       | (58,573        | )          | 17,120            |       | 64,467      |       | 87,275      |        |
| Accounts payable                                                                       |       | 8,926          |       | (45,029           | )          | 7,062       |       | 9,561       |        |
| Accrued expenses and other                                                             |       | (78,611        | )          | (39,857           | )          | (14,724     | )          | (19,934     | )           |
| Accrual for customers’ right of return                                            |       | (3,147         | )          | (249              | )          | 727         |       | 984         |        |
| Income taxes payable                                                                   |       | 9,161          |       | (7,494            | )          | (1,555      | )          | (2,105      | )           |
| **Total adjustments**                                                                  | ** ** | **64,202**     | ** ** | **59,929**        | ** ** | **241,009** | ** ** | **326,277** | ** **  |
| **Cash provided by operating activities**                                              | ** ** | **436,279**    | ** ** | **327,272**       | ** ** | **527,883** | ** ** | **714,648** | ** **  |
|                                                                                        |            |                |            |                   |            |             |            |             |             |  |

 

See Notes to Consolidated Financial Statements

 

----

(*)           In accordance withU.S. GAAP

(1)           Translated forconvenience at the New York City Noon Buying Rate as determined in Note 1

 

F-7

----

 
| ** **                                                        | ** ** | **2002**       | ** ** | **2003**          | ** ** | **2004**     | ** ** | **2004**     | ** **  |
|-------------------------------------------------------------------|------------|----------------|------------|-------------------|------------|--------------|------------|--------------|-------------|
| ** **                                                        | ** ** | **(Euro/000)** | ** ** | **(US $/000)(1)** | ** ** |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                         |       |           |       |              |       |         |       |         |        |
| Property, plant and equipment:                                    |       |           |       |              |       |         |       |         |        |
| Additions                                                         |       | (173,330       | )          | (81,288           | )          | (117,420     | )          | (158,963     | )           |
| Disposals                                                         |       | 4,646          |       | 3,839             |       | 198          |       | 268          |        |
| Purchases of businesses net of cash  acquired                     |       | (27,428        | )          | (342,432          | )          | (362,978     | )          | (491,400     | )           |
| Increase in investments                                           |       | (7,611         | )          | (501              | )          | —       |       | —       |        |
| (Additions) disposals of intangible  assets-net                   |       | 28,611         |       | (48,177           | )          | (301         | )          | (407         | )           |
| **Cash used in investing activities**                             | ** ** | **(175,112**   | **)**      | **(468,559**      | **)**      | **(480,501** | **)**      | **(650,502** | **)**       |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                         |       |           |       |              |       |         |       |         |        |
| Long-term debt:                                                   |       |           |       |              |       |         |       |         |        |
| Proceeds                                                          |       | 1,000,714      |       | 619,859           |       | 1,187,601    |       | 1,607,774    |        |
| Repayments                                                        |       | (1,408,308     | )          | (332,045          | )          | (935,443     | )          | (1,266,403   | )           |
| Use of restricted cash deposit                                    |       | 201,106        |       | —            |       | —       |       | —       |        |
| (Decrease) increase overdraft balances                            |       | (21,712        | )          | 156,290           |       | (246,680     | )          | (333,955     | )           |
| Sales of treasury shares                                          |       | 9,269          |       | —            |       | —       |       | —       |        |
| Investment in treasury shares                                     |       | (24,547        | )          | (45,440           | )          | —       |       | —       |        |
| Exercise of stock options, including tax  benefit                 |       | 13,461         |       | 1,743             |       | 6,787        |       | 9,188        |        |
| Dividends                                                         |       | (77,211        | )          | (95,405           | )          | (94,113      | )          | (127,410     | )           |
| **Cash (used in) provided by financing  activities**              | ** ** | **(307,228**   | **)**      | **305,002**       | ** ** | **(81,848**  | **)**      | **(110,806** | **)**       |
| **(DECREASE) INCREASE IN CASH AND CASH  EQUIVALENTS**             | ** ** | **(46,061**    | **)**      | **163,715**       | ** ** | **(34,466**  | **)**      | **(46,660**  | **)**       |
| **CASH AND EQUIVALENTS, BEGINNING OF YEAR**                       | ** ** | **199,202**    | ** ** | **151,418**       | ** ** | **299,937**  | ** ** | **406,055**  | ** **  |
| **Effect of exchange rate changes on cash and  cash equivalents** | ** ** | **(1,723**     | **)**      | **(15,196**       | **)**      | **(8,122**   | **)**      | **(10,996**  | **)**       |
| **CASH AND EQUIVALENTS, END OF YEAR**                             | ** ** | **151,418**    | ** ** | **299,937**       | ** ** | **257,349**  | ** ** | **$**        | **348,399** | ** ** |
| **SUPPLEMENTAL DISCLOSURE OF CASH FLOWS  INFORMATION:**           |       |           |       |              |       |         |       |         |        |
| Cash paid during the year for interest                            |       | 58,162         |       | 44,951            |       | 58,371       |       | 79,023       |        |
| Cash paid during the year for income taxes                        |       | 137,650        |       | 110,609           |       | 108,440      |       | 146,806      |        |
| Acquisition of businesses:                                        |       |           |       |              |       |         |       |         |        |
| Fair value of assets acquired                                     |       | —         |       | 102,323           |       | 157,905      |       | 213,772      |        |
|                                                                   |            |                |            |                   |            |              |            |              |             |  |

 

See Notes to Consolidated Financial Statements

 

----

(*)           In accordance withU.S. GAAP

(1)           Translated forconvenience at the New York City Noon Buying Rate as determined in Note 1

 

F-8

----

 

**LUXOTTICA GROUP S.p.A. and Subsidiaries**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1. ORGANIZATION AND SIGNIFICANT ACCOUNTINGPOLICIES**

 

**Organization**—LuxotticaGroup S.p.A. and its subsidiaries (collectively “Luxottica Group” or the “Company”)operate in two industry segments: (1) manufacturing and wholesaledistribution and (2) retail distribution. Through its manufacturing andwholesale distribution operations, Luxottica Group is engaged in the design,manufacturing, wholesale distribution and marketing of house brand and designerlines of mid to premium-priced prescription frames and sunglasses. The Companyoperates in the retail segment through its Retail Division, consisting ofLensCrafters, Inc. and other affiliated companies (“LensCrafters”), SunglassHut International, Inc. and its subsidiaries (“Sunglass Hut International”),OPSM Group Limited and its subsidiaries (“OPSM”) since August 2003, andCole National Corporation and its wholly owned subsidiaries (“Cole”) since October 4,2004. As of December 31, 2004, LensCrafters operated 888 stores throughoutthe United States of America and Canada; Sunglass Hut International operated1,858 stores located in North America, Europe and Australia; OPSM operated 598stores under three brands across states and territories in Australia, NewZealand, Hong Kong, Singapore and Malaysia; and Cole National operated 2,407owned stores and 472 franchised specialty retailers of optical products andpersonalized gifts located in the United States of America and Canada. Certainof the Company’s U.S. subsidiaries also are engaged as providers of managedvision care benefits and claims payment administrators whose programs providecomprehensive eyecare benefits primarily directed to large employers and healthmaintenance organizations.

 

**Principles of Consolidation and Basis ofPresentation**—The consolidated financial statements ofLuxottica Group include the financial statements of the parent company and allwholly or majority-owned subsidiaries. The Company’s investments in unconsolidatedsubsidiaries which are at least 20 percent owned and where the Companyexercises significant influence over operating and financial policies areaccounted for using the equity method. Luxottica Group holds a 44 percentinterest in an affiliated manufacturing and wholesale distributor, located inIndia, and a 50 percent interest in an affiliated company located in GreatBritain, which are both accounted for under the equity method. The results ofoperations of these investments are not material to the results of theoperations of the Company. Investments in other companies in which the Companyhas less than a 20 percent interest are carried at cost. All significantintercompany accounts and transactions are eliminated in consolidation. LuxotticaGroup prepares its consolidated financial statements in accordance withaccounting principles generally accepted in the United States of America (“U.S.GAAP”).

 

The Company has included a variable interestentity (the “Trust”), consisting of a synthetic operating lease, for one ofCole’s facilities. The Trust is included in these consolidated financialstatements since the Company is required to absorb any expected losses from,and will receive the majority of expected returns on, the activities of the Trust,and is the primary beneficiary of the Trust. The assets of Euro1.6 million and liabilities of Euro 1.6 million have beenconsolidated into the financial statements as of December 31, 2004. Futureoperating results of the Trust are not expected to have a material effect onthe Company’s financial position or operating results.

 

The North America Retail Division fiscal yearis a 52- or 53-week period ending on the Saturday nearest December 31.The accompanying consolidated financial statements include the operations ofthe North America Retail Division for the 53-week period ended January 3,2004 and the 52-week period ended January 1, 2005.

 

**Foreign Currency Translation and Transactions**—LuxotticaGroup accounts for its foreign currency denominated transactions and foreignoperations in accordance with Statement of Financial Accounting Standards (“SFAS”)No. 52, *Foreign Currency Translation*. Thefinancial statements of foreign subsidiaries are translated into Euro, which isthe functional currency of the parent company and the reporting currency of theCompany. Assets and liabilities of foreign subsidiaries, which use the localcurrency as their functional currency, are translated at year-end exchangerates. Results of operations are translated using the average exchange ratesprevailing throughout the year. The resulting cumulative translationadjustments have been recorded as a separate component of accumulated othercomprehensive income (loss).

 

The Company has one subsidiary in a highlyinflationary country. However, the operations of such subsidiary are currentlynot material to the Company’s consolidated financial statements.

 

F-9

----

 

Transactions in foreign currencies arerecorded at the exchange rate in effect at the transaction date. Gains orlosses from foreign currency transactions, such as those resulting from thesettlement of foreign receivables or payables during the year, are recognizedin consolidated income in such year.

 

**Cash and Cash Equivalents**—LuxotticaGroup considers investments purchased with a remaining maturity of three monthsor less to be cash equivalents.

 

**Bank Overdrafts**—Bankoverdrafts represent negative cash balances held in banks and amounts borrowedunder various unsecured short-term lines of credit (See “Credit Facilities”included in Note 14 for further discussion of the short-term lines ofcredit) that the Company has obtained through local financial institutions.These facilities are usually short-term in nature or may contain provisionsthat allow them to renew automatically with a cancellation notice period.Certain subsidiary agreements require a guarantee from Luxottica Group S.p.A.Interest rates on these lines of credit vary and can be used to obtain variousletters of credit when needed.

 

**Inventories**—LuxotticaGroup’s manufactured inventories, approximately 76.9 percent and65.0 percent of total frame inventory for 2003 and 2004, respectively, arestated at the lower of cost, as determined under the weighted-average method(which approximates the first-in, first-out method, “FIFO”), or market value.Retail inventory not manufactured by the Company or its subsidiaries are statedat the lower of cost, as determined on a retail last-in, first-out method (“LIFO”),FIFO or weighted-average cost, or market value. The LIFO reserve was notmaterial as of December 31, 2003 and 2004.

 

**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 expenses are expensedas incurred. Upon the sale or disposition of property and equipment, the costof the asset and the related accumulated depreciation and leaseholdamortization are removed from the accounts and any resulting gain or loss isincluded in the Statements of Consolidated Income.

 

In 2003, management determined that theuseful lives of certain machinery and equipment were longer than originallyexpected based upon useful lives of similar fully amortized assets which arestill in use. A change in accounting estimate was recognized to reflect thisdecision resulting in an immaterial increase in net income for the 2003 fiscalyear.

 

**Capitalized Lease 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**—Goodwillrepresents the excess of the purchase price (including acquisition-relatedexpenses) over the value assigned to the net tangible and identifiableintangible assets acquired. The Company’s goodwill is tested for impairment asof December 31st of each year and, in November 2002, in connectionwith the announcement of the termination of the license agreement for theproduction and distribution of the Giorgio Armani and Emporio Armanicollections. Such tests are performed at reporting unit level which consists oftwo units, Wholesale and Retail, as required by the provisions of SFAS No.142, *Goodwill and Other Intangible Assets*. For the years ended December 31,2002, 2003 and 2004, the result of this process was the determination that thecarrying value of each reporting unit of the Company was not impaired and, as aresult, the Company has not recorded a goodwill impairment charge.

 

**Trade Names 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

 

F-10

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amortized on a straight-line basis over periods ranging from 20 to25 years (see Note 6). Intangibles include among other itemsdistributor networks, customer lists and contracts, franchise agreements, andlicense agreements and are amortized over the respective useful lives. Allintangibles are subject to test for impairment in accordance with SFAS No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets* (“SFAS 144”). Aggregate amortization expenseof trade names and other intangibles for the years ended December 31,2002, 2003 and 2004 was Euro 42.2 million, Euro 42.6 million and Euro51.6 million, respectively.

 

**Impairment of 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 theassets and their eventual disposition. If the sum of the expected undiscountedfuture cash flows were less than the carrying amount of the assets, the Companywould recognize an impairment loss, if determined to be necessary. Suchimpairment loss is measured as the amount by which the carrying amount of theasset exceeds the fair value of the asset in accordance with SFAS 144. TheCompany determined that, for the years ended December 31, 2002, 2003 and2004, there had been no impairment in the carrying value of its long-livedassets.

 

**Store Opening and Closing Costs**—Storeopening costs are charged to operations as incurred in accordance withStatement of Position No. 98-5, *Accounting for the Cost ofStart-up Activities*. The costs associated with closing stores orfacilities are recorded at fair value as such costs are incurred. Store closingcosts charged to the Statements of Consolidated Income during fiscal 2002, 2003and 2004 were not material.

 

**Self Insurance**—TheCompany is self insured for certain losses relating to workers’ compensation,general liability, auto liability, and employee medical benefits for claimsfiled and for claims incurred but not reported. The Company’s liability isestimated on an undiscounted basis using historical claims experience andindustry averages; however, the final cost of the claims may not be known forover five years. As of December 31, 2003 and 2004 self insurance accrualswere Euro 18.6 million and Euro 36.1 million, respectively.

 

**Income Taxes**—Incometaxes are recorded 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 is recordedfor deferred tax assets if it is determined that it is more likely than notthat the asset will not be realized.

 

**Liability for Termination Indemnities**—Terminationindemnities represent amounts accrued for employees in Australia, Austria,Greece, Israel, Italy and Japan, determined in accordance with labour laws andagreements in each respective country (see Note 9).

 

**Revenue Recognition**—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 are recorded fromsales of products at the time of shipment, as title and the risks and rewardsof ownership of the goods are assumed by the customer at such time. Theproducts are not subject to formal customer acceptance provisions. In somecountries, the customer has the right to return products for a limited periodof time after the sale. However, such right of return does not impact thetiming of revenue recognition as all conditions of SFAS No. 48, *Revenue Recognition When Right of Return Exists,* aresatisfied at the date of sale. Accordingly, the Company has recorded an accrualfor the estimated amounts to be returned. This estimate is based on the Company’sright of return policies and practices along with historical data and sales trends.There are no other post-shipment obligations.

 

Retail Division revenues, including internetand catalog sales, are recorded upon receipt by the customer at the retaillocation, or when goods are shipped directly to the customer for internet andcatalog sales. In some countries, the Company allows retail customers to returngoods for a period of time and as such the Company has recorded an accrual forthe estimated amounts to be returned. This accrual is based on the historicalreturn rate as a percentage of net sales and the timing of the returns from theoriginal transaction date. There are no other post-shipment obligations.Additionally, the Retail Division enters into discount programs and similarrelationships with third parties that have terms of twelve or more months.Revenues under these

 

F-11

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arrangements are likewise recognized as transactions occur in theCompany’s retail locations and customers take receipt of products and services.Also included in Retail Division revenues are managed vision care revenuesconsisting of (i) insurance revenues which are recognized when earned overthe terms of the respective contractual relationships, and (ii) administrativeservices revenues which are recognized when services are provided during thecontract period. Accruals are established for amounts due under theserelationships determined to be uncollectible.

 

Cole earns and accrues franchise revenuesbased on sales by franchisees which are accrued as earned. Initial franchisefees are recorded as revenue when all material services or conditions relatingto the sale of the franchise have been substantially performed or satisfied byCole and when the related store begins operations. Accruals are established foramounts due under these relationships determined to be uncollectible.

 

The Retail Division also sells separatelypriced 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 changes in deferredrevenue from the sale of warranty contracts and other deferred items is asfollows:

 
| **(Thousands of Euro)**            | ** ** | **2003**   | ** ** | **2004**   | ** ** |
|------------------------------------|------------|------------|------------|------------|------------|
| Begining  balance                  |       | 845        |       | 512        |       |
| Translation  difference            |       | (120       | )          | (3,631     | )          |
| Cole  acquired balances            |       | —     |       | 44,161     |       |
| Warranty  contracts sold           |       | —     |       | 10,152     |       |
| Other  deferred revenues           |       | 4,319      |       | 3,922      |       |
| Amortization  of deferred revenues |       | (4,532     | )          | (14,152    | )          |
| **Total**                          | ** ** | **512**    | ** ** | **40,964** | ** ** |
| Current                            |       | 512        |       | 31,948     |       |
| **Non-current**                    |       | **—** |       | **9,016**  |       |

 

The Wholesale and Retail Divisions may offercertain promotions during the year. Free frames given to customers as part of apromotional offer are recorded as cost of sales at the time they are deliveredto the customer. Discounts and coupons tendered by customers are recorded as areduction of revenue at the date of sale.

 

**Managed Vision Care Underwriting andExpenses—**The Company sells vision insurance planswhich generally have duration of up to two years. Based on its experience, theCompany believes it can predict utilization and claims experience under theseplans, including claims incurred but not yet reported, with a high degree ofconfidence. Claims are recorded as they are incurred and certain othermembership costs are amortized over the covered period.

 

**Advertising and Direct Response Marketing**—Coststo develop and create newspaper, television, radio and other media advertisingare expensed as incurred, and the costs to communicate the advertising areexpensed 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 result in future economic benefit and the primary purpose ofthe advertising is to elicit sales to customers who could be shown to haveresponded specifically to the advertising. Such costs related to the directresponse advertising are amortized over the period during which the revenuesare recognized, not to exceed 90 days. Generally, other direct responseprogram costs that do not meet the capitalization criteria are expensed thefirst time the advertising occurs.

 

With the acquisition of Cole in October 2004,the Company receives a reimbursement from its Pearle 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 amount received in fiscal year 2004 for suchreimbursement was Euro 4.2 million.

 

**Pervasiveness of 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

 

F-12

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contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

 

**Earnings Per Share**—LuxotticaGroup calculates basic and diluted earnings per share in accordance with SFAS No. 128,*Earnings per Share*. Net income availableto shareholders is the same for the basic and diluted earnings per sharecalculations for the years ended December 31, 2002, 2003 and 2004. Basicearnings per share are based on the weighted average number of shares of commonstock outstanding during the period. Diluted earnings per share are based onthe weighted average number of shares of common stock and common stockequivalents (options and warrants) outstanding during the period, except whenthe common stock equivalents are anti-dilutive. The following is reconciliationfrom basic to diluted shares outstanding used in the calculation of earningsper share:

 
| **In thousands**                                                                                                                               | ** ** | **2002**  | ** ** | **2003**  | ** ** | **2004**  | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Weighted  average shares outstanding—basic                                                                                                |       | 453,174.0 |       | 448,664.4 |       | 448,275.0 |       |
| Effect of  dilutive stock options                                                                                                              |       | 2,179.5   |       | 1,537.7   |       | 2,085.9   |       |
| Weighted  average shares outstanding—dilutive                                                                                             |       | 455,353.5 |       | 450,202.1 |       | 450,360.9 |       |
| Options not  included in calculation of dilutive shares as the exercise price was greater  than the average price during the respective period |       | 1,974.7   |       | 4,046.6   |       | 2,169.6   |       |

 

**Fair Value of Financial Instruments**—Financialinstruments consist primarily of cash and cash equivalents, marketablesecurities, trade account receivables, accounts payable, long-term debt andderivative financial instruments. Luxottica Group estimates the fair value offinancial instruments based on interest rates available to the Company and bycomparison to quoted market prices, when available. At December 31, 2003and 2004, the fair value of the Company’s financial instruments approximatedthe carrying value.

 

**Stock-based Compensation**—TheCompany has elected to follow the accounting provisions of AccountingPrinciples Board (“APB”) Opinion No. 25, *Accountingfor Stock Issued to Employees* (“APB 25”) for stock-based compensationand to provide the disclosures required under SFAS No. 123, *Accounting for Stock-Based Compensation*, as amended by SFAS No. 148,*Accounting for Stock-based Compensation*—*Transition and Disclosure*(collectively, “SFAS 123”)(see Note 10). No stock-based employee compensation cost is reflected innet income, as all options granted under the plans have an exercise price equalto the market value of the underlying stock on the date of the grant. TheCompany changed its method to value options issued after January 1, 2004from the Black-Scholes model to a binomial model as the Company believes abinomial valuation technique will result in a better estimate of the fair valueof the options. The following table illustrates the effect on net income andearnings per share had the compensation costs of the plans been determinedunder a fair-value based method as stated in SFAS 123:

 
| **(Thousands of Euro):**                                                                                         | ** ** | **Year ended  December 31,  2002** | ** ** | **Year ended  December 31,  2003** | ** ** | **Year ended  December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| Net income  as reported                                                                                          |       | 372,077                                 |       | 267,343                                 |       | 286,874                                 |       |
| Deduct:  Stock-based compensation expense determined under fair value based method for  all awards, net of taxes |       | (9,359                                  | )          | (11,127                                 | )          | (9,964                                  | )          |
| Pro-forma  (Unaudited)                                                                                           |       | 362,718                                 |       | 256,216                                 |       | 276,910                                 |       |
|                                                                                                             |       |                                    |       |                                    |       |                                    |       |
| **Basic  earnings per share (Euro):**                                                                            | ** ** | ** **                              | ** ** | ** **                              | ** ** | ** **                              | ** ** |
| As reported                                                                                                      |       | 0.82                                    |       | 0.60                                    |       | 0.64                                    |       |
| Pro-forma  (Unaudited)                                                                                           |       | 0.80                                    |       | 0.57                                    |       | 0.62                                    |       |
|                                                                                                             |       |                                    |       |                                    |       |                                    |       |
| **Diluted  earnings per share (Euro):**                                                                          | ** ** | ** **                              | ** ** | ** **                              | ** ** | ** **                              | ** ** |
| As reported                                                                                                      |       | 0.82                                    |       | 0.59                                    |       | 0.64                                    |       |
| Pro-forma  (Unaudited)                                                                                           |       | 0.80                                    |       | 0.57                                    |       | 0.61                                    |       |

 

The fair value of options granted wasestimated on the date of grant using the Black-Scholes option-pricing model foroptions issued prior to January 1, 2004 and using a binomial model foroptions issued after such date with the following weighted average assumptions:

 
| ** **                          | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Dividend  yield                     |       | 0.70     | %          | 1.06     | %          | 1.71     | %          |
| Risk-free  interest rate            |       | 4.48     | %          | 3.65     | %          | 2.92     | %          |
| Expected  option life (years)       |       | 5        |       | 5        |       | 5.44     |       |
| Expected  volatility                |       | 47.04    | %          | 36.00    | %          | 36.56    | %          |
| Weighted  average fair value (Euro) |       | 7.37     |       | 5.45     |       | 5.10     |       |

 

F-13

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The Company recognizes forfeitures as theyoccur for the years 2002 and 2003 and changing to the binomial approach in 2004has assumed a forfeiture rate of six percent for 2004 grants.

 

**Derivative Financial Instruments**—Derivativefinancial instruments are accounted for in accordance with SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities*,as amended and interpreted (“SFAS 133”).

 

SFAS 133 requires that all derivatives,whether or not designed in hedging relationships, be recorded on the balancesheet at fair value regardless of the purpose or intent for holding them. If aderivative is designated as a fair-value hedge, changes in the fair value ofthe derivative and the related change in the hedge item are recognized inoperations. If a derivative is designated as a cash-flow hedge, changes in thefair value of the derivative are recorded in other comprehensive income (“OCI”)in the Statements of Consolidated Shareholders’ Equity and are recognized inthe Statements of Consolidated Income when the hedged item affects operations.The effect of these derivatives in the Statements of Consolidated Operationsdepends on the item hedged (for example, interest rate hedges are recorded in interestexpense). For a derivative that does not qualify as a hedge, changes in fairvalue are recognized in the Statements of Consolidated Operations, under thecaption “Other—net”.

 

Luxottica Group uses derivative financialinstruments, principally interest rate and currency swap agreements, as part ofits risk management policy to reduce its exposure to market risks from changesin interest and foreign exchange rates. Although it has not done so in thepast, the Company may enter into other derivative financial instruments when itassesses that the risk can be hedged effectively.

 

**Recent Accounting Pronouncements**—InDecember 2003, the Financial Accounting Standards Board (“FASB”) issuedFASB Interpretation (“FIN”) No. 46, *Consolidation of VariableInterest Entities-an interpretation of ARB No.51* (“FIN 46-R”)to address certain FIN No. 46 implementation issues. This interpretationclarifies the application of Accounting Research Bulletin (“ARB”) No. 51, *Consolidated Financial Statements* for companies with interestsin entities that are variable interest entities (“VIEs”) as defined under FIN No. 46.According to this interpretation, if a company has an interest in a VIE and isat risk for the majority of the VIE’s expected losses or receives a majority ofthe VIE’s expected gains it shall consolidate the VIE. FIN 46-R alsorequires additional disclosures by primary beneficiaries and other significantvariable interest holders. FIN 46-R is effective no later than the end ofthe first interim or reporting period ending after March 15, 2004, exceptfor those VIEs that are considered to be special purpose entities for which theeffective date is no later than the end of the first reporting period endingafter December 15, 2003. The Company adopted FIN 46-R on January 1,2004 and such adoption did not have a material effect on the Company’sconsolidated financial statements.

 

In December 2003, the FASB issued SFAS No. 132-R,*Employer’s Disclosures about Pensions and OtherPostretirement Benefits,* which requires additional disclosures inthe financial statements about assets, obligations, and cash flows among otheritems. The new required disclosures are reflected in Note 9.

 

In May 2004, the FASB issued FASB StaffPosition No. FAS 106-2, *Accounting and DisclosureRequirements Related to the Medicare Prescription Drug, Improvement andModernization Act of 2003* (“FSP FAS 106-2”), whichsupersedes FSP FAS 106-1. Under the Act of 2003, if a sponsor ofretiree healthcare plans offers drug benefits that are at least actuariallyequivalent to those to be offered under Medicare Part D, it can beentitled to a federal subsidy equal to 28 percent of the prescription drugclaims under the plan. FSP FAS 106-2 requires plan sponsors todisclose the effect of the subsidy on the net periodic expense and accumulatedpost retirement benefit obligation in their interim and annual financialstatements for periods beginning after June 15, 2004. The effect of thisAct on the Company’s current plans was immaterial and thus not disclosed separatelydue to the small number of eligible plan participants.

 

In November 2004, the FASB issued SFAS No. 151,*Inventory Costs—an amendment of ARB No. 43,Chapter 4* to clarify that abnormal amounts of idle facility expense,freight, handling costs, and wasted material should be recognized as periodcosts. 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 FASB issued SFAS No. 123-R(revised 2004), *Share-Based Payment*(“SFAS 123-R”)which replaces the existing SFAS 123 and supersedes Accounting PrinciplesBoard Opinions (“APB”) No. 25 *Accounting for Stock*

 

F-14

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*Issued to Employees*.SFAS 123-R requires companies to measure and record compensation expensefor stock options and other share-based payment methods based on theinstruments’ fair value. SFAS 123-R is effective for the Company on January 1,2006. The Company is currently evaluating the impact of the adoption ofSFAS 123-R.

 

In December 2004, the FASB issued SFAS No. 153,*Exchanges of Nonmonetary Assets—an amendment of APBOpinion No. 29* (“SFAS153”) SFAS 153 amends APB No. 29,*Accounting for Nonmonetary Transactions,*to eliminate the exception for nonmonetary exchanges of similar productive assetsand replaces it with a general exception for exchanges of nonmonetary assetsthat do not have commercial substance. A nonmonetary exchange has commercialsubstance if the future cash flows of the entity are expected to changesignificantly as a result of the exchange. SFAS 153 is effective forreporting periods beginning after June 15, 2005. The adoption ofSFAS 153 is not expected to have a material effect on the Company’sconsolidated financial statements.

 

**Information Expressed in U.S. Dollars**—TheCompany’s consolidated financial statements are stated in Euro, the currency ofthe country in which the parent company is incorporated and operates. Thetranslation of Euro amounts into U.S. $ amounts is included solely for theconvenience of international readers and has been made at the rate of Euro 1 toU.S. $1.3538. Such rate was determined by using the noon buying rate of theEuro to U.S. $ as certified for custom purposes by the Federal Reserve Bank ofNew York as of December 31, 2004. Such translations should not beconstrued as representations that Euro amounts could be converted into U.S. $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.

 

**Investment**—On December 31,2001, a U.S. subsidiary of the Company held 1,205,000 of the Company’s ordinaryshares, which had been previously purchased at a cost of U.S. $3.1 million(Euro 2.4 million at historical exchange rates). These shares were soldduring 2002 for proceeds of U.S. $8.8 million (Euro 9.3 million). Theafter-tax net gain of U.S. $6.5 million (Euro 6.9 million) wasrecorded as an increase to the Company’s additional paid-in capital balance.Approximately 63 percent of these shares were sold to a related party withan after-tax net gain of U.S. $4.3 million (Euro 4.4 million).

 

**License Agreement**—TheCompany has a worldwide exclusive license agreement to manufacture and distributeophthalmic products under the name of Brooks Brothers. The Brooks Brotherstradename is owned by Retail Brand Alliance, Inc., which is controlled bya Director of the Company. The license agreement expired on March 31, 2003and was renewed in January 2005. For the fiscal year 2004 conditions werenot changed and royalties paid to Retail Brand Alliance, Inc. for suchagreement were Euro 1.4 million, Euro 1.1 million and Euro0.9 million in the years ended December 31, 2002, 2003 and 2004,respectively.

 

In July 2004, the Company signed aworldwide exclusive license agreement to manufacture and distribute ophthalmicproducts under the name of Adrienne Vittadini. The Adrienne Vittadini tradenameis owned by Retail Brand Alliance, Inc., which is controlled by a Directorof the Company. The license agreement expires on December 31, 2007. Forthe year ended December 31, 2004, royalties paid to Retail Brand Alliance, Inc.for such agreement were Euro 0.1 million.

 

**Stock Incentive Plan**—OnSeptember 14, 2004, the Company’s Chairman and majority shareholder, Mr. LeonardoDel Vecchio, had allocated shares held through La Leonardo Finanziaria S.r.l.,an Italian 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. The stock options to be issued under the stock option plan vestupon meeting certain economic objectives. As such, compensation expense will berecorded for the options issued to management under this plan based on themarket value of the underlying ordinary shares only when the number of sharesto be vested and issued is known.

 

F-15

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**3. INVENTORIES**

 

Inventories consisted of the following(thousands of Euro):

 
| ** **                   | ** ** | **December 31,** | ** ** |
|------------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2003**              | ** ** | **2004** | ** ** |
| Raw  materials and packaging |       | 62,209                |       | 50,656 |   |
| Work in  process             |       | 25,363                |       | 24,486 |   |
| Finished  goods              |       | 316,644               |       | 358,016 |   |
| **Total**                    | ** ** | **404,216**           | ** ** | **433,158** | ** ** |

 

**4. ACQUISITIONS AND INVESTMENTS**

 

a)                                    Sunglass HutInternational, Inc.

 

On February 20, 2001, Luxottica Groupformed an indirect wholly-owned U.S. subsidiary, Shade Acquisition Corp., forthe purpose of making a tender offer for all the outstanding common stock ofSunglass Hut International, Inc. (“SGHI”), a publicly traded company onthe NASDAQ National Market. The tender offer commenced on March 5, 2001and was completed on March 30, 2001. On April 4, 2001, ShadeAcquisition Corp. was merged with and into SGHI and SGHI became an indirectwholly-owned subsidiary of the Company. As such, the results of SGHI have beenconsolidated into the Company’s consolidated financial statements as of theacquisition date. The acquisition was accounted by using the purchase method,and accordingly, the purchase price of Euro 558 million (includingapproximately Euro 33.9 million of direct acquisition-related expenses)was allocated to the assets acquired and liabilities assumed based on theirfair value at the date of the acquisition. The Company uses many differentvaluation techniques to determine the fair value of the net assets acquiredincluding 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 APB No. 16, *BusinessCombinations*, subsequently superseded by SFAS No. 141, *Business Combinations* (“SFAS 141”). As a result of thefinal valuations, which were completed in March 2002, the aggregatebalance of goodwill and other intangibles previously recorded as of December 31,2001 increased by approximately Euro 147 million during the year ended December 31,2002. The excess of purchase price over net assets acquired (“goodwill”) hasbeen recorded in the accompanying consolidated balance sheet.

 

The purchase price and expenses have beenallocated based upon the valuation of the Company’s acquired assets andliabilities assumed as follows:

 
| ** **                                                    | ** ** | **Thousands  of Euro** | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                    |       |                   |       |
| **Assets  purchased:**                                        |       |                   |       |
| Cash and  cash equivalents                                    |       | 17,023                 |       |
| Inventories                                                   |       | 90,034                 |       |
| Property,  plant and equipment                                |       | 113,212                |       |
| Prepaid  expenses and other current assets                    |       | 14,717                 |       |
| Accounts  receivable                                          |       | 2,161                  |       |
| Trade  name—(useful life of 25 years, no residual value) |       | 340,858                |       |
| Other assets  including deferred tax assets                   |       | 34,657                 |       |
|                                                          |       |                   |       |
| **Liabilities  assumed:**                                     |       |                   |       |
| Accounts  payable and accrued expenses                        |       | (101,020               | )          |
| Other  current liabilities                                    |       | (52,200                | )          |
| Deferred tax  liabilities                                     |       | (135,340               | )          |
| Long-term debt                                                |       | (128,691               | )          |
| Bank  overdraft                                               |       | (104,155               | )          |
|                                                          |       |                   |       |
| **Fair  value of net assets**                                 | ** ** | **91,256**             | ** ** |
| Goodwill                                                      |       | 466,790                |       |
| **Total  purchase price**                                     | ** ** | **558,046**            | ** ** |

 

F-16

----

 

b)                                     OPSM

 

In May 2003, Luxottica Group formed anindirect wholly-owned subsidiary in Australia, Luxottica South Pacific PtyLimited, for the purpose of making a cash offer for all outstanding shares,options and performance rights of OPSM Group Limited (“OPSM”), a publiclytraded company on the Australian Stock Exchange. The cash offer commenced on June 16,2003, received acceptances which increased Luxottica’s relevant interest inOPSM shares to 50.68 percent on August 8, 2003, and was completed on September 3,2003. At the close of the offer, Luxottica South Pacific held82.57 percent of OPSM’s ordinary shares. As a consequence of theacquisition, all options and performance rights were cancelled. As a result ofLuxottica South Pacific Pty Limited acquiring the majority of OPSM’s shares on August 8,2003, OPSM’s financial position and results of operations are reported in theconsolidated financial statements since August 1, 2003. Results ofoperations for the seven day period ended August 7, 2003 were immaterial.The acquisition was accounted for in accordance with SFAS 141, andaccordingly, the purchase price of Euro 253.7 million or Australian Dollar442.7 million (including approximately Australian Dollar 7.2 millionof direct acquisition-related expenses) was allocated to the assets acquired andliabilities assumed based on their fair value at the date of the acquisition.The Company uses many different valuation techniques to determine the fairvalue of the net assets acquired including but not limited to discounted cashflow and present value projections. Intangible assets are recognized separatefrom goodwill if they arise from contractual or other legal rights or if theydo not meet the definition of separable as noted in SFAS 141. Thevaluation of OPSM’s acquired assets and assumed liabilities was completed in June 2004without significant changes to the preliminary valuation. The excess ofpurchase price over the net assets acquired (“goodwill”) has been recorded inthe accompanying consolidated balance sheet. The acquisition of OPSM was madeas a result of the Company’s strategy to expand its retail business in AsiaPacific area.

 

The purchase price (including directacquisition-related expenses) has been allocated based upon the valuation ofthe Company’s acquired assets and liabilities, assumed as follows (reported atthe exchange rate on the date of acquisition):

 
| ** **                                               | ** ** | **Thousands  of Euro** | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|
| **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 forma informationfor the years ended December 31, 2002 and 2003, summarizes the results ofoperations as if the acquisition of OPSM had been completed on January 1,2002 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)** | ** ** | **2002**  | ** ** | **2003**  | ** ** |
|----------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| Net Sales                                                      |       | 3,449,810 |       | 3,018,670 |       |
| Income from  Operations                                        |       | 615,764   |       | 439,676   |       |
| Net Income                                                     |       | 372,987   |       | 266,188   |       |
| No. of  Shares (Thousands)—Basic                     |       | 453,174   |       | 448,664   |       |
| No. of  Shares (Thousands)—Diluted                   |       | 455,353   |       | 450,202   |       |
| Earnings per  Share (Euro)—Basic                          |       | 0.82      |       | 0.59      |       |
| Earnings per  Share (Euro)—Diluted                        |       | 0.82      |       | 0.59      |       |

 

F-17

----

 

This pro forma financial information ispresented for information purposes only and is not necessarily indicative ofthe results of operations that would have been achieved had the acquisitiontaken place on January 1, 2002.

 

On November 26, 2004, the Companythrough its wholly owned subsidiary, Luxottica South Pacific Pty Ltd.,made an offer for all the unowned remaining outstanding shares of OPSM Group.

 

At the close of the offer on February 7,2005, the Company held 98.5 percent of OPSM Group’s shares, which is inexcess of the compulsory acquisition threshold. On February 8, 2005, theCompany announced the start of the compulsory acquisition process for allremaining shares in OPSM Group not already owned by the Company.

 

On February 15, 2005, the AustralianStock Exchange suspended trading in OPSM Group shares and on February 21,2005 it delisted OPSM Group shares from the Australian Stock Exchange. Thecompulsory acquisition process was completed on March 23, 2005 and as ofthat date the Company held 100.0 percent of OPSM Group’s shares.

 

c)                                      I.C.Optics

 

On January 13, 2003 the Companyannounced 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¤50joint venture. 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 company acquiredincluding an intangible asset for the license agreement for an amount ofapproximately Euro 28.8 million and goodwill for an amount ofapproximately Euro 10.7 million. Further, an amount of Euro25 million has been paid for the option right, which enables the Companyto extend the original license agreement for an additional ten years. No proforma financial information is presented, as the acquisition was not materialto the Company’s consolidated financial statements.

 

d)                                     E.I.D.

 

On July 23, 2003, the Company announcedthe signing of a ten-year worldwide license agreement for exclusive productionand distribution of prescription frames and sunglasses with the Prada and MiuMiu names. The deal was finalized through Luxottica’s purchase of two of Prada’sfully-owned companies named E.I.D. Italia and E.I.D. Luxembourg, that produceand distribute eyewear, for the amount of Euro 26.5 million. Theacquisition was accounted for in accordance with SFAS 141, andaccordingly, the purchase price has been allocated to the fair market value ofthe assets and liabilities of the companies acquired including an intangibleasset for the license agreement for an amount of approximately Euro29.7 million. Goodwill for an amount of Euro 11.1 million over netassets acquired has been recorded in the accompanying consolidated balancesheets. No pro forma financial information is presented, as the acquisition wasnot material to the Company’s consolidated financial statements.

 

e)                                      COLENATIONAL

 

On July 23, 2003, the Company formed anindirect wholly-owned subsidiary, Colorado Acquisition Corp., for the purposeof acquiring all the outstanding common stock of Cole, a publicly tradedcompany on the New York Stock Exchange. On January 23, 2004, as amended asof June 2, 2004 and on July 15, 2004, the Company and Cole enteredinto a definitive merger agreement with the unanimous approval of the Boards ofDirectors of both companies. On October 4, 2004 Colorado Acquisition Corp.consummated its merger with Cole. As a result of the merger, Cole became anindirect wholly owned subsidiary of the Company. The aggregate considerationpaid by the Company to former shareholders, option holders and holders ofrestricted stock of Cole was approximately Euro 407.9 million (US Dollar500.6 million). In connection with the merger, the Company assumedoutstanding indebtedness with an approximately aggregate fair value of itsprincipal balance of Euro 253.3 million (U.S. Dollar 310.9 million).The acquisition was accounted by using the purchase method, and accordingly,the purchase price of Euro 423.7 million (US Dollar 520.1 million),including approximately Euro 15.8 million (US Dollar 19.5 million) ofdirect acquisition-related expenses, was allocated to the assets acquired andliabilities assumed based on their fair value at the date of the acquisition.The Company used various methods to calculate the fair value of the assets andliabilities and all valuations have not

 

F-18

----

 

yet been completed. As such, the final allocation of assets may changeduring 2005. The excess of purchase price over net assets acquired (“goodwill”)has been recorded in the accompanying consolidated balance sheet. Theacquisition of Cole National was made as result of the Company’s strategy tocontinue expansion of its retail business in North America

 

The purchase price (includingacquisition-related expenses) has been allocated based upon the preliminaryvaluation of the Company’s acquired assets and liabilities currently assumed asfollows:

 
| ** **                                                                   | ** ** | **Thousands  of Euro** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                   | ** ** | ** **             | ** ** |
| **Assets  purchased:**                                                       |       |                   |       |
| Cash and  cash equivalents                                                   |       | 60,762                 |       |
| Inventories                                                                  |       | 89,631                 |       |
| Accounts  receivable                                                         |       | 114,385                |       |
| Prepaid  expenses and other current assets                                   |       | 12,503                 |       |
| Property,  plant and equipment                                               |       | 45,759                 |       |
| Trade names  (useful lives of 25 years, no residual value)                   |       | 72,909                 |       |
| Distributor  network (useful life of 23 years, no residual value)            |       | 98,321                 |       |
| Customer  list and contracts (useful life of 21-23 years, no residual value) |       | 68,385                 |       |
| Other intangibles                                                            |       | 37,122                 |       |
| Asset held  for sale—Pearle Europe                                      |       | 143,617                |       |
| Other assets                                                                 |       | 11,299                 |       |
|                                                                         |       |                   |       |
| **Liabilities  assumed:**                                                    |       |                   |       |
| Accounts  payable                                                            |       | (47,782                | )          |
| Accrued  expenses and other current liabilities                              |       | (176,571               | )          |
| Deferred tax  liabilities, net                                               |       | (21,550                | )          |
| Long-term  debt                                                              |       | (253,284               | )          |
| Bank  overdraft                                                              |       | (22,668                | )          |
| Other non  current liabilities                                               |       | (74,933                | )          |
|                                                                         |       |                   |       |
| **Fair  value of net assets**                                                | ** ** | **157,905**            | ** ** |
| Goodwill                                                                     |       | 265,835                |       |
| **Total  purchase price**                                                    | ** ** | **423,740**            | ** ** |

 

The Company believes that the preliminaryallocation of the purchase price is reasonable, but it is subject to revisionupon completion of the final valuation of certain assets and liabilities, whichis expected to occur during the third quarter of 2005. As such, the purchaseprice allocation set forth above may change during 2005 to reflect the finalamounts.

 

Included under the caption “Asset held forsale—Pearle Europe” in the above table and on the consolidated balance sheet atDecember 31, 2004 is the fair value of the Company’s investment in PearleEurope B.V. (“PE”) established through negotiations with the majorityshareholder of PE to acquire the asset. As part of the acquisition of Cole, theCompany acquired approximately 21 percent of PE’s outstanding shares. Achange of control provision included in the Articles of Association of PErequired Cole to make an offer to sell these shares to the shareholders of PEwithin 30 days of the change of control, which deadline was extended byagreement of the parties. In December 2004, substantially all the terms ofthe sale were established at a final cash selling price of Euro144.0 million, subject to customary closing conditions. The saletransaction closed in January 2005 (see Note 15). As the asset isdenominated in Euros, which is not the functional currency of the subsidiarythat held the investment, the Company has recorded an unrealized foreignexchange gain of approximately Euro 13.4 million (US Dollar18.2 million) as of December 31, 2004 relating to the changes in theUS Dollar/Euro exchange rate between October 4, 2004 (the date of theacquisition) and through December 31, 2004.

 

The following unaudited pro-forma informationfor the years ended December 31, 2003 and 2004 summarizes the results ofoperations 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      |       |

 

F-19

----

 

This pro forma financial information ispresented for information purposes only and is not necessarily indicative ofthe results of operations that would have been achieved had the acquisitiontaken place on January 1, 2003.

 

On October 17, 2004, Cole caused itssubsidiary to purchase Euro 122.2 million (U.S. Dollar 150 million)of its outstanding 8 7/8% Senior Subordinated Notesdue 2012 in a tender offer and consent solicitation for Euro 143 million(US Dollar 175.5 million), which amount represented all of the issued andoutstanding notes of such series. On November 30, 2004, Cole redeemed allof its outstanding 8 5¤8%Senior Subordinated Notes due 2007 for Euro 103.0 million (US Dollar126.4 million).

 

f)                                        Otheracquisitions and establishments:

 

•During 2002 the Company acquired six retail companies for an aggregate amountof Euro 35.0 million (U.S. $ 33.5 million). All tangible assets andliabilities assumed were insignificant individually and in the aggregate and,accordingly, substantially the entire purchase price was allocated to goodwill.No pro forma financial information is presented, as the acquisitions were notmaterial to the Company’s consolidated financial statements. One of thesecompanies is accounted for under the equity method.

 

•In 2003, Luxottica Holland B.V., a wholly-owned subsidiary, acquired theremaining interest in Mirari Japan, a wholesale distributor, for aggregate cashconsideration of Euro 18 million. The subsidiary has been accounted for asa step acquisition and the Company has recorded goodwill of approximately Euro16.9 million in connection therewith.

 

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

 

Property, plant and equipment-net consistedof the following (thousands of Euro):

 
| ** **                                            | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **2003**              | ** ** | **2004** | ** ** |
| Land and  buildings, including leasehold improvements |       | 416,752               |       | 475,605 |   |
| Machinery  and equipment                              |       | 428,644               |       | 458,578 |   |
| Aircraft                                              |       | 25,908                |       | 25,908 |   |
| Other  equipment                                      |       | 268,138               |       | 320,077 |   |
| Building,  held under capital lease                   |       | 2,332                 |       | 2,332 |   |
| ** **                                            | ** ** | **1,141,774**         | ** ** | **1,282,500** | ** ** |
| Less:  accumulated depreciation and amortization      |       | 644,339               |       | 683,255 |   |
| **Total**                                             | ** ** | **497,435**           | ** ** | **599,245** | ** ** |

 

Depreciation and amortization expenserelating to property, plant and equipment for the years ended December 31,2002, 2003 and 2004 was Euro 103.8 million, Euro 92.2 million andEuro 101.1 million, respectively. Included in Other equipment isapproximately Euro 16.5 million and Euro 26.6 million of constructionin progress as of December 31, 2003 and 2004, respectively.

 

F-20

----

 

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

 

The changes in the carrying amount ofgoodwill for the year ended December 31, 2004, are as follows (thousandsof Euro):

 
| ** **                            | ** ** | **Retail  Segment** | ** ** | **Wholesale  Segment** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|---------------------|------------|------------------------|------------|-----------|------------|
| Balance as  of January 1, 2003   |       | 987,367             |       | 257,293                |       | 1,244,660 |       |
| Acquisitions(a)                       |       | 153,838             |       | 57,467                 |       | 211,305   |       |
| Change in  exchange rates(b):         |       | (126,953            | )          | (98                    | )          | (127,051  | )          |
| Balance as  of December 31, 2003 |       | 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 |       |

 

----

(a)                                  Goodwillacquired in 2003 and 2004 consisted primarily of the retail acquisitions ofOPSM and Cole National and the wholesale acquisitions of the EID companies andIC Optics Group (See Note 4).

 

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

 

Intangible assets—net consisted of thefollowing (thousands of Euro):

 
| ** **                                                                                                                                                                            | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                            | ** ** | **2003**              | ** ** | **2004** | ** ** |
| LensCrafters  trade name, net of accumulated amortization of Euro 60,252 thousand and Euro  62,565 thousand as of December 31, 2003 and 2004, respectively(a)                    |       | 114,392               |       | 99,941 |   |
|                                                                                                                                                                                  |       |                  |       |   |   |
| Ray-Ban  acquired trade names, net of accumulated amortization of Euro 62,866 thousand  and Euro 76,836 thousand as of December 31, 2003 and 2004,  respectively(a)              |       | 216,334               |       | 202,364 |   |
|                                                                                                                                                                                  |       |                  |       |   |   |
| Sunglass Hut  trade name, net of accumulated amortization of Euro 26,371 thousand and Euro  33,461 thousand as of December 31, 2003 and 2004, respectively (see  Note 4)(a) |       | 213,368               |       | 189,614 |   |
|                                                                                                                                                                                  |       |                  |       |   |   |
| OPSM trade  names, net of accumulated amortization of Euro 2,444 thousand and Euro 7,998  thousand as of December 31, 2003 and 2004, respectively (see  Note 4)(a)          |       | 144,205               |       | 133,133 |   |
|                                                                                                                                                                                  |       |                  |       |   |   |
| Various  trade names of the Cole National Group, net of accumulated amortization of  Euro 777 thousand as of December 31, 2004 (see Note 4)(a)                              |       | —                |       | 68,023 |   |
|                                                                                                                                                                                  |       |                  |       |   |   |
| Distributor  network, net of accumulated amortization of Euro 969 thousand as of December 31,  2004 (see Note 4)(b)                                                         |       | —                |       | 88,173 |   |
|                                                                                                                                                                                  |       |                  |       |   |   |
| Customer  list and contracts, net of accumulated amortization of Euro 701 thousand as  of December 31, 2004 (see Note 4)(b)                                                 |       | —                |       | 61,299 |   |
|                                                                                                                                                                                  |       |                  |       |   |   |
| Other  intangibles, net of accumulated amortization of Euro 36,888 thousand and Euro  42,294 thousand as of December 31, 2003 and 2004, respectively (see  Note 4)(c)       |       | 76,399                |       | 129,544 |   |
|                                                                                                                                                                                  |       |                  |       |   |   |
| **Total**                                                                                                                                                                             | ** ** | **764,698**           | ** ** | **972,091** | ** ** |

 

----

(a)                                  TheLensCrafters, Sunglass Hut International, OPSM and Cole National trade namesare amortized on a straight-line basis over a period of 25 years and theRay-Ban trade names over a period of 20 years, as the Company believesthese trade names to be finite lived assets.

 

F-21

----

 

(b)                                 Distributornetwork, customer contracts and lists, were identifiable intangibles recordedin connection with the acquisition of Cole in 2004. These assets have a finitelife and are amortized on a straight line basis ranging between 20 and23 years. The weighted average amortization period is of 22.5 years.

 

(c)                                  Otherintangibles consist of numerous items which include among other items licenseagreements, franchise agreements, and non compete agreements. The weightedaverage amortization period is 13.7 years.

 

F-22

----

 

Estimated annual amortization expenserelating 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):

 
| 2005 |   | 64.179 |   |
|------|--------|--------|--------|
| 2006 |   | 62.125 |   |
| 2007 |   | 57.990 |   |
| 2008 |   | 55.081 |   |
| 2009 |   | 55.081 |   |

 

**7. INCOME TAXES**

 

Income before provision for income taxes andthe provision for income taxes consisted of the following (thousands of Euro):

 
| ** **                                      | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **2002**                         | ** ** | **2003** | ** ** | **2004** | ** ** |
| Income  before provision for income taxes— |       |                             |       |   |   |   |   |
| Italian  companies                              |       | 229,527                          |       | 146,055 |   | 149,479 |   |
| Foreign  companies                              |       | 309,915                          |       | 243,738 |   | 307,674 |   |
| **Total**                                       | ** ** | **539,442**                      | ** ** | **389,793** | ** ** | **457,153** | ** ** |
| Provision  for income taxes:                    |       |                             |       |   |   |   |   |
| Current—                                   |       |                             |       |   |   |   |   |
| Italian  companies                              |       | 52,616                           |       | 17,313 |   | 23,194 |   |
| Foreign  companies                              |       | 117,865                          |       | 87,150 |   | 93,057 |   |
| ** **                                      | ** ** | **170,481**                      | ** ** | **104,463** | ** ** | **116,251** |   |
| ** **                                      | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** |   |
| Deferred—                                  |       |                             |       |   |   |   |   |
| Italian  companies                              |       | (14,204                          | )          | 14,174 |   | 9,017 |   |
| Foreign  companies                              |       | 6,419                            |       | (1,309 | ) | 36,397 |   |
| ** **                                      | ** ** | **(7,785**                       | **)**      | **12,865** | ** ** | **45,414** |   |
| **Total**                                       | ** ** | **162,696**                      | ** ** | **117,328** | ** ** | **161,665** | ** ** |

 

The Italian statutory tax rate is the resultof two components: national (“IRES”) and regional (“IRAP”) tax. IRAP could havea substantially different base for its computation than IRES.

 

Reconciliation between the Italian statutorytax rate and the effective tax rate is as follows:

 
| ** **                                                                                                                               | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                               | ** ** | **2002**                         | ** ** | **2003** | ** ** | **2004** | ** ** |
| Italian  statutory tax rate                                                                                                              |       | 40.3                             | %          | 38.3 | % | 37.3 | % |
| Aggregate  effect of different rates in foreign jurisdictions                                                                            |       | (2.3                             | )%         | (1.9 | )% | 0.5 | % |
| Permanent differences,  principally losses in subsidiary companies funded through capital  contributions, net of non-deductible goodwill |       | (7.8                             | )%         | (6.3 | )% | (2.4 | )% |
| **Effective  rate**                                                                                                                      | ** ** | **30.2**                         | **%**      | **30.1** | **%** | **35.4** | **%** |

 

Since fiscal year 2004, for income taxpurposes, the Company and its Italian subsidiaries file tax returns onconsolidated basis.

 

F-23

----

 

The deferred tax assets and liabilities as ofDecember 31, 2003 and 2004, respectively, were comprised of (thousands ofEuro):

 
| ** **                                                       | ** ** | **December 31,**                     | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                       | ** ** | **2003  Deferred Tax  Asset/(Liability)** | ** ** | **2004  Deferred Tax  Asset/(Liability)** | ** ** |
| **Current  portion**                                             |       |                                      |       |   |   |
| Inventory                                                        |       | 29,733                                    |       | 47,424 |   |
| Insurance  and other reserves                                    |       | 13,551                                    |       | 27,212 |   |
| Recorded  reserves                                               |       | 17,340                                    |       | 10,248 |   |
| Net  operating loss carryforwards                                |       | 71,429                                    |       | 47,101 |   |
| Loss on  investments                                             |       | 5,452                                     |       | 3,930 |   |
| Dividends                                                        |       | (13,112                                   | )          | (6,092 | ) |
| Trade name                                                       |       | (5,506                                    | )          | (5,179 | ) |
| Right of  return reserve                                         |       | 1,456                                     |       | 10,572 |   |
| Asset held  for sale—Pearle Europe                          |       | —                                    |       | (55,448 | ) |
| Deferred  revenue—extended warranty contracts               |       | —                                    |       | 10,508 |   |
| Other, net                                                       |       | 14,458                                    |       | 14,232 |   |
| Valuation  allowance                                             |       | (10,350                                   | )          | — |   |
| **Net  current deferred tax assets**                             | ** ** | **124,451**                               | ** ** | **104,508** | ** ** |
| ** **                                                       | ** ** | ** **                                | ** ** | ** ** | ** ** |
| **Non-current  portion:**                                        |       |                                      |       |   |   |
| Difference  in basis of fixed assets                             |       | (53,003                                   | )          | (126,324 | ) |
| Net  operating loss carryforwards                                |       | 81,724                                    |       | 70,071 |   |
| Recorded  reserves                                               |       | 5,142                                     |       | 14,305 |   |
| Occupancy  reserves                                              |       | 4,040                                     |       | 15,558 |   |
| Depreciation                                                     |       | (3,529                                    | )          | (2,843 | ) |
| Employee-related  reserves (including minimum pension liability) |       | 19,042                                    |       | 28,503 |   |
| Trade name                                                       |       | (121,108                                  | )          | (108,833 | ) |
| Other  intangibles                                               |       | (10,734                                   | )          | (19,917 | ) |
| Trade mark  accelerated amortization                             |       | (68,255                                   | )          | (74,341 | ) |
| Other, net                                                       |       | 11,658                                    |       | 10,767 |   |
| Valuation  allowance                                             |       | (26,079                                   | )          | (22,837 | ) |
| **Net  non-current deferred tax liabilities**                    | ** ** | **(161,102**                              | **)**      | **(215,891** | **)** |

 

In 2004, the Italian statutory tax rate wasreduced to 37.25 percent. As a consequence, deferred tax assets andliabilities have been recomputed in line with the new tax rate. The immaterialresult of the change in the Italian tax rate has been included in deferred taxexpense.

 

Italian companies taxes are subject to reviewpursuant to Italian law. As of December 31, 2004, tax years from 1998through the most recent year were open for such review. Certain Luxottica Groupcompanies are subject to tax reviews for previous years. Management believes nosignificant unaccrued liabilities will arise from the related tax reviews.

 

As of December 31, 2004, the taxes thatwould be due on the distribution of retained earnings to the related parentcompany, including net earnings for the year, of subsidiaries for 2004 andprior years would approximate Euro 19.1 million. Luxottica Group has notprovided an accrual for taxes on such distributions, nor has it provided anaccrual for taxes on its investments in such subsidiaries, as the likelihood ofdistribution is remote and such earnings and investments are deemed to bepermanently reinvested. In connection with the 2004 earnings of certainsubsidiaries, the Company has provided for an accrual for Italian income taxesrelated to declared dividends of earnings.

 

In connection with various capitalcontributions, certain Italian subsidiaries, which file tax returns on aseparate company basis, have incurred net operating losses, which expire infive years from the period in which the tax loss was incurred. Since it ismanagement’s belief that such net operating losses are not more likely than notto be realized in the future period, valuation allowances have been recorded inthe Company’s consolidated financial statements. Management continues toevaluate

 

F-24

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the likelihood of realizing such deferred tax assets and reverses therelated valuation allowance when the realization of the deferred tax assetsbecomes more likely than not.

 

At December 31, 2004, a U.S. subsidiaryhad restricted U.S. Federal net operating loss carryforwards of approximatelyEuro 84.9 million (US Dollar 115.0 million), which begin expiring in2019. Additionally, with the acquisition of Cole, the Company acquired approximatelyEuro 27.1 million (US Dollar 36.7 million) of restricted U.S. Federalnet operating loss carryforwards. These loss carryforwards are limited due tothe change in ownership or previous limitations placed thereon. Parts of theCole net operating loss carryforwards will expire each year going forward.

 

As of December 31, 2003 and 2004, theCompany has recorded an aggregate valuation allowance of Euro 36.4 millionand Euro 22.8 million, respectively, against deferred tax assets recordedin connection with net operating loss carryforwards because it is more likelythan not that the above deferred income tax assets will not be fully utilizedin future periods.

 

**8. LONG-TERM DEBT**

 

Long-term debt consisted of the following(thousands of Euro):

 
| ** **                                                                                                                                                                                                                                    | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                    | ** ** | **2003**              | ** ** | **2004** | ** ** |
| Credit  agreement with various Italian financial institutions(a)                                                                                                                                                                              |       | 875,000               |       | 450,000 |   |
| UniCredito Italiano credit facility(b)                                                                                                                                                                                                        |       | 115,107               |       | 125,572 |   |
| Senior  unsecured guaranteed notes(c)                                                                                                                                                                                                         |       | 238,152               |       | 221,598 |   |
| Credit  agreement with various financial institutions(d)                                                                                                                                                                                      |       | —                |       | 851,890 |   |
| Capital  lease obligations, payable in installments through 2005                                                                                                                                                                              |       | 745                   |       | 4,107 |   |
| Other loans  with banks and other third parties, interest at various rates (from 2.47 to  4.11 percent per annum), payable in installments through 2017. Certain  subsidiaries’ fixed assets are pledged as collateral for such loans(e) |       | 24,423                |       | 29,697 |   |
| **Total**                                                                                                                                                                                                                                     | ** ** | **1,253,427**         | ** ** | **1,682,864** | ** ** |
| Less:  current maturities                                                                                                                                                                                                                     |       | 390,935               |       | 405,369 |   |
| **Long-term  debt**                                                                                                                                                                                                                           | ** ** | **862,492**           | ** ** | **1,277,495** | ** ** |

 

----

(a)                                  InDecember 2002, the Company entered into a new unsecured credit facilitywith Banca Intesa S.p.A. The new unsecured credit facility provides borrowingavailability of up to Euro 650 million. This facility includes a termportion of Euro 500 million which required a balloon payment of Euro200 million in June 2004 and equal quarterly instalments of principalof Euro 50 million subsequent to that date. Interest accrues on the termportion based on Euribor as defined in the agreement plus 0.45 percent(2.628 percent on December 31, 2004). The revolving portion providesborrowing availability of up to Euro 150 million. Amounts borrowed underthe revolving loan can be borrowed and repaid until final maturity. At December 31,2004, Euro 75 million had been drawn under the revolving loan. Interestaccrues on the revolving loan at Euribor as defined in the agreement plus0.45 percent (2.623 percent on December 31, 2004). The finalmaturity of all outstanding principal amounts and interest is December 27,2005. The Company has the option to choose interest periods of one, two orthree months. The credit facility contains certain financial and operatingcovenants. The Company was in compliance with these covenants as of December 31,2004.

 

In December 2002, the Company enteredinto two interest rate swap transactions (the “Intesa Swaps”) beginning with anaggregate maximum notional amount of Euro 250 million, which decreased byEuro 100 million on June 27, 2004 and by Euro 25 million in eachsubsequent three-month period. The Intesa Swaps will expire on December 27,2005. The Intesa Swaps were entered into as a cash flow hedge on a portion ofthe Banca Intesa Euro 650 million unsecured credit facility discussedabove. As such changes in the fair value of the Intesa Swaps are included inOCI until they are realized in the financial statements. The Intesa Swapsexchange the floating rate based of Euribor for a fixed rate of2.985 percent per annum.

 

As disclosed in Note 4(b), in September 2003,the Company acquired its ownership interest of OPSM and more than90 percent of performance rights and options of OPSM for an aggregate ofAustralian Dollar 442.7 million (Euro 253.7 million), includingacquisition expenses. The purchase price was paid for with the proceeds of a newcredit facility with Banca Intesa S.p.A. of Euro 200 million, in additionto other short-term lines available. The new credit facility includes a Euro150 million term loan, which will require repayments of equal semi-annualinstallments of principal repayments of Euro 30 million starting September 30,2006 until the final maturity date. Interest accrues on the term loan atEuribor (as defined in the agreement) plus 0.55 percent(2.729 percent on December 31, 2004). The revolving loan providesborrowing availability of up to Euro 50 million; amounts borrowed underthe revolving portion can be borrowed and repaid until final maturity. At December 31,2004, Euro 25 million had been drawn from the revolving portion. Interestaccrues on the revolving loan at Euribor (as defined in the agreement) plus0.55 percent (2.697 percent on December 31, 2004). The finalmaturity of the credit facility is September 30, 2008. The Company canselect interest periods of one,

 

F-25

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two or three months. The credit facilitycontains certain financial and operating covenants. The Company was incompliance with those covenants as of December 31, 2004.

 

In May 2003, the Company entered into anunsecured credit facility with Credito Emiliano (“Credem”) for a borrowing ofEuro 25 million. This line of credit was repaid in full when it expired onNovember 2004.

 

(b)                                 InJune 2002, a Luxottica U.S. Holdings Corp. (“U.S. Holdings”), a U.S.subsidiary entered into a U.S. Dollar 350 million credit facility with agroup of four Italian banks led by UniCredito Italiano S.p.A. The creditfacility is guaranteed by Luxottica Group and matures in June 2005. Theterm loan portion of the credit facility provided U.S. $200 million ofborrowing and requires equal quarterly principal instalments beginning March 2003.The revolving loan portion of the credit facility allows for a maximumborrowing of U.S. $150 million. Interest accrues at LIBOR as defined inthe agreement plus 0.5 percent (2.92 percent for the term loan portionand 2.917 percent for the revolving portion on December 31, 2004) andthe credit facility allows the Company to select interest periods of one, twoor three months. The credit facility contains certain financial and operatingcovenants. The Company is in compliance with those covenants as of December 31,2004. Under this credit facility, Euro 125.6 million (U.S. $170.0 million) was outstanding as of December 31, 2004.

 

The U.S. subsidiary entered into aConvertible Swap Step-Up (“Swap 2002”) with an initial notional amount of U.S.$ 275 million which decreases by U.S. $20 million quarterly starting March 17,2003. The Swap 2002 expiration date is June 17, 2005. The Swap 2002 wasentered into to convert the UniCredito floating rate credit agreement referredto the preceeding paragraph to a mixed position rate agreement by allowing U.S.Holdings to pay a fixed rate of interest if LIBOR remains under certain definedthresholds and to receive an interest payment at the three months LIBOR rate(as defined in the agreement). These amounts are settled net every three monthsuntil the final expiration of the Swap 2002 on June 17, 2005. The Swap2002 does not qualify for hedge accounting under SFAS 133 and as such ismarked to market with the gains or losses from the change in value reflected incurrent operations. Losses of Euro 2.6 million and gains of Euro0.6 million and Euro 1.5 million are included in current operationsin the years ended December 31, 2002, 2003 and 2004, respectively.

 

(c)                                  OnSeptember 3, 2003, U.S. Holdings closed a private placement of U.S.$300 million (Euro 238 million) of senior unsecured guaranteed notes(the “Notes”), issued in three series (Series A, Series B and Series C).Interest on the Series A Notes accrues at 3.94 percent per annum andinterest on Series B and Series C Notes accrues at 4.45 percentper annum. The Series A and Series B Notes mature on September 3,2008 and the Series C Notes mature on September 3, 2010. The Series Aand Series C Notes require annual prepayments beginning on September 3,2006 through the applicable Notes date of maturity. The Notes are guaranteed ona senior unsecured basis by the Company and Luxottica S.r.l., a wholly ownedsubsidiary. The Notes can be prepaid at U.S. Holdings option under certaincircumstances. The proceeds from the Notes were used for the repayment ofoutstanding debt and for other working capital needs. The notes contain certainfinancial and operating covenants. The Company was in compliance with thosecovenants as of December 31, 2004.

 

In connection with the issuance of the Notes,U.S. Holdings entered into three interest rate swap agreements with DeutscheBank AG (the “DB Swap”). The three separate agreements, notional amounts, andinterest payment dates coincide with the Notes. The DB Swap exchanges the fixedrate of the Notes to a floating rate of the six-month LIBOR rate plus0.6575 percent for the Series A Notes and the six-month LIBOR rateplus 0.73 percent for the Series B and Series C Notes. Theseswaps are treated as fair value hedges of the related debt and qualify for theshortcut method of hedge accounting (assuming no ineffectiveness in a hedge inan interest rate swap). Thus the interest income/expense on the swaps isrecorded as an adjustment to the interest expense on the debt effectivelychanging the debt from a fixed rate of interest to the swap rate.

 

(d)                                 OnJune 3, 2004, the Company and U.S. Holdings entered into a new creditfacility with a group of banks providing for loans in the aggregate principalamount of Euro 740 million and U.S. $325 million. The five-yearfacility consists of three Tranches (Tranche A, Tranche B, Tranche C). TrancheA is a Euro 405 million amortizing term loan requiring repayment of nineequal quarterly installments of principal of Euro 45 million beginning in June 2007,which is to be used for general corporate purposes, including the refinancingof existing Luxottica Group S.p.A. debt as it matures. Tranche B is a term loanof US$ 325 million which was drawn upon on October 1, 2004 by U.S.Holdings to finance the purchase price of the acquisition of Cole. Amountsborrowed under Tranche B will mature in June 2009. Tranche C is aRevolving Credit Facility of Euro 335 million-equivalent multi-currency(€/US$). Amounts borrowed under Tranche C may be repaid and reborrowed with alloutstanding balances maturing in June 2009. The Company can selectinterest periods of one, two, three or six months with interest accruing onEuro-denominated loans based on the corresponding Euribor rate and U.S.$denominated 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, 2004was 2.628 percent for Tranche A, 2.456 percent for Tranche B, and2.889 percent on Tranche C. The new credit facility contains certainfinancial and operating covenants. The Company was in compliance with thosecovenants as of December 31, 2004. Under this credit facility, Euro852 million was outstanding as of December 31, 2004.

 

(e)                                  Otherloans consist of numerous small credit agreements and a promissory note themost significant of which is OPSM’s renegotiated multicurrency loan facilitywith Westpac Banking Corporation. This credit facility has a maximum availableline of Euro 57.5 million (AU $100 million). The base rate for theinterest charged varies depending on the currency borrowed; for borrowingsdenominated in

 

F-26

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Australian Dollars the interest accrues onthe basis 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 2004, the BBR and HIBOR were5.85 percent and 0.59 percent, respectively). At December 31,2004, the facility was utilized for an amount of Euro 11.9 million (AU$20.69 million). The final maturity of all outstanding principal amountsand interest is August 31, 2006. OPSM has the option to choose weekly ormonthly interest periods. The credit facility contains certain financial andoperating covenants. OPSM was in compliance with these covenants as of December 31,2004.

 

Excluding current maturities, long-term debtmatures in the years subsequent to December 31, 2005 as follows (thousandsof Euro):

 
| **YEAR ENDED DECEMBER 31,** | ** ** | ** **    | ** ** |
|----------------------------------|------------|---------------|------------|
| 2006                             |       | 104,777       |       |
| 2007                             |       | 260,427       |       |
| 2008                             |       | 357,003       |       |
| 2009                             |       | 546,263       |       |
| 2010                             |       | 8,568         |       |
| Thereafter                       |       | 457           |       |
| **Total**                        | ** ** | **1,277,495** | ** ** |

 

**9. EMPLOYEE BENEFITS**

 

**Liability for Termination Indemnities**  —The liability for termination indemnitiesrepresents amounts accrued for employees in Australia, Austria, Greece, Israel,Italy and Japan, determined in accordance with labour laws and labouragreements in each respective country. Each year, the Company adjusts itsaccrual based upon headcount, changes in compensation level and inflation. Thisliability is not funded. Therefore, the accrued liability represents the amountthat would be paid if all employees were to resign or be terminated as of thebalance sheet date. This treatment is in accordance with SFAS No. 112, *Employers’ Accounting for Post Employment Benefits*, whichrequires employers to expense the cost of benefits paid before retirement (i.e.severance) over the service lives of employees. The charge to earnings duringthe years ended December 31, 2002, 2003 and 2004 aggregated Euro5.7 million, Euro 12.5 million and Euro 10.4 million,respectively.

 

**Qualified Pension Plan**  —During fiscal years 2003 and 2004, U.S.Holdings sponsors a qualified noncontributory defined benefit pension planwhich provides for the payment of benefits to eligible past and presentemployees of U.S. Holdings upon retirement. Pension benefits are accrued basedon length of service and annual compensation under a cash balance formula. Asof December 31, 2004, associates that work for the acquired Colebusinesses and legal entities were not eligible to participate in the abovementioned pension plan.

 

As of the effective date of the Coleacquisition, U.S. Holdings, through its newly acquired subsidiary sponsors theCole 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 employees at retirement based primarily upon years of service andthe employees’ compensation levels near retirement. In January 2002, thisplan was frozen for all participants. The average pay for all participants wasfrozen as of March 31, 2002 and covered compensation was frozen on December 31,2001. Benefit service was also frozen as of March 31, 2002 except forthose individuals who were at least age 50 with at least ten years of benefitservice as of that date, whose service will continue to increase as long asthey remain employed by U.S. Holdings or one of its subsidiaries.

 

**Nonqualified Pension Plan**  —U.S. Holdings also maintains a nonqualified,unfunded supplemental executive retirement plan (“SERP”) for participants inits qualified pension plan to provide benefits in excess of amounts permittedunder the provisions of prevailing tax law. The pension liability and expenseassociated with this plan are accrued using the same actuarial methods andassumptions as those used for the qualified pension plan.

 

As of the Cole acquisition date, U.S.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’sChief Executive Officer at such time. This plan provides benefits in excess ofamounts permitted under the provisions of the prevailing tax law. The pension

 

F-27

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liability and expense associated with this plan are accrued using thesame actuarial methods and assumptions as those used for the qualified pensionplan.

 

The following tables provide key informationpertaining to U.S. Holdings’ pension plans and SERP. U.S. Holdings uses a September 30measurement date for these plans.

 

**Obligations and Funded Status  —**

 
| ** **                                 | ** ** | **Pension Plans** | ** ** | **SERP** | ** ** |
|--------------------------------------------|------------|-------------------|------------|----------|------------|
| **(Amounts in Euro/thousands)**            | ** ** | **2003**          | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** |
| **Change  in benefit obligations:**        |       |              |       |     |       |   |   |   |   |
| Benefit  obligation at beginning of period |       | 201,668           |       | 191,787  |       | 5,061 |   | 4,667 |   |
| Translation  differences                   |       | (36,699           | )          | (17,558  | )          | (904 | ) | (366 | ) |
| Service cost                               |       | 11,816            |       | 11,584   |       | 221 |   | 199 |   |
| Interest  cost                             |       | 12,035            |       | 11,012   |       | 287 |   | 248 |   |
| Actuarial  loss (gain)                     |       | 10,061            |       | (5,648   | )          | 2 |   | (169 | ) |
| Acquisition                                |       | —            |       | 41,536   |       | — |   | 564 |   |
| Benefits  paid                             |       | (7,096            | )          | (7,685   | )          | — |   | (329 | ) |
| Benefit  obligation at end of period       |       | 191,786           |       | 225,028  |       | 4,667 |   | 4,814 |   |

 
| ** **                                        | ** ** | **Pension Plans** | ** ** | **SERP**    | ** ** |
|---------------------------------------------------|------------|-------------------|------------|-------------|------------|
| **(Amounts in Euro/thousands)**                   | ** ** | **2003**          | ** ** | **2004**    | ** ** | **2003** | ** ** | **2004** | ** ** |
| **Change  in plan assets:**                       | ** ** | ** **        | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fair value  of plan assets at beginning of period |       | 132,614           |       | 123,044     |       | — |   | — |   |
| Translation  differences                          |       | (23,777           | )          | (11,748     | )          | — |   | — |   |
| Actual  return (loss) on plan assets              |       | 18,650            |       | 10,486      |       | — |   | — |   |
| Plan assets  acquired                             |       | —            |       | 23,913      |       | — |   | — |   |
| Employer  contribution                            |       | 2,655             |       | 11,634      |       | — |   | 329 |   |
| Benefits  paid                                    |       | (7,096            | )          | (7,685      | )          | — |   | (329 | ) |
| **Fair  value of plan assets at end of period**   | ** ** | **123,046**       | ** ** | **149,644** | ** ** | **—** | ** ** | **—** | ** ** |
| Funded  status                                    |       | (68,741           | )          | (75,384     | )          | (4,667 | ) | (4,814 | ) |
| Unrecognized  net actuarial loss                  |       | 51,125            |       | 43,520      |       | 1,251 |   | 965 |   |
| Unrecognized  prior service cost                  |       | 2,302             |       | 1,623       |       | 61 |   | 47 |   |
| Other  adjustments                                |       | —            |       | 464         |       | — |   | 40 |   |
| **Accrued  pension cost**                         | ** ** | **(15,314**       | **)**      | **(29,777** | **)**      | **(3,355** | **)** | **(3,762** | **)** |

 
| ** **                              | ** ** | **Pension Plan** | ** ** | **SERP** | ** ** |
|-----------------------------------------|------------|------------------|------------|----------|------------|
| **(Amounts in Euro/thousands)**         | ** ** | **2003**         | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** |
| Liabilities:                            |       |             |       |     |       |   |   |   |   |
| Accrued  pension cost                   |       | 15,314           |       | 29,777   |       | 3,355 |   | 3,762 |   |
| Additional  minimum liability           |       | 35,153           |       | 31,689   |       | 779 |   | 745 |   |
| Total  accrued pension liability        |       | 50,467           |       | 61,466   |       | 4,134 |   | 4,507 |   |
| Assets—                            |       |             |       |     |       |   |   |   |   |
| Intangible  asset                       |       | 2,302            |       | 1,623    |       | 61 |   | 47 |   |
| Other  comprehensive income—       |       |             |       |     |       |   |   |   |   |
| Accumulated  other comprehensive income |       | 32,849           |       | 30,066   |       | 718 |   | 698 |   |

 

F-28

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The accumulated benefit obligations for the pension plan as of September 30were as follows:

 
| ** **                                                                       | ** ** | **Pension Plan** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                       | ** ** | **2002**         | ** ** | **2003** | ** ** | **2004** | ** ** |
|                                                                             |       | 204,184          |       | 193,473 |   | 230,990 |   |
| **Components  of Net Periodic Benefit Cost:**                                    |       |             |       |   |   |   |   |
| Service cost                                                                     |       | 11,732           |       | 11,816 |   | 11,584 |   |
| Interest  cost                                                                   |       | 13,572           |       | 12,035 |   | 11,012 |   |
| Expected  return on plan assets                                                  |       | (16,366          | )          | (13,333 | ) | (12,263 | ) |
| Amortization  of actuarial loss                                                  |       | —           |       | 294 |   | 564 |   |
| Amortization  of prior service cost                                              |       | 749              |       | 624 |   | 568 |   |
| Net periodic  pension expense                                                    |       | 9,687            |       | 11,436 |   | 11,465 |   |
| **Additional  Information:**                                                     |       |             |       |   |   |   |   |
| (Decrease)/Increase  in minimum liability included in other comprehensive income |       | 38,126           |       | (546 | ) | 1,045 |   |

 

The accumulated benefit obligations for SERPas of September 30 were as follows:

 
| ** **                                                                       | ** ** | **SERP** | ** ** |
|----------------------------------------------------------------------------------|------------|----------|------------|
| ** **                                                                       | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|                                                                             |       | 3,937    |       | 4,610 |   | 4,965 |   |
| **Components  of Net Periodic Benefit Cost:**                                    |       |     |       |   |   |   |   |
| Service cost                                                                     |       | 372      |       | 221 |   | 199 |   |
| Interest  cost                                                                   |       | 362      |       | 287 |   | 248 |   |
| Expected  return on plan assets                                                  |       | —   |       | — |   | — |   |
| Amortization  of actuarial loss                                                  |       | 149      |       | 115 |   | 48 |   |
| Amortization  of prior service cost                                              |       | 14       |       | 12 |   | 10 |   |
| Net periodic  pension expense                                                    |       | 897      |       | 635 |   | 506 |   |
| **Additional  Information:**                                                     |       |     |       |   |   |   |   |
| (Decrease)/Increase  in minimum liability included in other comprehensive income |       | 94       |       | 640 |   | 30 |   |

 
| ** **                                                                                                                  | ** ** | **Pension Plan** | ** ** | **SERP** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|----------|------------|
| ** **                                                                                                                  | ** ** | **2003**         | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** |
| **Assumptions**                                                                                                             |       |             |       |     |       |   |   |   |   |
| Weighted-average  assumptions used to determine benefit obligations at September 30:                                   |       |             |       |     |       |   |   |   |   |
| Discount  rate                                                                                                              |       | 6.00             | %          | 5.75     | %          | 6.00 | % | 5.75 | % |
| Rate of  compensation increase                                                                                              |       | 4.75             | %          | 4.25     | %          | 4.75 | % | 4.25 | % |
| Weighted-average  assumptions used to determine net periodic benefit cost for years ended December 31,  2003 and 2004: |       |             |       |     |       |   |   |   |   |
| Discount  rate                                                                                                              |       | 6.50             | %          | 6.00     | %          | 6.50 | % | 6.00 | % |
| Expected  long-term return on plan assets                                                                                   |       | 8.75             | %          | 8.50     | %          | N/A |   | N/A |   |
| Rate of  compensation increase                                                                                              |       | 4.75             | %          | 4.75     | %          | 4.75 | % | 4.75 | % |

 

U.S. Holdings used 8.50% as the expected rateof return on plan assets for fiscal year 2004. This assumption was developedusing the building block method. Under this approach, the assumption wasarrived at by applying historical average total returns by asset class overvarious time horizons to the plan’s current and target asset allocation. Theresulting assumption was also benchmarked against the assumptions used by otherU.S. corporations and the pension trust’s actual investment performance overten and twenty year periods.

 

F-29

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**Plan Assets**

 

The weighted-average target asset allocationsand weighted average actual asset allocations by asset category as of September 30,2003 and 2004 are as follows:

 
| ** **         | ** ** | **Asset  Allocation  Target** | ** ** | **Luxottica  Pension  Plan Assets** | ** ** | **Cole Pension  Plan Assets** | ** ** |
|--------------------|------------|-------------------------------|------------|-------------------------------------|------------|-------------------------------|------------|
| **Asset Category** | ** ** | ** **                    | **2003**   | ** **                          | **2004**   | ** **                    | **2004**   | ** ** |
| Equity securities  |       | 65                            | %          | 64                                  | %          | 62                            | %          | 65 | % |
| Debt  securities   |       | 35                            | %          | 35                                  | %          | 35                            | %          | 33 | % |
| Other              |       | 0                             | %          | 1                                   | %          | 3                             | %          | 2 | % |
| Total              |       | 100                           | %          | 100                                 | %          | 100                           | %          | 100 | % |

 

The actual percentages at any given time mayvary from these targeted amounts.

 

The defined pension plans’ investmentpolicies provide the framework within which investment decisions are made, andestablish standards to measure investment manager performance, outline rolesand responsibilities and describe the ongoing review process. The plans’investment strategies include established allocation targets and ranges tomaximize investment return within reasonable and prudent levels of risk so asto minimize contributions needed over time to reach a full funding level andmaintain sufficient liquidity to meet monthly benefit payments.

 

***Benefit Payments***—Thefollowing estimated future benefit payments, which reflect expected futureservice, are expected to be paid in the years indicated for both the Luxotticaand Cole plans (translated for convenience at the December 31, 2004 noonbuying rate):

 
| **(thousands of Euro)** | ** ** | **Pension Plans** | ** ** | **Supplemental Plans** | ** ** |
|-------------------------|------------|-------------------|------------|------------------------|------------|
| 2005                    |       |              | 8,644      |                   | 263        |   |
| 2006                    |       |              | 8,647      |                   | 153        |   |
| 2007                    |       |              | 9,419      |                   | 204        |   |
| 2008                    |       |              | 10,392     |                   | 864        |   |
| 2009                    |       |              | 11,366     |                   | 323        |   |
| 2010-2014               |       |              | 78,619     |                   | 3,339      |   |

 

***Contributions—***U.S.Holdings expects to contribute US Dollar 27.8 million (Euro20.5 million at the December 31, 2004 noon buying rate) to itspension plan in 2005.

 

***Other Benefits—***U.S.Holdings provides certain post-employment medical, disability and lifeinsurance benefits. As of December 31, 2003 and 2004, the accruedliability related to this obligation was immaterial.

 

U.S. Holdings sponsors a tax incentivesavings plan covering all full-time employees. U.S. Holdings makes quarterlycontributions in cash to the plan based on a percentage of employees’contributions. Additionally, U.S. Holdings may make an annual discretionarycontribution to the plan which may be made in Luxottica Group S.p.A.’s AmericanDepository Recipts (“ADRs”) or cash.

 

Aggregate contributions made to the taxincentive savings plan by U.S. Holdings were US Dollar 6.7 million (Euro6.0 million) and US Dollar 8.3 million (Euro 6.7 million) forfiscal years 2003 and 2004, respectively.

 

With the acquisition of Cole, U.S. Holdingsthrough one of its wholly-owned subsidiaries, now sponsors the followingadditional other benefit plans which cover certain present and past employeesof the Cole companies acquired:

 

•              Cole provides post employment benefits underindividual agreements for continuation of health care benefits and lifeinsurance coverage to former employees after employment but before retirement.As of December 31, 2004, the accrued liability related to this benefit wasUS Dollar 1.6 million (Euro 1.2 million) and is included in theaccrued employee benefits on the consolidated balance sheet.

 

F-30

----

 

•                  Cole has defined contribution plans covering allfull-time employees in the U.S. and Puerto Rico. Eligible employees maycontribute a percentage of their compensation to the plan. In the UnitedStates, Cole provides for a mandatory company match in cash of 25 percentof the first 4 percent of employee contributions. Additionally, theCompany may make an annual discretionary contribution to the plan in cash. InPuerto Rico, the plan provides for a mandatory match of 50 percent of thefirst 6 percent of employee contributions. Contributions to both plans arerequired to be made once a year. U.S. Holdings’ matching contributions, net offorfeitures, of Euro 0.9 million were made in early 2005 and accrued foras of December 31, 2004.

 

•                  Cole established and maintains the Cole NationalGroup, Inc. Supplemental Retirement Benefit Plan, which providessupplemental retirement benefits for certain highly compensated and managementemployees who were previously designated by the former Board of Directors ofCole as participants. This is an unfunded non-contributory defined contributionplan. Each participant’s account is credited with a percentage of theparticipant’s base salary and interest earned on the average balance during theyear. The plan liability of Euro 1.5 million at December 31, 2004 isincluded in accrued employee benefits on the consolidated balance sheet.

 

•                  Cole maintained a deferred compensation plan forexecutives and other senior management which allowed for the deferral of aportion of their compensation. A total of US Dollar 3.2 million (Euro2.3 million) was paid to the participants in the fourth quarter of 2004 inaccordance with the change in control provisions of this plan. There is noremaining liability for this plan on the consolidated balance sheet at December 31,2004.

 

***Defined Contribution Plan*—**U.S.Holdings sponsors a noncontributory profit-sharing plan for employees of itsformer women’s apparel business. Contributions to this plan were discontinuedfor plan years subsequent to January 28, 1995.

 

***Health Benefit Plans*—**U.S.Holdings partially subsidizes health care benefits for eligible retirees.Employees generally become eligible for retiree health care benefits when theyretire from active service between the ages of 55 and 65. Health care benefitsare discontinued when a participant retiree attains the age of 65.

 

As of the Cole acquisition date, U.S.Holdings through its wholly owned subsidiary has a liability for a postretirement benefit plan maintained by Cole in connection with its acquisitionof Pearle in 1996. This plan was closed to new participants at the time of Cole’sacquisition of Pearle. Under this plan, the eligible former employees areprovided life insurance and certain health care benefits which are partiallysubsidized by Cole.

 

Net periodic cost of these benefits forfiscal years 2004 and 2003 included the following components:

 
| **(Amounts in Euro/thousands)**          | ** ** | **2003** | ** ** | **2004** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
| Service cost                             |       | 166      |       | 126      |       |
| Interest  cost                           |       | 75       |       | 72       |       |
| Amortization  of unrecognized net (gain) |       | (7       | )          | (3       | )          |
| Amortization  of prior service cost      |       | (15      | )          | (23      | )          |
| Net periodic  pension cost               |       | 219      |       | 172      |       |

 

F-31

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The following table sets forth the fundedstatus of the postretirement benefit plan:

 
| **(Amounts in Euro/thousands)**                   | ** ** | **2003** | ** ** | **2004** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
| Change in  benefit obligation:                    |       |     |       |     |       |
| Benefit  obligation—beginning of year        |       | 1,256    |       | 1,330    |       |
| Translation  differences                          |       | (244     | )          | (298     | )          |
| Service cost                                      |       | 166      |       | 126      |       |
| Interest  cost                                    |       | 75       |       | 72       |       |
| Plan  participants’ contributions            |       | 18       |       | 23       |       |
| Amendments                                        |       | —   |       | (94      | )          |
| Actuarial  gain                                   |       | 110      |       | (2       | )          |
| Acquisition                                       |       | —   |       | 2,359    |       |
| Benefits  paid                                    |       | (51      | )          | (48      | )          |
| Benefits  obligation—end of year             |       | 1,330    |       | 3,468    |       |
|                                              |       |     |       |     |       |
| Changes in  plan assets:                          |       |     |       |     |       |
| Fair value  of plan assets—beginning of year |       | —   |       | —   |       |
| Translation  differences                          |       | —   |       | —   |       |
| Company  contribution                             |       | 33       |       | 25       |       |
| Plan  participants’ contributions            |       | 18       |       | 23       |       |
| Benefits  paid                                    |       | (51      | )          | (48      | )          |
| Fair value  of plan assets—end of year       |       | —   |       | —   |       |
| Funded  status                                    |       | (1,330   | )          | (3,468   | )          |
| Unrecognized  net gain and prior service costs    |       | (160     | )          | (213     | )          |
| Prepaid  (accrued) postretirement benefit cost    |       | (1,490   | )          | (3,681   | )          |

 

***Benefit Payments—***Thefollowing estimated future benefit payments, which reflect expected futureservice, are estimated to be paid in the years indicated for both the Luxotticaand Cole plans (amounts in thousands of Euro translated for convenience at thenoon buying rate at December 31, 2004):

 
| 2005      |   | 165   |   |
|-----------|--------|-------|--------|
| 2006      |   | 150   |   |
| 2007      |   | 185   |   |
| 2008      |   | 196   |   |
| 2009      |   | 224   |   |
| 2010-2014 |   | 1,532 |   |

 

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 weightedaverage discount rate used in determining the accumulated post-retirementbenefit obligation was 5.75 percent at September 30, 2004 and6.00 percent at September 30, 2003.

 

The weighted average discount rate used indetermining the net periodic benefit cost for 2004 and 2003 was6.0 percent and 6.5 percent, respectively.

 

Certain of the company’s non-Italian andnon-US subsidiaries provide limited non-pension benefits to retirees inaddition to government sponsored programs. The cost of these programs is notsignificant to the Company.

 

F-32

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**10. STOCK OPTION AND INCENTIVE PLANS**

 

**Stock Option Plan**

 

Beginning in April 1998, certainofficers and other key employees of the Company and its subsidiaries weregranted stock options of Luxottica Group S.p.A. under the Company’s stockoption plan. The stock options were granted at a price equal to the marketvalue of the shares at the date of grant. These options become exercisable inthree equal annual installments from the date of grant and expire on or before January 31,2012.

 

As Luxottica Group has elected to apply APB25, no compensation expense was recognized because the option exercise pricewas equal to the quoted market value on the date of grant.

 

The following table summarizes informationabout stock options for each year:

 
| ** **                                    | ** ** | **Number  of Options  Outstanding** | ** ** | **Weighted Average  Exercise Price  (Denominated  in Euro)(1)** | ** ** |
|-----------------------------------------------|------------|-------------------------------------|------------|-----------------------------------------------------------------|------------|
| **Outstanding  as of January 1, 2002**   | ** ** | **7,407,783**                       | ** ** | **9.67**                                                        | ** ** |
| Granted                                       |       | 2,348,400                           |       | 16.98                                                           |       |
| Forfeitures                                   |       | (248,367                            | )          | 14.54                                                           |       |
| Exercised                                     |       | (1,397,783                          | )          | 6.67                                                            |       |
| **Outstanding  as of December 31, 2002** | ** ** | **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**                                                       | ** ** |

 

----

(1)                                  Forconvenience all amounts are translated at the noon buying rate in effect at theend of each year.

 

Stock option grants outstanding at December 31,2004 are summarized as follows:

 
| **Grant** | ** ** | **Exercise Price  denominated in  Euro(2)** | ** ** | **Number  Outstanding** | ** ** | **Number  Exercisable** | ** ** | **Remaining  Life (Years)** | ** ** |
|-----------|------------|---------------------------------------------|------------|-------------------------|------------|-------------------------|------------|-----------------------------|------------|
| 1         |       | 7.38                                        |       | 807,250                 |       | 807,250                 |       | 2.1                         |       |
| 2         |       | 4.38                                        |       | 1,161,960               |       | 1,161,960               |       | 3.1                         |       |
| 3         |       | 9.52                                        |       | 1,292,700               |       | 1,292,700               |       | 4.1                         |       |
| 4         |       | 11.23                                       |       | 1,669,850               |       | 1,669,850               |       | 5.1                         |       |
| 5         |       | 13.15                                       |       | 2,150,700               |       | 1,429,000               |       | 6.1                         |       |
| 6         |       | 10.51                                       |       | 2,236,100               |       | 689,100                 |       | 7.1                         |       |
| 7         |       | 13.79                                       |       | 2,035,500               |       | —                  |       | 8.1                         |       |

 

----

(2)                          Certain optionswere granted in U.S. Dollars and have been converted using a December 31,2004 conversion rate of Euro 1.00 to US $1.3538.

 

Included as an addition to the Company’spaid-in capital account in fiscal years 2003 and 2004 is Euro 0.3 millionand Euro 0.8 million, respectively, of tax benefits the Company receivedfrom employees exercising these stock options.

 

F-33

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**Stock Incentive Plans—**

 

Luxottica Group granted stock options tocertain employees under an incentive plan. These options vest and becameexercisable only if certain financial performance measures were met over athree-year period ending December 2004. As of December 31, 2003 and2004, there were 970,000 options outstanding at an exercise price of Euro 11.86(U.S. Dollars 16.06) per share. Compensation expense will be recognized for theoptions issued under the incentive plan based on the market value of theunderlying ordinary shares when the number of shares to be issued is known.Subsequent to December 31, 2004, these options were cancelled as thecalculation for the financial performance measurements were finalized and themeasures were not met.

 

Options granted in October 2004 under aCompany Incentive Plan (1,000,000 ordinary shares) vest and become exercisablefrom January 31, 2007 only if certain financial performance measures aremet over the period ending December 2006 and at such point would becomeexercisable after January 31, 2007.

 

On September 14, 2004, the Company’sChairman and majority shareholder, Mr. Leonardo Del Vecchio, allocatedshares held through La Leonardo Finanziaria S.r.l., an Italian holding companyof the Del Vecchio family, representing 2.11 percent (or 9.6 millionshares) of the Company’s currently authorized and issued share capital, to astock option plan for top management of the Company. The stock options to beissued under the stock option plan vest upon meeting certain economicobjectives. As such, compensation expense will be recorded for the options issuedto management under this plan based on the market value of the underlyingordinary shares only when the number of shares to be vested and issued isknown.

 

**11. SHAREHOLDERS’ EQUITY**

 

In June 2003 and 2004, the Company’sAnnual Shareholders Meetings approved cash dividends of Euro 95.4 millionand Euro 94.1 million, respectively. These amounts became payable in July 2003and 2004, respectively. Italian law requires that five percent of net income beretained, as a legal reserve until this reserve is equal to one-fifth of theissued share capital. As such, this legal reserve is not available fordividends to the shareholders. Legal reserves of the Italian entities includedin retained earnings at December 31, 2003 and 2004 aggregated Euro8.3 million and Euro 8.4 million, respectively. In addition, there isan amount of Euro 3.0 million, which represents other legal reserves offoreign entities, that is not available for dividends to the shareholders.

 

In accordance with SFAS No. 87, *Employer’s Accounting for Pensions,* Luxottica Group hasrecorded a minimum pension liability for underfunded plan of Euro35.2 million and Euro 31.7 million as of December 31, 2003 and2004, respectively, representing the excess of unfunded accumulated benefitobligations over previously recorded pension cost liabilities. A correspondingamount is recognized as an intangible asset except to the extent that theseadditional liabilities exceed related unrecognized prior service cost and netobligation, in which case the increase in liabilities is charged directly toshareholders’ equity. The principal cause of the deterioration of the fundedstatus in the pension liability in previous years was caused by negativereturns from investments held in the worldwide equity market in those years. Asof December 31, 2003 and 2004, a decrease of Euro 1.2 million and anincrease of Euro 0.2 million, respectively, in the excess minimumliability, net of income taxes, resulted in a charge to equity.

 

U.S. Holdings held at December 31, 2001,1,205,000 of Luxottica Group S.p.A.’s ordinary shares, which had beenpreviously purchased at a cost of U.S. Dollars 3.1 million (Euro2.9 million at the December 31, 2002 noon buying rate). These shareswere sold during 2002 for proceeds of U.S. Dollars 8.8 million (Euro9.3 million). The after-tax net gain of U.S. Dollars 6.5 million(Euro 6.9 million) was recorded as an increase to the Company’s additionalpaid-in capital balance (Note 2).

 

In September 2002 the Board of Directorsauthorized U.S. Holdings to repurchase through the open market up to 11,500,000ADRs of Luxottica Group S.p.A., representing 2.5 percent of the authorizedand issue share capital, during an 18-month period starting in September 2002.In March 2003, the Company announced that U.S. Holdings had resolved topurchase up to an additional 10,000,000 ADRs of Luxottica Group S.p.A.,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 U.S. Holdings has purchased6,434,786 (1,911,700 in 2002 and 4,523,786 in 2003) ADRs at an aggregatepurchase price of Euro 70.0 million (U.S. Dollars 88.1 million). Inconnection with the repurchase, an amount of Euro 70.0 million isclassified as treasury shares in the Company’s consolidated financialstatements.

 

**12. SEGMENTS AND RELATED INFORMATION**

 

The Company adopted SFAS No. 131, *Disclosures About Segments of an Enterprise and Related Information*,in 1998. The Company operates in two industry segments: (1) manufacturingand wholesale distribution and (2) retail distribution. Through itsmanufacturing and wholesale distribution operations, the Company is engaged inthe design, manufacture, wholesale

 

F-34

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distribution and marketing of house brand and designer lines of mid- topremium-priced prescription frames and sunglasses. The Company operates in theretail segment through its Retail Division, consisting of LensCrafters, SunglassHut International, since April 2001, OPSM, since August 2003, andCole National, since October 2004.

 

The following tables summarize the segmentaland geographic information deemed essential by the Company’s management for thepurpose of evaluating the Company’s performance and for making decisions aboutfuture allocations of resources.

 

The “Inter-segment transactions and corporateadjustments” column includes the elimination of inter-segment activities whichconsist primarily of sales of product from the manufacturing and wholesalesegment to the retail segment and corporate related expenses not allocated toreportable segments. This has the effect of increasing reportable operatingprofit for the manufacturing and wholesale and retail segments. Identifiableassets are those tangible and intangible assets used in operations in eachsegment. Corporate identifiable assets are principally cash, goodwill and tradenames.

 
| **(Thousands of Euro)  Year Ended  December 31,** | ** ** | **Manufacturing  And  Wholesale** | ** ** | **Retail** | ** ** | **Inter-Segments  Transactions  and Corporate  Adjustments** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------|------------|------------|------------|--------------------------------------------------------------|------------|------------------|------------|
| **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        |       |
| **2002;**                                              |       |                              |       |       |       |                                                         |       |             |       |
| Net sales                                              |       | 1,128,901                         |       | 2,227,702  |       | (154,815                                                     | )(1)       | 3,201,788        |       |
| Income from  operations                                |       | 287,627                           |       | 319,425    |       | (5,544                                                       | )(2)       | 601,508          |       |
| Capital  expenditures                                  |       | 81,651                            |       | 91,679     |       | —                                                       |       | 173,330          |       |
| Depreciation  and amortization                         |       | 46,298                            |       | 77,217     |       | 22,465                                                       | (3)        | 145,980          |       |
| Identifiable  assets                                   |       | 1,431,317                         |       | 882,113    |       | 1,272,902                                                    | (4)        | 3,586,332        |       |

 

----

(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-segmentdepreciation and amortization relates to depreciation and amortization ofcorporate identifiable assets.

 

(4)                          Inter-segmentidentifiable assets includes mainly the net value of goodwill and trade namesof acquired retail businesses.

 

The geographic segments include Italy, themain manufacturing and distribution base, North America (which includes theUnited States of America, Canada and Caribbean islands), Asia Pacific (whichincludes Australia, New Zealand, Singapore, Malaysia, Thailand, China, HongKong, Japan and Taiwan) and Other (which includes all other geographiclocations including Europe (excluding Italy), South America and the MiddleEast). Sales are attributed to geographic segments based on the legal entitydomicile where the sale is originated. Intercompany sales included inintersegment elimination are accounted for on a cost plus mark-up basis.

 

F-35

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| **(Thousands of Euro)  Year Ended  December 31,** | ** ** | **Italy (6)** | ** ** | **North  America (6)** | ** ** | **Asia  Pacific (6)** | ** ** | **Other (6)** | ** ** | **Adjustments  And  Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------|------------|---------------|------------|------------------------|------------|-----------------------|------------|---------------|------------|------------------------------------|------------|------------------|------------|
| **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          |       |
| 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          |       |
| Identifiable assets                                    |       | 1,095,350     |       | 2,075,904              |       | 572,691               |       | 217,458       |       | (48,727                            | )          | 3,912,676        |       |
| **2002;**                                              |       |          |       |                   |       |                  |       |          |       |                               |       |             |       |
| Net sales(5)                                           |       | 792,370       |       | 2,345,834              |       | 185,956               |       | 491,045       |       | (613,417                           | )          | 3,201,788        |       |
| Income from operations                                 |       | 207,250       |       | 323,038                |       | 19,826                |       | 62,362        |       | (10,968                            | )          | 601,508          |       |
| Identifiable assets                                    |       | 974,412       |       | 2,405,462              |       | 153,779               |       | 221,154       |       | (168,475                           | )          | 3,586,332        |       |

 

----

(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.

 

Certain amounts for the years 2002 and 2003 have been reclassified toconform to the 2004 presentation.

 

**13. FINANCIAL INSTRUMENTS**

 

**Concentration of Credit Risk—**

 

Concentrations of credit risk with respect totrade accounts receivable are limited due to the large number of customerscomprising the Company’s customer base. Ongoing credit evaluations of customers’financial condition are performed.

 

**Concentration of Sales under LicenseAgreement—**

 

In 1999, the Company signed a licenseagreement for the design, production and distribution of frames under theChanel trade name. Since 1999, Chanel sales have been increasing, representingapproximately 4.4 percent of total sales in 2004. In February 2004,the Company announced the renewal of this license agreement. This renewedlicense agreement expires in 2008.

 

**Concentration of Supplier Risk—**

 

Oakley Inc. is one of the Company’slargest suppliers of products to its retail division. For the 2002, 2003 and2004 fiscal years, Oakley accounted for approximately 11.8 percent,8.7 percent and 6.8 percent of the total merchandise purchases fromsuppliers, respectively. In December 2004, the Company signed a new oneyear purchase contract with Oakley. Management believes that the loss of thisvendor would not cause a significant impact on the future operations of theCompany as it could replace this vendor quickly with other productsmanufactured by the Company and other third party suppliers.

 

As a result of the OPSM and Coleacquisitions, Essilor S.A. has become one of the Company’s largest suppliers toits retail division. For the 2004 fiscal year, Essilor S.A. accounted forapproximately 9.9 percent of the Company’s total merchandise purchases.The Company has not signed any specific purchase contract with Essilor.Management believes that the loss of this vendor would not cause a significantimpact on the future operations of the Company as it could replace this vendorquickly with other third party suppliers.

 

**14. COMMITMENTS AND CONTINGENCIES**

 

**Royalty Agreements—**

 

The Company is obligated undernon-cancellable license agreements with designers, which expire at variousdates through 2013. In accordance with the provisions of such agreements, theCompany is required to pay royalties and advertising

 

F-36

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fees based on a percentage of sales (as defined) with, in certainagreements, minimum guaranteed payments in each year of the agreements. In thefirst half of 2003, the Company terminated its license agreement for theproduction and distribution of the Giorgio Armani and Emporio Armani eyewearcollections and has signed a ten-year worldwide license agreement for theproduction and distribution of eyewear of Versace, Versus and Versace Sportframes. The agreement is renewable at the Company’s discretion for anadditional ten years. In the second part of 2003, a license agreement wassigned for the production and distribution of products with the Prada and MiuMiu trade names. The Prada license agreement expiration date is in 2013. In June 2004,the Company signed a new licensing agreement for the design, production andworldwide distribution of Donna Karan and DKNY prescription frames and sunglasses.The initial term of the agreement is five years, which began on January 1,2005 and is renewable for an additional five years. In October 2004, theCompany signed a new licensing agreement for the design, production andworldwide distribution of Dolce & Gabbana and D&G Dolce &Gabbana prescription frames and sunglasses. The initial term of the agreementis five years, which will begin on January 1, 2006, with an automaticallyrenewable extension for an additional five years upon meeting certain targets.On December 27, 2004 the Company and the current license agreed to advancethe initial term of the license to October 1, 2005.

 

Minimum payments required in each of theyears subsequent to December 31, 2004 are detailed as follows (thousandsof Euro):

 
| **YEARS ENDING DECEMBER 31,** | ** ** | ** **  | ** ** |
|------------------------------------|------------|-------------|------------|
| 2005                               |       | 31,217      |       |
| 2006                               |       | 43,757      |       |
| 2007                               |       | 42,308      |       |
| 2008                               |       | 33,203      |       |
| 2009                               |       | 27,952      |       |
| Thereafter                         |       | 150,771     |       |
| **Total**                          | ** ** | **329,208** | ** ** |

 

Total royalties and advertising expenses forthe years ended December 31, 2002, 2003 and 2004 aggregated Euro88.7 million, Euro 64.3 million and Euro 83.0 million,respectively.

 

Total payments for royalties and advertisingexpenses for the years ended December 31, 2002, 2003 and 2004 aggregatedEuro 70.3 million, Euro 124.2 million and Euro 68.5 million,respectively.

 

**Leases and Licenses—**

 

The Company leases through its worldwidesubsidiaries various retail store, plant, warehouse and office facilities, aswell as certain of its data processing and automotive equipment under operatinglease arrangements expiring between 2005 and 2025, with options to renew atvarying terms. The lease and license arrangements for the Company’s U.S. retaillocations often include escalation clauses and provisions requiring the paymentof incremental rentals, in addition to any established minimums contingent uponthe achievement of specified levels of sales volume. In addition with theacquisition of Cole, the Company operates departments in various host storespaying occupancy costs solely as a percentage of sales. Certain agreements,which provides for operations of departments in a major retail chain in theUnited States contain short-term cancellation clauses.

 

Future minimum annual rental commitments for operating leases are asfollows (thousands of Euro):

 
| **YEARS ENDING DECEMBER 31,** | ** ** | ** **  | ** ** |
|------------------------------------|------------|-------------|------------|
| 2005                               |       | 204,436     |       |
| 2006                               |       | 175,686     |       |
| 2007                               |       | 140,584     |       |
| 2008                               |       | 109,174     |       |
| 2009                               |       | 79,866      |       |
| Thereafter                         |       | 168,307     |       |
| **Total**                          | ** ** | **878,053** | ** ** |

 

F-37

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Total rent expense under operating leases for each year ending December 31,is as follows:

 
| **Thousands of Euro** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|----------|------------|
| Minimum rent          |       | 188,889  |       | 204,406  |       | 208,134  |       |
| Contingent  rent      |       | 5,216    |       | 4,883    |       | 15,051   |       |
| Sublease  income      |       | (27,546  | )          | (44,739  | )          | (49,247  | )          |
|                  |       | 166,559  |       | 164,550  |       | 173,938  |       |

 

**Guarantees—**

 

The United States Shoe Corporation, a whollyowned subsidiary of the Company, remains contingently liable on seven storeleases in the United Kingdom. These leases were previously transferred to thirdparties. The third parties have assumed all future obligations of the leasesfrom the date each agreement was signed. However, under the common law of theUnited Kingdom, the lessor still has the right to seek payment of certainamounts from the Company if unpaid by the new obligor. If the Company isrequired to pay under these guarantees, it has the right to recover amountsfrom the new obligor. These leases will expire during various years until December 31,2015. At December 31, 2004, the maximum amount for which the Company’ssubsidiary is contingently liable is Euro 11.6 million.

 

Cole has guaranteed future minimum leasepayments for certain store locations leased directly by franchisees. Theseguarantees aggregated approximately Euro 8.2 million at December 31,2004. Performance under a guarantee by the Company is triggered by default of afranchisee in its lease commitment. Generally, these guarantees also extend topayments of taxes and other expenses payable under the leases, the amounts ofwhich are not readily quantifiable. The term of these guarantees ranges fromone to ten years. Many are limited to periods less than the full term of thelease involved. Under the terms of the guarantees, Cole has the right to assumethe primary obligation and begin operating the store. In addition, as part ofthe franchise agreements, Cole may recover any amounts paid under the guaranteefrom the defaulting franchisee. The Company has accrued an immaterial liabilityat December 31, 2004, relating to these guarantees based on the estimatedfair value, using an expected present value calculation.

 

**Credit Facilities—**

 

As of December 31, 2003 and 2004Luxottica Group had unused short-term lines of credit of approximately Euro271.8 million and Euro 365.8 million, respectively.

 

These lines of credit are renewed annuallyand are guaranteed by the Company. At December 31, 2004, there were Euro5.2 million of borrowings outstanding and Euro 29.0 million inaggregate face amount of standby letters of credit outstanding under theselines of credit (see below).

 

The blended average interest rate on theselines of credit is approximately LIBOR plus 0.25%.

 

**Outstanding Standby Letters of Credit—**

 

A U.S. subsidiary has obtained variousstandby letters of credit from banks that aggregate Euro 21.2 million andEuro 35.6 million as of December 31, 2003 and 2004, respectively.Most of these letters of credit are used for security in risk managementcontracts or as security on store leases. Most contain evergreen clauses underwhich the letter is automatically renewed unless the bank is notified not torenew.

 

**Litigation—**

 

In May 2001, certain former stockholdersof Sunglass Hut International, Inc. commenced an action in the U.S.District Court for the Eastern District of New York against the Company, itsacquisition subsidiary formed to acquire SGHI and certain other defendants, onbehalf of a purported class of former SGHI stockholders, alleging in theoriginal and in the amended complaint filed later, among other claims, that thedefendants violated certain provisions of U.S. securities laws and the rules thereunder,in connection with the acquisition of SGHI in a tender offer and second-stepmerger, by reason of entering into a consulting, non-disclosure andnon-competition agreement prior to the commencement of the tender offer, withthe former chairman of SGHI, which purportedly involved paying consideration tosuch person for his SGHI shares and his support of the

 

F-38

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tender offer that was higher than that paid to SGHI’s stockholders in thetender offer. The plaintiffs are seeking, among other remedies, the payment ofsuch higher consideration to all tendering shareholders, other than LuxotticaGroup S.p.A. and its affiliates.

 

The Company and the other defendants filed amotion 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) ofthe Securities Exchange Act of 1934 and Rule 10b-5 thereunder, butdenied the Company’s motion to dismiss the claims under Rule 14d-10relating to the consulting, non-disclosure and non-competition agreement with Mr. Hauslein,the former Chairman of SGHI, and aiding and abetting alleged breaches by SGHI’sformer directors of their fiduciary duties, noting that it was obligated, forthe purpose of rendering its decision on the motion to dismiss, to treat all ofthe plaintiffs’ allegations in the complaint as true. On June 8, 2004, theconsolidated complaint was further amended to add Mr. Leonardo DelVecchio, the Company’s Chairman, as a defendant in respect of the two remainingclaims.

 

The Company continues to believe that theclaims that were not dismissed are without merit and that its defenses aremeritorious, and will continue to defend against such claims vigorously.However, the Company can provide no assurance as to the outcome of the case.

 

In March 2002, an individual commencedan action in the California Superior Court for the County of San Francisco againstLuxottica Group S.p.A. and certain of our subsidiaries, including LensCrafters, Inc.,and EYEXAM of California, Inc. The plaintiff, along with a secondplaintiff named in an amended complaint, seeks to certify this case as a classaction. The claims have been partially dismissed. The remaining claims, againstLensCrafters, EYEXAM and EyeMed Vision Care, LLC, allege various statutoryviolations relating to the operation of LensCrafters’ stores in California,including violations of California laws governing relationships amongopticians, 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 our operating results, financial condition and cash flow.

 

In February 2002, the State ofCalifornia commenced an action in the California Superior Court for the Countyof San Diego 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 unspecified damages, disgorgement and restitutionof allegedly unjustly obtained sums, civil penalties and injunctive relief,including an injunction that would prohibit defendants from providing eyeexaminations 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 appellate court issued an opinion in which it stated that becauseCalifornia law prohibited defendants from providing eye examinations and otheroptometric services at Pearle Vision Centers, the trial court should haveenjoined defendants from advertising the availability of eye examinations atPearle Vision Centers. The appellate court also ruled in Cole’s favour withrespect to charging 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 onour operating results, financial condition and cash flow.

 

F-39

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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. The course of this investigation orother litigation or investigations arising out of the restatement of Cole’sfinancial statements cannot be predicted. In addition, under certaincircumstances Cole would be obliged to indemnify the individual current andformer directors and officers who are named as defendants in litigation or whoare or become involved in an investigation. Cole is honouring its obligationsto advance reasonable attorneys’ fees incurred by current and former officersand directors 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. If the investigation developsinto litigation and Cole is not successful in defending against thatlitigation, or is obligated to indemnify individuals who do not succeed indefending against such litigation, there may be a material adverse effect onCole’s financial condition, cash flow, and results of operations.

 

In December 2002, the Company wasinformed that the Attorney General of the State of New York had begun aninvestigation into the Company’s pricing and distribution practices relating tosunglasses under applicable state and federal antitrust laws. The office of theAttorney General recently advised the Company that it has closed itsinvestigation without taking any action whatsoever against the Company.

 

On April 22, 2003, the Company enteredinto a settlement agreement with Oakley, Inc. (“Oakley”), under which twopreviously reported patent and intellectual property lawsuits brought by Oakleyin 1998 (originally against Bausch & Lomb Incorporated and certain ofits subsidiaries and assumed by the Company in connection with its acquisitionfrom Bausch & Lomb in 1999 of the Ray Ban business) and in 2001against the Company and certain of its subsidiaries, each in the U.S. DistrictCourt for the Central District of California, were settled. As part of thesettlement, neither party admitted to any wrongdoing in either case, and allclaims and counterclaims were released and discharged. Further, the preliminaryinjunction that Oakley had obtained in the second case against certainsubsidiaries of the Company was dissolved.

 

On August 29, 2003, the SecuritiesAppellate Tribunal (SAT) in India upheld the decision to require a subsidiaryof the Company to make a public offering to acquire up to an additional20 percent of the outstanding shares of RayBan Sun Optics India Ltd.On October 30, 2003, the Company announced that it intended to comply withthe SAT’s decision and that the Company, through its subsidiary, Ray Ban IndianHoldings Inc., would launch a public offer to purchase an additional20 percent of the outstanding shares of RayBan Sun Optics India Ltd.In accordance with applicable Indian regulation, the Company placed in escrowwith the Manager of the Offer Rs 226 million (Euro 4.2 million). On November 17,2003, the Supreme Court of India stayed the SAT’s order and directed that thematter be further reviewed at the end of January 2004, provided that theCompany issue a letter of credit in favour of the Indian securities regulatoryagency within the following four week period of Rs 630.6 million (Euro11.9 million). The Company has complied with such requirement and theappeal is waiting to be heard before the Supreme Court of India. If the Companyis ultimately required to make the public offer, it expects the aggregate costof the offer to be approximately Euro 16 million, including stipulatedinterest increments.

 

On July 14, 2004, a shareholder of Colefiled a shareholders’ class action complaint against Cole, its directors, andthe Company in the Delaware Chancery Court, known as Pfeiffer v. Cole NationalCorp., et al., Civil Action No. 569-N. The complaint alleges, amongother things, that the individual defendants breached their fiduciary duties asdirectors and /or officers to Cole by causing Cole to enter into an agreementto be acquired by the Company for $22.50 per share “without having exposed thecompany to the marketplace through fair and open negotiations with allpotential bidders and/or an active market check or open auction for sale of thecompany.” The complaint seeks preliminary and permanent injunctive reliefagainst the merger, rescission of the merger if it is consummated, and/ordamages and other associated relief. The Company believes that the action iswithout merit.

 

The Company is defendant in various otherlawsuits arising in the ordinary course of business. It is the opinion of themanagement of the Company that it has meritorious defences against alloutstanding claims, which the Company will vigorously pursue, and that theoutcome will not have a material adverse effect on either the Company’sconsolidated financial position or results of operations.

 

**15. SUBSEQUENT EVENTS**

 

On January 4, 2005, Cole, a wholly ownedsubsidiary of the Company, completed the sale of all its shares in PE,representing approximately 21 percent of that company’s outstandingshares, to HAL Investments B.V., a subsidiary of HAL Holding N.V., for a cashpurchase price of Euro 144 million (or approximately US Dollar191 million calculated at the January 4, 2005 noon buying rate).

 

F-40

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On February 7, 2005, the offer for allthe unowned remaining outstanding shares of OPSM Group was closed and theCompany held 98.5 percent of OPSM Group’s shares, which is in excess ofthe compulsory acquisition threshold. On February 8, 2005, the Companyannounced the start of the compulsory acquisition process for all remainingshares in OPSM Group not already owned by the Company.

 

On February 15, 2005, the AustralianStock Exchange suspended trading in OPSM Group shares and on February 21,2005 it delisted OPSM Group shares from the Australian Stock Exchange. Thecompulsory acquisition process was completed on March 23, 2005 and as ofthat date the Company held 100.0 percent of OPSM Group’s shares.

 

* * * * *

 

F-41

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**LuxotticaGroup S.p.A. and Subsidiaries**

**Schedule II**

**VALUATIONAND QUALIFYING ACCOUNTS**

**ALLOWANCEFOR DOUBTFUL ACCOUNTS**

**(Amountsexpressed 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** | ** ** |
|------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|---------------|------------|----------------|------------|--------------------------------|------------|
| 2002                         |       | 22,433                                |       | 4,699                               |       | (1,665        | )          | (7,369         | )          | 18,098                         |       |
| 2003                         |       | 18,098                                |       | 6,731                               |       | 3,143         |       | (6,480         | )          | 21,492                         |       |
| 2004                         |       | 21,492                                |       | 4,851                               |       | 5,598         |       | (8,534         | )          | 23,407                         |       |

 

----

(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.

 

F-42

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**ITEM 19. EXHIBITS**

 

*Exhibits.*  The following documents are filed as exhibitsherewith, 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) (incorporated by reference  to our Annual Report on Form 20-F for the year ended December 31,  2003, as filed with the Commission on June 29, 2004). |
|                |       |         |   |
| 2.                  | 1          |         | Deposit Agreement among Luxottica  Group S.p.A., The Bank of New York, as Depositary, and the holders  from time to time of American Depositary Receipts, as amended and restated as  of July 16, 2001, including the form of American Depositary Receipt  annexed thereto (incorporated by reference to our Annual Report on Form 20-F  for the year ended December 31, 2001, as filed with the Commission on June 28,  2002). |
|                |       |         |   |
| 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). |

 

85

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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     |         | 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 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 (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.                  | 12     |         | 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). |
|                |   |         |   |
| 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). |

 

86

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**SIGNATURES**

 

The registrant hereby certifies that it meetsall of the requirements for filing on Form 20-F and that it has dulycaused and authorized the undersigned to sign this annual report on its behalf.

 

 
|   | LUXOTTICA GROUP S.p.A.  (Registrant)   |              |
|--------|----------------------------------------|-------------------|
|   |                                   |              |
|   | By:                                    | /s/ Andrea Guerra |
|   | Andrea Guerra  Chief Executive Officer |              |
|        |                                        |                   |  |

 

 

Dated: June 29, 2005

 

87

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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) (incorporated by reference  to our Annual Report on Form 20-F for the year ended December 31,  2003, as filed with the Commission on June 29, 2004). |
|                |       |         |   |
| 2.                  | 1          |         | Deposit Agreement among Luxottica  Group S.p.A., The Bank of New York, as Depositary, and the holders  from time to time of American Depositary Receipts, as amended and restated as  of July 16, 2001, including the form of American Depositary Receipt  annexed thereto (incorporated by reference to our Annual Report on Form 20-F  for the year ended December 31, 2001, as filed with the Commission on June 28,  2002). |
|                |       |         |   |
| 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). |

 

88

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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         |         | 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 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 (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.                  | 12         |         | 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). |
|                |       |         |   |
| 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). |

 

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