**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 20-F**

 
| **(Mark  One)**                                      | ** ** | ** **                                                                                                         |
|------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|
| **o**                                                | ** ** | **REGISTRATION STATEMENT PURSUANT TO  SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                           |
| **OR**                                               |
| ** **                                           | ** ** | ** **                                                                                                         |
| **x**                                                | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                |
| ** **                                           | ** ** | ** **                                                                                                         |
| **For the fiscal year ended December 31, 2007** |
| ** **                                           | ** ** | ** **                                                                                                         |
| **OR**                                               |
| ** **                                           | ** ** | ** **                                                                                                         |
| **o**                                                | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**            |
| ** **                                           | ** ** | ** **                                                                                                         |
| **o**                                                | ** ** | **SHELL COMPANY REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**         |

 

**Commission file number 1-10421**

** **

**LUXOTTICAGROUP S.p.A.**

(Exact name of Registrant as specified in its charter)

(Translation of Registrant’s name into English)

 

**REPUBLIC OF ITALY**

(Jurisdiction of incorporation ororganization)

 

**VIA C. CANTÙ 2, MILAN 20123, ITALY**

(Address of principal executive offices)

 

Securitiesregistered or to 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 |       | NEW YORK STOCK EXCHANGE                        |
| EURO 0.06 PER SHARE*       |       |                                           |
|                       |       |                                           |
| AMERICAN DEPOSITARY        |       | NEW YORK STOCK EXCHANGE                        |
| SHARES, EACH REPRESENTING  |       |                                           |
| ONE ORDINARY SHARE         |       |                                           |

 

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*       Not fortrading, but only in connection with the registration of American DepositaryShares, pursuant to the requirements of the New York Stock Exchange

 

Securitiesregistered or to be registered pursuant to Section 12(g) of the Act.

 

**None.**

 

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

 

**None.**

 

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

 

| **ORDINARY SHARES, PAR VALUE EURO  0.06 PER SHARE** | ** ** | **462,623,620** | ** ** |
|-----------------------------------------------------|------------|-----------------|------------|

 

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

Yesx   No o

 

Ifthis report is an annual or transition report, indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934.

Yes  o  No x

 

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

Yesx   No o

 

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

 

x Large acceleratedfiler                                o Acceleratedfiler                                o Non-accelerated filer

 

Indicateby check mark which basis of accounting the registrant has used to prepare thefinancial statements included in this filing:

 
| x U.S. GAAP |   | o International Financial Reporting Standards  as issued |   | o Other |
|-------------|--------|----------------------------------------------------------|--------|---------|
|        |   | by  the International Accounting Standards Board         |   |    |

 

If“Other” has been checked in response to the previous question, indicate bycheck mark which financial statement item the registrant has elected to follow.

Item 17   o  Item 18   o

 

Ifthis is an annual report, indicate by check mark whether the registrant is ashell company (as defined by Rule 12b-2 of the Exchange Act).

Yes  o  No x

 

 

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| **PART I**        | ** ** | ** **    | ** **                                                                        | ** ** |
|------------------------|------------|---------------|-----------------------------------------------------------------------------------|------------|
| ** **             | ** ** | **ITEM 1.**   | **IDENTITY OF DIRECTORS,  SENIOR MANAGEMENT AND ADVISERS**                        | 4          |
| ** **             | ** ** | **ITEM 2.**   | **OFFER STATISTICS AND  EXPECTED TIMETABLE**                                      | 4          |
| ** **             | ** ** | **ITEM 3.**   | **KEY  INFORMATION**                                                              | 4          |
| ** **             | ** ** | **ITEM  4.**  | **INFORMATION  ON THE COMPANY**                                                   | 12         |
| ** **             | ** ** | **ITEM 4A.**  | **UNRESOLVED STAFF  COMMENTS**                                                    | 35         |
| ** **             | ** ** | **ITEM 5.**   | **OPERATING  AND FINANCIAL REVIEW AND PROSPECTS**                                 | 35         |
| ** **             | ** ** | **ITEM 6.**   | **DIRECTORS,  SENIOR MANAGEMENT AND EMPLOYEES**                                   | 51         |
| ** **             | ** ** | **ITEM 7.**   | **MAJOR  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS**                            | 64         |
| ** **             | ** ** | **ITEM 8.**   | **FINANCIAL  INFORMATION**                                                        | 66         |
| ** **             | ** ** | **ITEM 9.**   | **THE OFFER AND LISTING**                                                         | 68         |
| ** **             | ** ** | **ITEM 10.**  | **ADDITIONAL  INFORMATION**                                                       | 69         |
| ** **             | ** ** | **ITEM 11.**  | **QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**                   | 85         |
| ** **             | ** ** | **ITEM 12.**  | **DESCRIPTION  OF SECURITIES OTHER THAN EQUITY SECURITIES**                       | 88         |
|                   |       |          |                                                                              |       |
| **PART II**       | ** ** | ** **    | ** **                                                                        | ** ** |
| ** **             | ** ** | **ITEM 13.**  | **DEFAULTS,  DIVIDEND ARREARAGES AND DELINQUENCIES**                              | 88         |
| ** **             | ** ** | **ITEM 14.**  | **MATERIAL  MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS** | 88         |
| ** **             | ** ** | **ITEM 15.**  | **CONTROLS AND  PROCEDURES**                                                      | 88         |
| ** **             | ** ** | **ITEM 16.**  | **[RESERVED]**                                                                    | 89         |
| ** **             | ** ** | **ITEM 16A.** | **AUDIT  COMMITTEE FINANCIAL EXPERT**                                             | 89         |
| ** **             | ** ** | **ITEM 16B.** | **CODE OF ETHICS**                                                                | 89         |
| ** **             | ** ** | **ITEM 16C.** | **PRINCIPAL  ACCOUNTANT FEES AND SERVICES**                                       | 89         |
| ** **             | ** ** | **ITEM 16D.** | **EXEMPTIONS  FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES**                   | 90         |
| ** **             | ** ** | **ITEM 16E.** | **PURCHASES  OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS**       | 90         |
|                   |       |          |                                                                              |       |
| **PART III**      | ** ** | ** **    | ** **                                                                        | ** ** |
| ** **             | ** ** | **ITEM 17.**  | **FINANCIAL  STATEMENTS**                                                         | 90         |
| ** **             | ** ** | **ITEM 18.**  | **FINANCIAL  STATEMENTS**                                                         | 91         |
| ** **             | ** ** | **ITEM 19.**  | **EXHIBITS**                                                                      | 92         |
|                   |       |          |                                                                              |       |
| **SIGNATURES**         |       |
|                   |       |          |                                                                              |       |
| **EXHIBIT INDEX** |       |
|                        |            |               |                                                                                   |            |  |  |  |

 

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**FORWARD-LOOKING INFORMATION**

 

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

 

Suchstatements involve risks, uncertainties and other factors that could causeactual results to differ materially from those which are anticipated. Suchrisks and uncertainties include, but are not limited to, the ability tosuccessfully integrate Oakley’s operations, the ability to realize expectedsynergies from the merger with Oakley, the ability to successfully introduceand market new products, the ability to maintain an efficient distributionnetwork, the ability to predict future economic conditions and changes inconsumer preferences, the ability to achieve and manage growth, the ability tonegotiate and maintain favorable license arrangements, the availability ofcorrection alternatives to prescription eyeglasses, fluctuations in exchangerates, the ability to effectively integrate other recently acquired businesses,as well as other political, economic and technological factors and other risksand uncertainties described in our filings with the U.S. Securities andExchange Commission (the “SEC”). These forward-looking statements are made asof the date hereof, and we do not assume any obligation to update them.

 

Throughoutthis annual report, when we use the terms “Luxottica,” “Company,” “Group,” “we,”“us” and “our,” unless otherwise indicated or the context otherwise requires,we are referring to Luxottica Group S.p.A. and its consolidated subsidiariesfor periods prior to our acquisition of Oakley, Inc. (“Oakley”) on November 14,2007. References to “Luxottica,” “Company,” “Group,” “we,” “us” and “our,” forperiods after such acquisition are to Luxottica Group S.p.A. and itsconsolidated subsidiaries, including Oakley and its subsidiaries, unlessotherwise indicated or the context otherwise requires.  References to “Oakley” for periods prior tothe acquisition refer to Oakley and its consolidated subsidiaries, unlessotherwise indicated or the context otherwise requires.

 

**TRADEMARKS**

 

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

 

3

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**PART I**

 

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

 

Notapplicable.

 

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

 

Notapplicable.

 

**ITEM 3. KEY INFORMATION**

 

Thefollowing tables set forth selected consolidated financial data for the periodsindicated and are qualified by reference to, and should be read in conjunctionwith, our consolidated financial statements, the related notes thereto, andItem 5—“Operating and Financial Review and Prospects” contained elsewhereherein. We prepare our financial statements in accordance with accountingprinciples generally accepted in the United States of America, or U.S. GAAP.The selected consolidated income statement data for the years ended December 31,2007, 2006 and 2005, and the selected consolidated balance sheet data as of December 31,2007 and 2006, are derived from the audited Consolidated Financial Statementsincluded in Item 18. The selected consolidated income statement data for theyears ended December 31, 2004 and 2003, and the selected consolidatedbalance sheet data as of December 31, 2005, 2004 and 2003, are derivedfrom audited consolidated financial statements which are not included in this Form 20-F.

 

[TABLES APPEAR ON THE FOLLOWING PAGE]

 

4

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| ** **                                                     | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                     | ** ** | **2007**                                   | ** ** | **2007(10)** | ** ** | **2006(8)(9)** | ** ** | **2005(6)(8)(9)** | ** ** | **2004(7)(8)(9)** | ** ** | **2003(6)(9)** | ** ** |
| ** **                                                     | ** ** | **(In thousands**                     | ** ** | **(In thousands of Euro)(3)** | ** ** |
| ** **                                                     | ** ** | **of U.S.$)**                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **(1)(3)**                                 | ** ** | ** ** | ** ** |
| **STATEMENT OF INCOME DATA:**                                  |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Net Sales                                                      |       | 7,251,929                                  |       | 4,966,054 |   | 4,676,156 |   | 4,134,263 |   | 3,179,613 |   | 2,852,194 |   |
| Cost of Sales                                                  |       | (2,300,876                                 | )          | (1,575,618 | ) | (1,487,700 | ) | (1,373,073 | ) | (1,053,076 | ) | (938,360 | ) |
| Gross Profit                                                   |       | 4,951,053                                  |       | 3,390,436 |   | 3,188,456 |   | 2,761,190 |   | 2,126,537 |   | 1,913,834 |   |
| OPERATING EXPENSE                                              |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Selling and Advertising                                        |       | (3,021,770                                 | )          | (2,069,280 | ) | (1,948,466 | ) | (1,755,536 | ) | (1,329,083 | ) | (1,216,385 | ) |
| General and Administrative                                     |       | (712,397                                   | )          | (487,843 | ) | (484,002 | ) | (424,253 | ) | (317,955 | ) | (265,662 | ) |
| Total                                                          |       | (3,734,167                                 | )          | (2,557,123 | ) | (2,432,468 | ) | (2,179,789 | ) | (1,647,038 | ) | (1,482,047 | ) |
| Income from Operations                                         |       | 1,216,886                                  |       | 833,313 |   | 755,987 |   | 581,401 |   | 479,499 |   | 431,787 |   |
| OTHER INCOME (EXPENSE)                                         |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Interest Income                                                |       | 24,952                                     |       | 17,087 |   | 9,804 |   | 5,650 |   | 6,662 |   | 5,922 |   |
| Interest Expense                                               |       | (130,694                                   | )          | (89,498 | ) | (70,622 | ) | (66,171 | ) | (55,378 | ) | (47,117 | ) |
| Other—Net                                                 |       | 28,885                                     |       | 19,780 |   | (16,992 | ) | 18,429 |   | 13,792 |   | (799 | ) |
| Other Income (Expenses)—Net                               |       | (76,857                                    | )          | (52,631 | ) | (77,810 | ) | (42,092 | ) | (34,924 | ) | (41,994 | ) |
| Income Before Provision for Income Taxes                       |       | 1,140,029                                  |       | 780,681 |   | 678,177 |   | 539,309 |   | 444,575 |   | 389,793 |   |
| Provision for Income Taxes                                     |       | (399,393                                   | )          | (273,501 | ) | (238,757 | ) | (199,266 | ) | (156,852 | ) | (117,328 | ) |
| Income Before Minority Interests in  Consolidated Subsidiaries |       | 740,636                                    |       | 507,180 |   | 439,420 |   | 340,043 |   | 287,723 |   | 272,465 |   |
| Minority Interests in Income of  Consolidated Subsidiaries     |       | (21,870                                    | )          | (14,976 | ) | (8,715 | ) | (9,253 | ) | (8,614 | ) | (5,122 | ) |
| Net Income from Continuing Operations                          |       | 718,766                                    |       | 492,204 |   | 430,705 |   | 330,790 |   | 279,109 |   | 267,343 |   |
| Discontinued Operations—Net of Taxes and  Gain on Sale    |       | 0                                          |       | 0 |   | (6,419 | ) | 11,504 |   | 7,765 |   | 0 |   |
|                                                           |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Net Income                                                     |       | 718,766                                    |       | 492,204 |   | 424,286 |   | 342,294 |   | 286,874 |   | 267,343 |   |
| Weighted Average Shares Outstanding  (thousands)               |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| —Basic                                                    |       | 455,184.8                                  |       | 455,184.8 |   | 452,898.0 |   | 450,179.1 |   | 448,275.0 |   | 448,664.4 |   |
| —Diluted                                                  |       | 458,530.6                                  |       | 458,530.6 |   | 456,186.0 |   | 453,303.4 |   | 450,360.9 |   | 450,202.1 |   |
| Basic Earnings per Share from Continuing  Operations (2)       |       | 1.58                                       |       | 1.08 |   | 0.95 |   | 0.73 |   | 0.62 |   | 0.60 |   |
| Basic Earnings per Share from Discontinued  Operations (2)     |       | 0.00                                       |       | 0.00 |   | (0.01 | ) | 0.03 |   | 0.02 |   | 0.00 |   |
| Basic Earnings per Share (2)                                   |       | 1.58                                       |       | 1.08 |   | 0.94 |   | 0.76 |   | 0.64 |   | 0.60 |   |
| Diluted Earnings per Share from Continuing  Operations (2)     |       | 1.57                                       |       | 1.07 |   | 0.94 |   | 0.73 |   | 0.62 |   | 0.59 |   |
| Diluted Earnings per Share from  Discontinued Operations (2)   |       | 0.00                                       |       | 0.0 |   | (0.01 | ) | 0.03 |   | 0.02 |   | 0.00 |   |
| Diluted Earnings per Share (2)                                 |       | 1.57                                       |       | 1.07 |   | 0.93 |   | 0.76 |   | 0.64 |   | 0.59 |   |
| Cash Dividends Declared per Share  (4)(5)                 |       | 0.61                                       |       | 0.42 |   | 0.29 |   | 0.23 |   | 0.21 |   | 0.21 |   |

 

5

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(1)    Translated forconvenience at the rate of Euro 1.00 = U.S.$1.4603, based on the NoonBuying Rate of Euro to U.S. dollars on December 31, 2007. See “—ExchangeRate Information” below for more information regarding the Noon Buying Rate.

 

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

 

(3)    Except per Shareamounts, which are in Euro and U.S. dollars, as applicable.

 

(4)    Cash Dividends Declaredper Share are expressed in gross amounts without giving effect to applicablewithholding or other deductions for taxes.

 

(5)    Our dividendpolicy is based upon, among other things, our consolidated net income for eachfiscal 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 year for which they have been shown in the table.

 

(6)    We acquired82.57 percent of the outstanding shares of OPSM Group Limited (“OPSM”) in August 2003.As such, the results for 2003 include approximately five months of operatingresults of OPSM and its subsidiaries. In March 2005, we acquired theremaining 17.43 percent of the outstanding shares of OPSM and, from that date,100 percent of the operating results of OPSM and its subsidiaries are includedabove.

 

(7)    We acquired allof the outstanding shares of Cole National Corporation (“Cole”) in October 2004.Therefore, 2004 includes approximately three months of operating results ofCole.

 

(8)    Results ofThings Remembered, our former specialty retail business, which was sold in2006, are classified as discontinued operations and are not included in resultsfrom continuing operations.

 

(9)    Certain amountsin prior years have been reclassified to conform to the 2007 presentation.

 

(10)  We acquired Oakleyin November 2007. Therefore, fiscal year 2007 includes operating resultsof Oakley for the period from and afterNovember 14, 2007, which was the date of the closing of the Oakleyacquisition.

 
| ** **                                                           | ** ** | **As of December 31,**     | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                           | ** ** | **2007**                                  | ** ** | **2007** | ** ** | **2006****(3)** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                           | ** ** | **(in thousands  of U.S.$)(1)** | ** ** | **(In thousands of Euro except share data)** | ** ** |
| **BALANCE SHEET DATA:**                                              |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Working Capital(2)                                                   |       | (363,078                                  | )          | (248,632 | ) | 68,187 |   | 368,863 |   | 218,807 |   | (56,185 | ) |
| Total Assets                                                         |       | 10,451,755                                |       | 7,157,266 |   | 4,968,878 |   | 4,973,522 |   | 4,556,058 |   | 3,912,676 |   |
| Total Debt(4)                                                        |       | 3,970,760                                 |       | 2,719,140 |   | 1,319,262 |   | 1,528,909 |   | 1,680,452 |   | 1,253,427 |   |
| Shareholders’ Equity                                            |       | 3,643,680                                 |       | 2,495,158 |   | 2,215,849 |   | 1,954,033 |   | 1,495,607 |   | 1,374,534 |   |
| Capital Stock                                                        |       | 40,534                                    |       | 27,757 |   | 27,613 |   | 27,479 |   | 27,312 |   | 27,269 |   |
| Number of Shares Adjusted to Reflect  Changes in Capital (thousands) |       |                                      |       | 462,623.6 |   | 460,216.2 |   | 457,975.7 |   | 455,205.5 |   | 454,477.0 |   |

 

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(1)    Translated forconvenience at the rate of Euro 1.00 = U.S.$1.4603, based on the NoonBuying Rate of Euro to U.S. dollars on December 31, 2007. See “—ExchangeRate Information” below for more information regarding the Noon Buying Rate.

 

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

 

(3)    Certain amountsin prior years have been reclassified to conform to the 2007 presentation.

 

(4)    The currentportion of long-term debt was Euro 792.6 million, Euro 359.5 million,Euro 111.0 million, Euro 405.1 million and Euro 390.9 million for the yearsended December 31, 2007, 2006, 2005, 2004 and 2003, respectively.

 

6

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**Dividends**

 

Weare required to pay an annual dividend on our ordinary shares if such dividendhas been approved by a majority of our shareholders at the ordinary meeting ofshareholders. Before we may pay any dividends with respect to any fiscal year,we are required, as necessary, to set aside an amount equal to five percent ofour statutory net income for such year in our legal reserve unless and untilthe reserve, including amounts remaining from prior years, is at least equal toone-fifth of the nominal value of our then issued share capital.  Each year thereafter, such legal reserve requirement remainsfulfilled so long as the reserve equals at least one-fifth of the nominal valueof our issued share capital for each such year.

 

Atour ordinary meeting of shareholders held on May 13, 2008, ourshareholders approved the distribution of a cash dividend in the amount of Euro0.49 per ordinary share. Our Board of Directors proposed, and the shareholdersapproved, the date of May 22, 2008 as the date for the payment of suchdividend to all holders of record of our ordinary shares on May 16, 2008,including Deutsche Bank Trust Company Americas, as depositary on behalf ofholders of our American Depositary Shares, or ADSs. Each ADS represents theright to receive one ordinary share and is evidenced by an American DepositaryReceipt, or ADR. The ADSs were traded ex-dividend on May 19, 2008, anddividends in respect of the ordinary shares represented by ADSs were paid toDeutsche Bank Trust Company Americas on May 22, 2008. Deutsche Bank TrustCompany Americas converted the Euro amount of such dividend payment into U.S.dollars on May 22, 2008. The dividend amount for each ADS holder was paidcommencing on May 29, 2008 to all such holders of record on May 21,2008. Future determinations as to dividends will depend upon, among otherthings, our earnings, financial position and capital requirements, applicablelegal restrictions and such other factors as the Board of Directors and ourshareholders may determine.

 

Thetable below sets forth the cash dividends declared and paid on each ordinaryshare in each year indicated.

 
| **Year**   | ** ** | **Cash Dividends per  Ordinary Share(1)(2)(3)** | ** ** | **Translated into U.S.$  per Ordinary Share(4)** | ** ** |
|------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** ** | ** ** | **(Euro)**                                                     | ** ** | **(U.S.$)**                                                          | ** ** |
| 2003       |       | 0.210                                                          |       | 0.242                                                                |       |
| 2004       |       | 0.210                                                          |       | 0.254                                                                |       |
| 2005       |       | 0.230                                                          |       | 0.276                                                                |       |
| 2006       |       | 0.290                                                          |       | 0.363                                                                |       |
| 2007       |       | 0.420                                                          |       | 0.564                                                                |       |
| 2008       |       |       0.490 (5)             |       | 0.770                                                                |       |

 

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(1)    Cash dividendsper ordinary share are expressed in gross amounts without giving effect toapplicable withholding or other deductions for taxes.

 

(2)    Each ADSrepresents one ordinary share.

 

(3)    Our dividendpolicy is based upon, among other things, our consolidated net income for eachfiscal 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 in the table.

 

(4)    Translated atthe Noon Buying Rate on the payment date to holders of ADSs. See “—ExchangeRate Information” below for more information regarding the Noon Buying Rate.Holders of ADSs received their dividend denominated in U.S. dollars based onthe conversion rate used by our paying agent, Deutsche Bank Trust CompanyAmericas, on the ADS dividend payment date. Deutsche Bank Trust Company Americas converted the dividend in respectof the 2007 fiscal year to U.S.$0.770****per ADS on May 22,2008.

 

(5)    Thedividend of Euro 0.49 per ordinary share was approved by our Board of Directorson March 13, 2008 and was voted upon and approved by our shareholders atthe ordinary meeting of shareholders held on May 13, 2008.

 

**ExchangeRate Information**

 

Thefollowing tables set forth, for each of the periods indicated, certaininformation regarding the Noon Buying Rate in New York City for cable transfersin foreign currencies as certified for customs purposes by the Federal ReserveBank of New York, which we refer to as the Noon Buying Rate, expressed in U.S.$per Euro 1.00:

 

7

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| **Period**                        | ** ** | **Low** | ** ** | **High** | ** ** | **Average(1)** | ** ** | **End of Period** | ** ** |
|-----------------------------------|------------|---------|------------|----------|------------|----------------|------------|-----------------------------|------------|
| Year Ended December 31, 2003 |       | 1.0361  |       | 1.2597   |       | 1.1411         |       | 1.2597                      |       |
| Year Ended December 31, 2004 |       | 1.1801  |       | 1.3625   |       | 1.2478         |       | 1.3538                      |       |
| Year Ended December 31, 2005 |       | 1.1667  |       | 1.3476   |       | 1.2400         |       | 1.1842                      |       |
| Year Ended December 31, 2006 |       | 1.1860  |       | 1.3327   |       | 1.2661         |       | 1.3197                      |       |
| Year Ended December 31, 2007 |       | 1.2904  |       | 1.4862   |       | 1.3705         |       | 1.4603                      |       |

 

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(1)    The average ofthe Noon Buying Rates in effect on the last business day of each month duringthe period. When the Company consolidates its profit and loss statement, ittranslates U.S. dollar denominated amounts into Euro using an average U.S.dollar/Euro exchange rate of each business day during the applicable period.

 
| **Month**          | ** ** | **Low** | ** ** | **High** | ** ** |
|--------------------|------------|---------|------------|----------|------------|
| December 2007 |       | 1.4344  |       | 1.4759   |       |
| January 2008  |       | 1.4574  |       | 1.4877   |       |
| February 2008 |       | 1.4495  |       | 1.5187   |       |
| March 2008    |       | 1.5195  |       | 1.5805   |       |
| April 2008    |       | 1.5568  |       | 1.6010   |       |
| May 2008      |       | 1.5370  |       | 1.5784   |       |

 

OnJune 20, 2008, the Noon Buying Rate was U.S.$ 1.5626 per Euro 1.00.

 

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

 

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

 

**RiskFactors**

 

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

 

*If weare not successful in completing and integrating strategic acquisitions toexpand or complement our business, our future profitability and growth will beat risk.*

 

Aspart of our growth strategy, we have made, and may continue to make, strategicbusiness acquisitions to expand or complement our business. Our acquisitionactivities, however, can be disrupted by overtures from competitors for thetargeted candidates, governmental regulation and rapid developments in our industry.We may 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 Oakley, we may facerisks and uncertainties following such acquisition in addition to those outlinedabove, including: (i) difficultyin integrating 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 loss of keyemployees of the acquired business; (iv) the diversion of the attention ofsenior management from our operations; (v) liabilities that were not knownat the time of acquisition or the need to address tax or accounting issues; (vi) difficultyintegrating Oakley’s human resources systems, operating systems, inventorymanagement systems and assortment planning systems with our systems; and (vii) thecultural differences between our organization and Oakley’s organization.

 

If we fail to timely recognize or addressthese matters or to devote adequate resources to them, we may fail to achieveour growth strategy or otherwise realize the intended benefits of anyacquisition.  Even if we are able tointegrate our business operations successfully, the integration may not resultin the realization of the full benefits of synergies, cost 

 

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savings, innovation and operational efficiencies that may be possiblefrom the integration or that the benefits will be achieved within theforecasted period of time.

 

*If weare unable to successfully introduce new products, our future sales andoperating performance will suffer.*

 

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

 

*If we failto maintain an efficient distribution network in our highly competitivemarkets, our business, results of operations and financial condition couldsuffer.*

 

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

 

*If wedo not correctly predict future economic conditions and changes in consumerpreferences, our sales of premium products and profitability will suffer.*

 

Thefashion and consumer products industries in which we operate are cyclical.Downturns in general economic conditions or uncertainties regarding futureeconomic prospects, which affect consumer disposable income, have historicallyadversely affected consumer spending habits in our principal markets and thusmade the growth in sales and profitability of premium-priced product categoriesdifficult during such downturns. Therefore, future economic downturns oruncertainties could have a material adverse effect on our business, results ofoperations and financial condition, including sales of our designer and otherpremium brands.

 

Theindustry is also subject to rapidly changing consumer preferences, and futuresales may suffer if the fashion and consumer products industries do notcontinue to grow or if consumer preferences shift away from our products.Changes in fashion could also affect the popularity and, therefore, the valueof the fashion licenses granted to us by designers. Any event or circumstanceresulting in reduced market acceptance of one or more of these designers couldreduce our sales and the value of our inventory of models based on that design.Unanticipated shifts in consumer preferences may also result in excessinventory and underutilized manufacturing capacity. In addition, our successdepends, in large part, on our ability to anticipate and react to changingfashion trends in a timely manner. Any sustained failure to identify andrespond to such trends would adversely affect our business, results ofoperations and financial condition and may result in the write down of excessinventory and idle manufacturing facilities.

 

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

 

Inorder to achieve and manage our growth effectively, we are required to increaseand streamline production and implement manufacturing efficiencies wherepossible, while maintaining strict quality control and the ability to deliverproducts to our customers in a timely and efficient manner. We must alsocontinuously develop new product designs and features, expand our informationsystems and operations, and train and manage an increasing number of managementlevel and other employees. If we are unable to manage these matterseffectively, our efficient distribution process could be at risk and we couldlose market share in affected regions.

 

*If wedo not continue to negotiate and maintain favorable license arrangements, oursales or cost of sales will suffer.*

 

Wehave entered into license agreements that enable us to manufacture anddistribute prescription frames and sunglasses under certain designer names,including *Chanel, Prada, Miu Miu, Dolce & Gabbana,D&G, Bvlgari, Tiffany &*

 

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*Co., Versace, Versus, Salvatore Ferragamo, Burberry*, *Polo Ralph Lauren, DonnaKaran, DKNY, Brooks Brothers, Anne Klein* and, most recently, *Stella McCartney* and, through our acquisition of Oakley, *Paul Smith Spectacles.*These license agreements typicallyhave terms of between three and ten years and may contain options for renewalfor additional periods 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 for theStella McCartney name. 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. For the years ended December 31,2007 and 2006, the sales realized through the Prada and Miu Miu trade namestogether represented approximately 6.4 percent and 5.5 percent of total sales,respectively.  For the year ended December 31,2007, the sales realized through the Dolce & Gabbana and D&G tradenames together represented approximately 5.5 percent of total sales.  Accordingly, if we are unable to negotiateand maintain satisfactory license arrangements with leading designers, ourgrowth prospects and financial results could suffer from a reduction in salesor an increase in advertising costs and royalty payments to designers.

 

*If vision correction alternatives to prescription eyeglasses becomemore widely available, or consumer preferences for such alternatives increase,our profitability could suffer through a reduction of sales of our prescriptioneyewear products, including lenses and accessories.*

 

Ourbusiness could be negatively impacted by the availability and acceptance ofvision correction alternatives to prescription eyeglasses, such as contactlenses and refractive optical surgery. According to industry estimates, over45 million people wear contact lenses in the United States, and disposablecontact lenses is the fastest growing segment of the lens subsector. Inaddition, the use of refractive optical surgery has grown substantially sinceit was approved by the U.S. Food and Drug Administration in 1995.

 

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

 

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

 

Ourprincipal manufacturing facilities are located in Italy. We also maintainmanufacturing facilities in China as well as sales and distribution facilitiesthroughout the world. As a result, we are vulnerable to foreign exchange ratefluctuations 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 being denominated in U.S. dollars. As a result,our operating results, which are reported in Euro, are affected by currencyexchange rate fluctuations, particularly between the U.S. dollar and the Euro.

 

Asour international operations grow, future changes in the exchange rate of theEuro against the U.S. dollar and other currencies may negatively impact ourreported results.

 

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

 

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

 

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

 

·      exposure to local economic and political conditions;

 

·      export and import restrictions;

 

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·      currency exchange rate fluctuations and currencycontrols;

 

·      disruptions of capital and trading markets;

 

·      accounts receivable collection and longer paymentcycles;

 

·      potential hostilities and changes in diplomatic andtrade relationships;

 

·      changes in legal or regulatory requirements;

 

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

 

·      investment restrictions or requirements; and

 

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

 

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

 

*If weare unable to protect our proprietary rights, our sales might suffer, and wemay incur significant costs to defend such rights.*

 

Werely on trade secret, unfair competition, trade dress, trademark, patent andcopyright laws to protect our rights to certain aspects of our products andservices, including product designs, proprietary manufacturing processes andtechnologies, product research and concepts and recognized trademarks, all ofwhich we believe are important to the success of our products and services andour competitive position. However, pending trademark or patent applications maynot in all instances result in the issuance of a registered trademark orpatent, and trademarks or patents granted may not be effective in thwartingcompetition or be held valid if subsequently challenged. In addition, theactions we take to protect our proprietary rights may be inadequate to preventimitation of our products and services. Our proprietary information couldbecome known to competitors, and we may not be able to meaningfully protect ourrights to proprietary information. Furthermore, other companies mayindependently develop substantially equivalent or better products or servicesthat do not infringe on our intellectual property rights or could assert rightsin, and ownership of, our proprietary rights. Moreover, the laws of certaincountries do not protect proprietary rights to the same extent as the laws ofthe United States.

 

Consistent with our strategy of vigorously defending our intellectualproperty rights, we devote substantial resources to the enforcement of patentsissued and trademarks granted to us, to the protection of our trade secrets,trade dress or other intellectual property rights and to the determination ofthe scope or validity of the proprietary rights of others that might beasserted against us. However, if the level of potentially infringingactivities by others were to increase substantially, we might have tosignificantly increase the resources we devote to protecting our rights. Fromtime to time, third parties may assert patent, copyright, trademark or similarrights against intellectual property that is important to our business. Theresolution or compromise of any litigation or other legal process to enforcesuch alleged third party rights, regardless of its merit or resolution, couldbe costly and divert the efforts and attention of our management. We may notprevail in any such litigation or other legal process or we may compromise orsettle such claims because of the complex technical issues and inherentuncertainties in intellectual property disputes and the significant expense indefending such claims.  An adverse determination in any disputeinvolving our proprietary rights could, among other things, (i) require usto grant licenses to, or obtain licenses from, third parties, (ii) preventus from manufacturing or selling our products, (iii) require us to discontinuethe use of a particular patent, trademark, copyright or trade secret or (iv) subject us to substantialliability. Any of these possibilities could have a material adverse effect onour business including by reducing our future sales or causing us to incursignificant costs to defend our rights.

 

*If weare unable to maintain our current operating relationship with Cole LicensedBrands host stores, we could suffer loss of sales and possible impairment ofcertain intangible assets.*

 

Oursales depend in part on our relationships with the host stores that allow us tooperate our Cole’s Licensed Brands division, including Sears. Our leases andlicenses with Sears are terminable upon short notice. If our relationship with 

 

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Sears were to end, we wouldsuffer a loss of sales and the possible impairment of certain intangible assets.This could have a material adverse effect on our business, results ofoperations, financial condition and prospects.

 

*If webecome subject to adverse judgments or determinations in legal proceedings towhich we are, or may become, a party, our future profitability could sufferthrough a reduction of sales or increased costs.*

 

Weare currently a party to certain legal proceedings as described in Item 8—“FinancialInformation—Legal Proceedings.” In addition, in the ordinary course of ourbusiness, we become involved in various other claims, lawsuits, investigationsand governmental and administrative proceedings, some of which are significant.Adverse judgments or determinations in one or more of these proceedings couldrequire us to change the way we do business or use substantial resources inadhering to the settlements and could have a material adverse effect on ourbusiness, including, among other consequences, by significantly increasing ourcosts to operate our business.

 

*If webecome subject to additional regulation by governmental authorities, ourcompliance with these regulations could have an adverse effect on our financialcondition, including adversely affecting the way we manufacture or distributeour products.*

 

Ouroperations are subject to regulation by governmental authorities in the UnitedStates and other jurisdictions in which we conduct business. Governmentalregulations, both in the United States and other jurisdictions, havehistorically been subject to change. New or revised requirements imposed bygovernmental regulatory authorities could have an adverse effect on us,including increased costs of compliance. We may also be adversely affected bychanges in the interpretation or enforcement of existing laws and regulationsby governmental authorities that could affect sales or the way we currentlymanufacture or distribute our products. Additionally, as a U.S.government contractor through our Oakley and Eye Safety Systems subsidiaries,we must comply with, and are affected by, laws and regulations related to ourperformance of our government business. These laws and regulations, includingrequirements to obtain applicable governmental approval, clearances and certainexport licenses, may impose additional costs and risks on our business.  We may also be subject to audits, reviews andinvestigations of our compliance with these laws and regulations. See Item 4—“Information on theCompany—Regulatory Matters” and Item 8—“Financial Information—LegalProceedings.”

 

*Adverseweather conditions could affect consumer spending, which could adversely impactour future sales and financial results.*

 

Weatherconditions around the world can affect consumer spending and could have asignificant impact on our sales. Our sunglass sales are particularly vulnerableto weather conditions.  Unusually badweather during the spring and summer months in one or more of our markets couldadversely affect sales of our sunglasses in those markets.  Additionally, severe weather, such assnowstorms and hurricanes, can inhibit consumers from discretionaryshopping.  This could affect both ourophthalmic and sunglass sales and create excess inventory which may causewritedowns in the future.

 

*If our procedures designed to comply with Section 404of the Sarbanes-Oxley Act of 2002 cause us to identify material weaknesses inour internal control over financial reporting, the trading price of oursecurities may be adversely impacted.*

 

Commencingwith last year’s annual report on Form 20-F, we included a report from ourmanagement relating to its evaluation of our internal control over financialreporting, as required under Section 404 of the U.S. Sarbanes-Oxley Act of2002, as amended.  There are inherentlimitations on the effectiveness of internal controls, including collusion,management override and failure of human judgment.  In addition, controlprocedures are designed to reduce, rather than eliminate, business risks. As a consequence of the systems and procedures we have implemented to complywith these requirements, we may uncover circumstances that we determine, withguidance from our independent auditors, to be material weaknesses, or thatotherwise result in disclosable conditions. Although we intend to take promptmeasures to remediate any such identified material weaknesses in our internalcontrol structure, measures of this kind may involve significant effort andexpense, and any disclosure of such material weaknesses or other disclosableconditions may result in a negative market reaction to our securities.

 

**ITEM 4. INFORMATION ON THE COMPANY**

 

**Overview**

 

We are a world leader in the design, manufacture and distribution ofprescription frames and sunglasses in the mid- and premium-price categories. Weoperate in two industry segments: (i) manufacturing and wholesale distributionand 

 

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(ii) retail distribution.See Item 18 —“Financial Statements” for additional disclosures about ouroperating segments. Through our manufacturing and wholesale distributionsegment, we are engaged in the design, manufacture, wholesale distribution andmarketing of house and designer lines of mid- to premium-priced prescriptionframes and sunglasses, and with the acquisition of Oakley in November 2007, weare a designer, manufacturer and worldwide distributor of performance opticsproducts. We operate our retail segment principally through our retail brands,which include, among others, LensCrafters, Sunglass Hut, Pearle Vision, OPSM,Laubman & Pank and our Licensed Brands (Sears Optical and TargetOptical), as well as through the retail brands of our newly-acquired business,Oakley, which include, among others, Oakley Stores and Vaults, Sunglass Icon,The Optical Shop of Aspen and Bright Eyes.

 

Ourmanufacturing activities are carried out through six manufacturing facilitiesin Italy, two manufacturing facilities in China, one manufacturing facility inIndia and two manufacturing facilities in the United States obtained as part ofthe Oakley acquisition. In 2007, we manufactured approximately 41.8 millionprescription frames and sunglasses, of which 0.8 million were attributable to the inclusion of prescription frames and sunglasses manufactured by Oakley since the acquisitiondate.  See Item 4—“Information on theCompany—Recent Developments—Acquisitions.”

 

Weoperate our distribution activities through an extensive worldwide wholesaledistribution network and a retail distribution network based primarily in NorthAmerica, Europe, Australia, mainland China and Hong Kong. In 2007, through ourwholesale and retail distribution networks, we distributed approximately21.0 million prescription frames, of which approximately 0.1 million wereattributable to the inclusion ofprescription framesdistributed by Oakley since theacquisition date, and approximately29.0 million sunglasses, of which approximately 1.2 million wereattributable to the inclusion ofsunglasses distributed by Oakley since the acquisition date, in approximately 5,600 models. Our productsare distributed in over 130 countries worldwide.

 

Our products are marketed under a variety of well-known brand names.Our house brands include *Ray-Ban, Persol, Vogue,Arnette, Revo, Luxottica*, *Sferoflex*and*Killer Loop.*They also include *Oakley, EyeSafety Systems, Mosley Tribes*and*Oliver Peoples,*allacquired in connection with our acquisition of Oakley. Our designer linesinclude *Chanel, Prada, Miu Miu, Dolce & Gabbana,D&G, Bvlgari, Tiffany & Co, Versace, Versus, Salvatore Ferragamo,Burberry*, *Polo Ralph Lauren, DonnaKaran, DKNY, Brooks Brothers, Anne Klein*and*Puma*(distributionlicense only). Our designer lines also include *Paul SmithSpectacles,* obtained in connection with our acquisition ofOakley.  Additionally, in the summer of2009, we will launch the first collection of *Stella McCartney*eyewear.  Stella McCartney sunglasses will bedistributed through premium retail locations. After an initial launch phaseduring which the new collections will be distributed through Stella McCartneystores and exclusive doors in North America, Japan, Hong Kong and the MiddleEast, distribution will be broadened to reach all other key global eyewearmarkets.

 

Ourwholesale network is comprised of 42 wholly- or majority-owned subsidiariesoperating in principal markets, over 2,000 sales representatives and approximately100 independent distributors. Our primary wholesale customers include retailersof mid- and premium-priced eyewear such as independent opticians, optical andsunglass chains, optical superstores, sunglass specialty stores, sporting goodsand specialty sports stores and duty-free shops. In certain countries, andespecially in North America, wholesale customers also include optometrists andophthalmologists, health maintenance organizations, or HMOs, and departmentstores.  In 2007, we continued tostrengthen our wholesale network with the acquisition of Oakley.  See Item 4—“Information on theCompany—Recent Developments—Acquisitions.”

 

Ourretail network is mainly comprised of the following retail brands: SunglassHut, which is operated globally; LensCrafters, which is operated in NorthAmerica, China and Hong Kong; Pearle Vision, our Licensed Brands (Sears Opticaland  Target Optical), ILORI, the retailbrands we acquired with Oakley (Oakley Stores and Vaults, Sunglass Icon, TheOptical Shop of Aspen and Oliver Peoples) and Internet and telesalesoperations, which are all operated in North America; and OPSM, Laubman &Pank and Budget Eyewear, as well as the Bright Eyes stores that we acquiredthrough the acquisition of Oakley, which are operated in Australia, New Zealandand Asia (other than China and Hong Kong). Our North American retail business is the largest optical retailbusiness in North America based on total sales. In 2007, in addition to ouracquisition of Oakley, we continued to strengthen our North American retailbusiness with the acquisition of certain assets of D.O.C Optics, which operatedapproximately 100 stores located primarily in the Midwest United States. Wealso expanded our global retail business by acquiring two prominent specialtysun chains in South Africa with a total of approximately 65 retail locations.See “—Products and Services” below for a more detailed discussion of ourbusiness.

 

**CompanyHistory**

 

In1961, Leonardo Del Vecchio and others established our original operations inAgordo, near Belluno, in northeastern Italy. Since that time, we have enjoyedsignificant growth in the scope and size of our operations. We have developedand grown in several phases, each of which is related to a specific businessstrategy. Throughout most of the 

 

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1960s, we manufactured molds,metal-cutting machinery, frame parts and semi-finished products for the opticalmarket. We then progressively expanded our production capabilities to enable usto produce a finished frame product.

 

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

 

Inthe early 1970s, we distributed our products exclusively through wholesalers.In 1974, with the acquisition of the distributor that had marketed theLuxottica product line in Italy since 1971, we took our first step towardsvertical integration.

 

LuxotticaGroup S.p.A. was organized as a corporation on November 23, 1981 under thelaws of the Republic of Italy. During the early 1980s, we continued to pursuevertical integration by acquiring independent optical distributors and formingwholesale subsidiaries in strategic markets. In 1981, with our acquisition ofLa Meccanoptica Leonardo S.p.A., the owner of the *Sferoflex*brand and the holder of an important patent for a flexible hinge, we increasedour market share in Italy and various key European markets. During the late1980s, we began to expand our product lines to include the design, manufactureand distribution of designer frames through license agreements with majorfashion designers.

 

In1990, our ADSs were listed on the New York Stock Exchange.  Throughout the 1990s, we expanded into thesunglasses business through various acquisitions. In 1990, we acquired FlorenceLine S.p.A., the owner of the “Vogue” brand. In 1995, we became the first framemanufacturer to enter the North American retail market through the acquisitionof LensCrafters. In the same year, we also acquired the medium- to high-endbrand product line of Persol S.p.A.

 

Throughoutthe 1990s, we continued to expand our distribution network by forming newwholesale subsidiaries. In June 1999, we acquired the Global EyewearDivision of Bausch & Lomb Incorporated, which we refer to as ourRay-Ban business. The Ray-Ban acquisition significantly increased our presencein the sunglasses market, strengthened our house brand portfolio and providedus with sunglass crystal lens manufacturing technology, manufacturingfacilities and equipment.

 

InDecember 2000, our ordinary shares were listed on the Mercato TelematicoAzionario della Borsa Italiana S.p.A., which we refer to as the Milan StockExchange, or MTA.

 

Since 2000, we have made a number of key strategicacquisitions to strengthen our business. In April 2001, we acquired Sunglass Hut, a leading retailer ofsunglasses worldwide based on sales. In May 2001, we acquired all of theissued and outstanding common stock of First American Health Concepts, Inc.,which at that time was a leading provider of managed vision care plans in theUnited States based on sales. In August 2003, we acquired82.57 percent of the outstanding shares of OPSM (we acquired the remaining17.43 percent interest in March 2005), resulting in our leading positionin the prescription business based on sales in the Australian and New Zealandmarkets, while at the same time presenting us with new growth opportunities inthe Asia-Pacific markets. In October 2004, we strengthened and expandedour North American retail and managed vision care business with the acquisitionof Cole, which, among other things, operates Pearle Vision and the LicensedBrands. In 2006, we expanded our retail presence in China by acquiring threepremium retail chains, Beijing Xueliang Optical Technology Co. Ltd., Ming LongOptical and Modern Sight Optics, to become a leading operator of premium opticalstores in China based on the number of stores, with a total of 274 locations inthree of the top premium optical markets in mainland China, as well as HongKong, an important market in Asia for luxury goods.  In November 2007, we acquired Oakley, aworldwide specialist in performance optics with brands including Oakley, EyeSafety Systems, Fox, Mosley Tribes, Oliver Peoples and Paul Smith Spectacles,and retail chains including Oakley Stores and Vaults, Sunglass Icon, TheOptical Shop of Aspen, Oliver Peoples and Bright Eyes. See Item 4—“Informationon the Company—Recent Developments—Acquisitions.”

 

Ourcapital expenditures for our continuing operations were Euro 334.8 millionfor the year ended December 31, 2007 and Euro 49.7 million for thethree-month period ended March 31, 2008. We expect 2008 aggregate capitalexpenditures to be approximately Euro 300 million, in addition toinvestment for any acquisitions. The most significant investments planned arefor the remodeling of existing stores for our North American retail operations,at an expected cost of approximately Euro 23.7 million. We will fund thesefuture capital expenditures with our current available borrowing capacity andavailable cash. For a description of capital expenditures for the previousthree years, see Item 5—“Operating and Financial Review and Prospects—Liquidityand Capital Resources—Cash Flows—Investing Activities.”

 

Ourprincipal executive offices are located at Via C. Cantù 2, Milan, 20123, Italy,and our telephone number at that address is (011) 39-02-863341. We aredomiciled in Milan, Italy.

 

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**BusinessOverview**

 

***RecentDevelopments***

 

*Acquisitions*

 

OnNovember 14,2007, we completed the acquisition of Oakley, a worldwide leader in the design,development, manufacture, distribution and marketing of performance opticsproducts, including market-leading premium sunglasses, prescription eyewear,goggles and electronically-enabled eyewear. As part of the merger, we acquired all of the outstanding shares ofOakley for a cash purchase price of U.S.$29.30 per share, together with thepurchase of all outstanding options and other equity rights at the same priceper share less the exercise price. The total purchase price was approximatelyU.S.$2.1 billion (approximately Euro 1.6 billion).  In addition to Oakley-branded opticsproducts, Oakley’s eyewear portfolio also includes the Eye Safety Systems,Mosley Tribes, Oliver Peoples and Paul Smith Spectacles brands. Oakley alsooffers an array of Oakley-branded apparel, footwear, watches and accessories.We also acquired retail locations through Oakley, including Oakley Stores andVaults, Sunglass Icon, The Optical Shop of Aspen, Oliver Peoples andBright Eyes. We believe Oakley’s principal strength is its ability to developproducts that demonstrate superior performance and aesthetics throughproprietary technology, manufacturing processes and styling.

 

Duringthe second quarter of 2007, we completed the acquisitions of two prominentspecialty sun chains in South Africa, with a total of 65 stores, forapproximately Euro 10 million. The two acquisitions represent an important stepin the expansion of our sun retail presence worldwide.

 

In February 2007, wecompleted the acquisition of the retail optical business of D.O.C Optics,comprising approximately 100 stores located primarily in the Midwest UnitedStates, for approximately U.S.$110 million in cash. We have since rebranded theacquired stores as either “LensCrafters” or “Pearle Vision.”

 

*Ray Ban Indian Holdings Offer*

 

On August 29, 2003, theSecurities Appellate Tribunal, or SAT, in India upheld the decision 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 RayBan Sun Optics India Ltd.(“RayBan Sun Optics”).  The Supreme Courtof India, by an order dated December 12, 2006, directed that a publicoffer be made within 45 days of the order, using April 28, 1999 as thereference date for calculating the offer price. The Supreme Court also directed that interest be paid at the rate of 10percent per annum for the period between August 27, 1999 and the closingdate to all persons who were shareholders of RayBan Sun Optics throughout suchperiod. On April 25, 2007, pursuant to the December 12, 2006 SupremeCourt order and in compliance with Regulation 10 and 12 of Chapter III of theSEBI Regulations 1997, we launched a public offer through our subsidiary, RayBan Indian Holdings, Inc., to acquire up to 4,895,900 shares, representingapproximately 20 percent of the equity share capital of RayBan Sun Optics,which we subsequently increased to up to 7,545,200 shares, representingapproximately 31 percent of the equity share capital of RayBan Sun Optics.  6,454,280 shares were tendered in theoffer, which closed on May 14, 2007.  Effective upon the entryof the share transfers in the share register on June 26, 2007, ourstake in RayBan Sun Optics increased to 70.5 percent.We paid total consideration of approximately Euro 13.0 million forthe tendered shares.

 

RayBan Sun Optics is listed onthe Bombay Stock Exchange. We acquired our initial interest in RayBan SunOptics in connection with the purchase of the RayBan eyewear business fromBausch & Lomb in 1999.

 

*License Agreements*

 

On April 17,2008, we signed a long-term exclusive license agreement for the design,production and worldwide distribution of sunglasses under the luxury lifestylebrand Stella McCartney. The agreement, which will begin on January 1,2009, is for an initial term of six years, automatically renewable for anadditional five-year term. The first collection will be launched in the summerof 2009. Stella McCartney first introduced her eyewear line in 2003. She willcontinue to personally follow each step of the creative process, together withthe Luxottica design and product team.

 

On January 30, 2008, we signed a new licenseagreement with Chanel.  This marks thefurther extension of a long-term relationship between the two companies, whichstarted in 1999 with the launch of Chanel’s first eyewear collections and nowseeks to capture the additional growth opportunities for this exclusive andiconic luxury fashion brand.

 

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*CreditAgreements*

 

On May 29, 2008,we entered into a Euro 250 million revolving credit facility agreement,guaranteed by our subsidiary Luxottica U.S. Holdings Corp. (“U.S. Holdings”) with Intesa Sanpaolo S.p.A. as agent and IntesaSanpaolo S.p.A., Banca Popolare di Vicenza S.c.p.A. and Banca Antonveneta S.p.A.as lenders. The final maturity of thecredit facility is May 29, 2013. The credit facility is a Euro 250 millionrevolving facility, which will require repayment of equal quarterly instalmentsof principal of Euro 30 million starting August 29, 2011 and a lastrepayment of Euro 40 million on the final maturity date. Interest accrues atEuribor (as defined in the agreement) plus a margin between 0.40 percent and0.60 percent based on the “Net Debt/EBITDA” ratio, as defined in the agreement.

 

In February 2008, we exercised an option includedin the Amended Euro 1,130 Million and U.S.$325 Million Credit Facility enteredinto by us and our subsidiary U.S. Holdings on June 3,2004, to extend the maturity date of Tranches B and C to March 2013.

 

Tofinance the Oakley acquisition discussed in “—Acquisitions” above, on October 12,2007, we and our subsidiary U.S. Holdings entered into two credit facilitieswith a group of banks providing for certain term loans and a short-term bridgeloan for an aggregate principal amount of U.S.$2.0 billion. The term loanfacility is a five-year term loan of U.S.$1.5 billion, with options toextend the maturity on two occasions for one year each time. The term loanfacility is divided into two facilities, Facility D and Facility E. Facility Dconsists of an amortizing term loan in an aggregate amount ofU.S.$1.0 billion, made available to U.S. Holdings, and Facility E consistsof a bullet term loan in an aggregate amount of U.S.$500 million, madeavailable to the Company. Each facility has a five-year term, with options toextend the maturity on two occasions for one year each time. The term loan hasa spread of between 20 and 40 basis points over LIBOR, depending on the Group’sratio of net debt to EBITDA. Interest accrues on the term loan at LIBOR (asdefined in the agreement) plus 0.40 percent (5.503 percent forFacility D and 5.458 percent for Facility E on December 31, 2007). Thefinal maturity of the credit facility is October 12, 2012.  This credit facility contains certainfinancial and operating covenants. We were in compliance with those covenantsas of March 31, 2008. We had borrowed U.S.$1.5 billion under this creditfacility as of December 31, 2007.

 

Duringthe fourth quarter of 2007, we entered into ten interest rate swap transactionswith an aggregate initial notional amount of U.S.$500 million with variousbanks (“Tranche E Swaps”). These swaps will expire on October 12, 2012.The Tranche E Swaps were entered into as a cash flow hedge on Facility E of thecredit facility discussed above. The Tranche E Swaps exchange the floating rateof LIBOR for an average fixed rate of 4.26 percent per annum.

 

Theshort-term bridge loan facility is for an aggregate principal amount ofU.S.$500 million. Interest accrues on the short-term bridge loan at LIBOR(as defined in the agreement) plus 0.15 percent (5.208 percent on December 31,2007). The final maturity of the credit facility was eight months from thefirst utilization date. On April 29, 2008, we and our subsidiary U.S.Holdings entered into an amendment and transfer agreement to this facility. Theterms of such amendment agreement among other things, reduced the totalfacility amount from U.S. $500 million to U.S. $150 million and provide for afinal maturity date that is eighteen (18) months from the effective date of theagreement.

 

 For additionalinformation, see Item5—“Operating and Financial Review and Prospects—Liquidity and CapitalResources—Our Indebtedness” and Note 9 to ourConsolidated Financial Statements included in Item 18 of this annualreport.

 

**Productsand Services**

 

***WholesaleOperations***

 

*OurBrands*

 

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

 

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*HouseBrands:*  Our house brands are sold worldwide underbrand names such as *Ray-Ban*and*Oakley*. We currently develop approximately 2,180 distinctstyles of frames within our house brands, of which approximately 1,230 areoptical and 950 are sun. Each style is typically produced in three sizes and atleast four colors. Actual availability of product styles, colors and sizesvaries among geographic markets depending upon local demand.

 

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

 

·                  **Ray-Ban**: Created in 1937 and acquired by us in 1999, the *Ray-Ban*line is the brand leader in the eyewear market based on sales and consumerawareness, bringing together renowned sunglass lenses and a timeless style.

 

·                  **Oakley**: Founded in 1975, *Oakley* is amarket-leading, strong, iconic brand of performance optics products,including premium sunglasses, prescription eyewear, goggles andelectronically-enabled eyewear, whose loyal consumers and athletes have helpedcreate a culture and brand that are intertwined.

 

·                  **Persol**: Created in 1926 and acquired by us in 1995, the *Persol* brand is synonymous with design, elegance, traditionand 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.

 

·                  **Oliver Peoples**:Founded in 1986, *Oliver Peoples* helped establishthe luxury eyewear market. *Oliver Peoples*’classic designs fuse old-world aesthetics with modern-day finesse and are wornby many of the world’s most recognizable celebrities.

 

·                  **Vogue**: Created in 1973 and acquired by us in 1990, the *Vogue*brand is recognized as trendy and innovative and symbolizes a young and dynamicstyle that stresses attention to detail and fashion.

 

·                  **Arnette**: Created in California in 1992 and acquired by us in 1999, *Arnette* is targeted at young consumers.  This sports product line is characterized bya very forward-thinking design and provides outstanding comfort andfunctionality, ideal for those who enjoy dynamic and extreme sports.

 

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

 

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

 

·                  **Sferoflex**: The *Sferoflex* product line, which in 1981became the first brand name acquired by Luxottica Group, 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 and a more “urban style.”

 

·                  **Mosley Tribes**:The *Mosley Tribes* brand, launched in 2005,is a modern brand fusing fashion and urban lifestyles.

 

·                  **Eye Safety Systems**:*ESS*designs, develops and markets advanced eyeprotection systems for military, firefighting and law enforcement professionalsand is a leading supplier of protective eyewear to the U.S. military andfirefighting markets.

 

*DesignerLines:* Ourdesigner lines are produced and distributed through license agreements withmajor fashion houses. Currently, we sell designer lines under the names *Chanel, Prada, Miu Miu, Dolce & Gabbana, D&G, Bvlgari,Tiffany & Co., Versace, Versus, Salvatore Ferragamo, Burberry,**Polo Ralph Lauren*with its six**lines (*Purple Label, Polo, RalphLauren, Ralph, Chaps*and*Club Monaco*), *Donna Karan, DKNY, Brooks Brothers*and*AnneKlein. * They also include *Paul SmithSpectacles,* obtained in connection with our acquisition ofOakley.  Additionally, in the summer of2009, we will launch the first collection of *StellaMcCartney*eyewear. The license agreements governing these designer linesare exclusive contracts and typically have terms of between three and tenyears. See “—Trademarks, Trade Names, Patents 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 3,300 different styles.

 

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Thefollowing is a summary description of our main designer lines:

 

·                  **Chanel**: In 1999, we became the first company licensed to produce *Chanel*products. The *Chanel* productline, targeting luxury-oriented consumers, reflects the essentialcharacteristics of the brand: style, elegance and class.

 

·                  **Prada**: The *Prada* license agreement was signed in2003. The *Prada* collections offer a range ofglasses presented in optical frames and sunglasses collections, as well as aseries of models created for leisure time, identified by the brand’sunmistakable red stripe. The *Prada* collectionshave always been distinctive not only for their high quality but also for theirforward-thinking approach and style, enabling the brand to anticipate and ofteninspire trends across all sectors. Sophisticated, elegant and refined, *Prada* products are identified by their strong character andunique style.

 

·                  **Miu Miu**: The *Miu Miu* license comprises both opticalframes and sunglasses. This brand addresses a clientele particularly attentiveto the free and easy, as well as sophisticated, new trends. This collectionexpresses Miuccia Prada’s vision of an alternative style, always characterizedby a strong personality. The brand *Miu Miu* can bedefined as: urban, young, sophisticated and sensual, an alternative vision, a “newclassic.”

 

·                  **Dolce & Gabbana:** Under licensesince 2005, our *Dolce & Gabbana* eyewearcollection is an expression of ultimate luxury. This collection brings theperiod’s shapes up to date and highlights its materials, characterized byprecious details such as logos in Swarovski crystals or elegant metal circles.

 

·                  **D&G**: The *D&G* eyewear collection has ayouthful, innovative and unconventional spirit. The eyewear collectionemphasizes the spirit of the brand: innovative, provocative and cosmopolitan.

 

·                  **Bvlgari**: Under license since 1997, Bvlgari eyewear is distinguished by the highquality of its materials, attention to detail and elegant design. This productline is targeted towards a clientele who seek something exclusive.

 

·                  **Tiffany & Co.**: For 169 years, *Tiffany & Co.*has designed and produced standard-setting jewelry and accessories. The firstcollection of *Tiffany & Co.* eyewear,launched in early 2008, remains true to the brand’s high standards.

 

·                  **Versace**: *Versace* is alifestyle brand for the modern man or woman who chooses to express strength,confidence and uniqueness through a bold and distinctive personal style. *Versace* represents the ideal of a sophisticated, free andhighly desirable lifestyle.

 

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

 

·                  **Paul Smith Spectacles**:  The Paul Smith Spectacles brand, whichlaunched in 1994, includes prescription eyewear and sunglasses that feature thewhimsical yet classic designs and attention to detail that are synonymous withone of Britain’s leading fashion designers.

 

·                  **Salvatore Ferragamo:**  The *Salvatore Ferragamo* collections are characterized by thegreatest attention to detail as well as by an original use of materials andchoice of colors. The eyewear collection is inspired by the craftsmanliketradition of this fashion house, reinterpreted according to contemporarytrends.

 

·              **Burberry**: The Burberry license agreement was signed in 2005, with the firstrelease of the *Burberry* eyewear collection in October 2006.This collection features the brand’s core values of form and function,innovation and the essence of classic style.

 

·              **Polo Ralph Lauren**: *Polo Ralph Lauren*iscomprised of six collections:

 

·              **Purple Label**:  Anexclusive eyewear collection, the *Purple Label*combines the elegance of tradition with the requirements of the moderngentleman: high quality, precious materials, details and style.

 

·              **Ralph Lauren**: The *Ralph Lauren*eyewear collection embraces a youthful sophisticated elegance that mixesrefined luxury with cinematic glamour and an air of mystery. For thefashion-conscious woman seeking 

 

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timeless styling with a modern attitude.

 

·              **Polo**: The *Polo* collection focuses on refineddesigns, inspired by the heritage of *Polo Ralph Lauren*apparel. This collection features emblematic models that are classic and neverout of style. *Polo* is the ideal collection formen who appreciate quality and tradition and are seeking classic styles with afresh design.

 

·              **Ralph**: This line is an expression of the *Ralph Lauren*spirit at an accessible price point. It features the latest looks and trends,as well as some more classic looks, and vibrant colors for a feminine, flirtyand fun look.

 

·              **Chaps**: *Chaps* features easy, wearable designs inthe classic tradition of *Polo Ralph Lauren*.The line offers a designer name to the young consumer of moderately-pricedsportswear. Since its introduction, *Chaps* has cometo represent classic design, excellent quality and value.

 

·                  **Club Monaco**: *Club Monaco* offers individuals a uniquebrand of quality eyewear at exceptional value and uncompromised style for anaccessible luxury. The styling targets both men and women, between 20 and 40years of age, who are urban professionals, style enthusiasts, and whoappreciate sophisticated design at a mid-level price point.

 

·                  **DonnaKaran**: This product line reflectsthe design sensibility and spirit of the *Donna Karan*collection, offering men and women styles that are sophisticated, using modernand lightweight materials.

 

·              **DKNY**: *DKNY* is fast fashion with an urbanmindset, the New York City street-smart look. *DKNY*eyewear caters to modern, urban, fashion-conscious women and men with multifacetedlifestyles: international, eclectic, fun and real.

 

·              **Brooks Brothers**: Characterized by lightweight materials and aslender line, the *Brooks Brothers* collectionsreflect the unique features of the style of this American brand. This is anaffordable product line with classic style that delivers functionality,lightness and high quality.

 

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

 

·              **StellaMcCartney**: This eyewear collection is inspired by Stella McCartney’smodern sense of innovation in the creation of desirable fashion. Combiningeveryday functionality with a strong fashion sensibility, the eyewearcollection offers contemporary femininity with a sense of modern luxury.

 

The followingtable presents the respective percentages of our total unit (a “unit”represents an eyeglass frame or sunglass and excludes sales of other materials)sales that our designer and house brands comprised during the periodsindicated:

 
| ** **                                                              | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **(as a percentage of total unit sales)** | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Designer brands                                                         |       | 42.7                                       |       | 41.2 |   | 35.9 |   | 32.8 |   | 33.6 |   |
| House brands                                                            |       | 57.3                                       |       | 58.8 |   | 64.1 |   | 67.2 |   | 66.4 |   |
| Total unit sales                                                        |       | 100                                        |       | 100.0 |   | 100.0 |   | 100.0 |   | 100.0 |   |

 

*PrescriptionFrames and Sunglasses*

 

In 2007, our manufacturing facilities produced acombined total of approximately 41.8 million prescription frames andsunglasses, of which 0.8 million were attributable to the inclusion of prescriptionframes and sunglasses manufactured by Oakleysince the acquisition date. In 2006 and 2005, our manufacturing facilities produced a combinedtotal of approximately 37.0 million and 28.5 million prescription frames andsunglasses, respectively.

 

Since1990, sunglasses have become an increasingly significant product line for us aswe seek to capitalize on growth opportunities in the sunglasses segment. In1990, we acquired a distributor that supplied sunglasses under the *Vogue* brand name. In 1995, we expanded our activities in thesunglasses market by acquiring Persol S.p.A., an Italian producer ofhigh-quality, fashionable sunglasses and prescription frames in thepremium-priced segment of the market. In 1999, we acquired the Ray-Ban businessfrom Bausch & Lomb Incorporated, including the *Ray-Ban,Revo, Arnette* and *Killer Loop*brand names. As a result of our acquisition of the Ray-Ban business, thepercentage of our unit sales represented by sunglasses that we manufacture hasgrown significantly. This trend continued with the acquisition of Sunglass Hutand, in 

 

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2007,with the expansion of our sunglass-based retail business in South Africa. Weexpect this growth trend in our sunglass business to continue as a result ofour acquisition of Oakley.  In additionto the more fashion-oriented sun and ophthalmic products for which we haveearned a strong reputation, the Oakley acquisition brings to us a complementarytechnological expertise and know-how in high-performance optics, which includessunglasses, prescription eyewear, goggles, shields, visors andelectronically-enabled eyewear, most of which feature Oakley’s High DefinitionOptics® (HDO®) technology.

 

Unitsales of sunglasses manufactured by us and third parties in 2007, as apercentage of our total aggregate unit sales, were 58.4 percent, as compared to57.2 percent in 2006 and 55.8 percent in 2005.

 

Thefollowing table presents the respective percentages of our total unit salesthat our prescription frames and sunglasses comprised for the periods indicated:

 
| ** **          | ** ** | **Year Ended December 31,**                              | ** ** |
|---------------------|------------|-------------------------------------------------------------------------|------------|
| ** **          | ** ** | **(as a percentage of total unit sales)** | ** ** |
| ** **          | ** ** | **2007**                                                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Prescription frames |       | 41.6                                                                    |       | 42.8 |   | 44.2 |   | 42.7 |   | 41.1 |   |
| Sunglasses          |       | 58.4                                                                    |       | 57.2 |   | 55.8 |   | 57.3 |   | 58.9 |   |
| Total unit sales    |       | 100.0                                                                   |       | 100.0 |   | 100.0 |   | 100.0 |   | 100.0 |   |

 

***RetailOperations***

 

We operate our retail operations through our retailbrands, which include, among others, LensCrafters, Sunglass Hut, Pearle Vision,ILORI, The Optical Shopof Aspen, OPSM, Laubman & Pank, Budget Eyewear and Bright Eyes.  Due to the fragmented nature of the Europeanretail market, we do not operate optical retail stores in Europe outside of theUnited Kingdom.  As of March 31,2008, our retail business consisted of 5,627 corporate store locations and 580franchised locations as follows:

 
| **Geographic region** | ** ** | **Retail brand**     | ** ** | **Number of corporate  store locations** | ** ** | **Number of franchised  or licensed locations** | ** ** | **Primary product** |
|----------------------------|------------|---------------------------|------------|---------------------------------------------------------|------------|-----------------------------------------------------------|------------|--------------------------|
| North America              |       | LensCrafters              |       | 951                                                     |       |                                                      |       | Prescription             |
|                       |       | Pearle Vision             |       | 470                                                     |       | 405                                                       |       | Prescription             |
|                       |       | Sunglass Hut              |       | 1,567                                                   |       |                                                      |       | Sun                      |
|                       |       | ILORI                     |       | 7                                                       |       |                                                      |       | Sun                      |
|                       |       | Sunglass Icon             |       | 132                                                     |       | 11                                                        |       | Sun                      |
|                       |       | The Optical Shop of Aspen |       | 20                                                      |       |                                                      |       | Prescription             |
|                       |       | Oliver Peoples            |       | 4                                                       |       | 1                                                         |       | Prescription/Sun         |
|                       |       | Oakley Stores and Vaults  |       | 83                                                      |       |                                                      |       | Sun/Apparel              |
| * *                   | * *   | *Licensed  Brands:*       |       |                                                    |       |                                                      |       |                     |
|                       |       | Sears Optical             |       | 881                                                     |       |                                                      |       | Prescription             |
|                       |       | Target Optical            |       | 304                                                     |       |                                                      |       | Prescription             |
| Asia-Pacific               |       | OPSM                      |       | 319                                                     |       |                                                      |       | Prescription             |
|                       |       | Laubman & Pank   |       | 134                                                     |       |                                                      |       | Prescription             |
|                       |       | Budget Eyewear            |       | 73                                                      |       | 20                                                        |       | Prescription             |
|                       |       | Sunglass Hut              |       | 214                                                     |       |                                                      |       | Sun                      |
|                       |       | Bright Eyes               |       | 39                                                      |       | 102                                                       |       | Sun                      |
|                       |       | Oakley Stores and Vaults  |       | 14                                                      |       | 1                                                         |       | Sun/Apparel              |
|                       |       | Oliver Peoples            |       |                                                    |       | 1                                                         |       | Prescription/Sun         |
| China and Hong Kong        |       | LensCrafters              |       | 159                                                     |       |                                                      |       | Prescription             |
|                       |       | Sunglass Hut              |       | 6                                                       |       |                                                      |       | Sun                      |
|                       |       | Other Brands              |       | 82                                                      |       |                                                      |       | Prescription             |
| Europe                     |       | Sunglass Hut              |       | 88                                                      |       |                                                      |       | Sun                      |
|                       |       | Oakley Stores and Vaults  |       | 9                                                       |       | 5                                                         |       | Sun/Apparel              |
| Africa and Middle East     |       | Sunglass Hut              |       |                                                    |       | 27                                                        |       | Sun                      |
|                       |       | Oakley Stores and Vaults  |       |                                                    |       | 1                                                         |       | Sun/Apparel              |
| South Africa               |       | Sunglass Hut              |       | 68                                                      |       |                                                      |       | Sun                      |
|                       |       | Oakley Stores and Vaults  |       | 2                                                       |       |                                                      |       | Sun/Apparel              |
| Central and South America  |       | Oakley Stores and Vaults  |       | 1                                                       |       | 6                                                         |       | Sun/Apparel              |

 

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*LensCrafters.*As of March 31,2008, we operated a retail network of 1,110 LensCrafters locations worldwide(of which 951 locations are in North America) offering a wide selection ofprescription frames, sunglasses, lenses and other optical products.LensCrafters is currently the largest optical retail chain in North America interms of sales. LensCrafters stores sell not only Luxottica products, but alsoa wide range of lenses and optical products made by other suppliers.LensCrafters’ products include innovative lenses, such as FeatherWates®(lightweight, thin and impact-resistant lenses), DURALENS® (superscratch-resistant lenses), Advanced View ProgressiveÔ(free-form, digitally surfaced progressive lenses), Invisibles®(anti-reflective lenses) and MVP Maximum View Progressives® (multi-focal lenseswithout 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, in North America, include a laboratory, whichenables us to provide the selected frame with prescription lenses to ourcustomers in approximately one hour. When we acquired LensCrafters in 1995,LensCrafters had approximately 600 stores. Between 1995 and 1998, we opened newstores and acquired other retail chains, reaching over 850 stores in NorthAmerica by 1999.

 

From1999 to 2004, LensCrafters’ expansion focused primarily on further developmentof those stores opened between 1996 and 1998. We continue to evaluate potentialretail expansion opportunities in North America through the acquiring of retailchains and opening of stores in areas where we are not already heavilyrepresented and in other prime locations. Since the LensCrafters acquisition,we have improved the efficiency of LensCrafters stores by managing theinventory 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 volume of ourproducts 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. As a result of these initiatives, LensCrafters’net sales have increased significantly since 1995.

 

During thelast few years, we have shifted LensCrafters to a more premium brand. Duringthis time, we have added additional elements, such as a new premium storeconcept that is being adopted as stores are remodeled across North America,associate training, advertising and marketing, which together represent thepremium brand and future direction of LensCrafters. With these new initiatives,we have seen the average transaction per customer grow.  LensCrafters is becoming known as one of thebest places to purchase fashionable, designer prescription frames andsunglasses.  LensCrafters hopes toshorten the purchase cycle of typically two to three years with this new focuson prescription frames as fashion**.**LensCraftersis also working to increase its share of the contact lens market.  This initiative focuses on selected products(mostly national brand names) and more competitive pricing.  This new push for contact lenses is beingsupported through in-store displays, marketing and associate training.

 

As noted above, one of the most visible changes inLensCrafters’ shift toward a premium and stylish eyewear shopping experience isa new design for the stores, which is adopted in new and remodeled storelocations across North America. The store design features elegant eyeweardisplay boxes, wood flooring, fashion graphics, sleek decorative accents andartistic lighting fixtures. Every feature of the design directs the spotlighton the shopping gallery of designer eyewear collections, while the “fit andfinish” stations are more private and separated from the shopping and frameselection. We have begun to display the eyewear collections by designer brandto help our customers shop for the style that is right for them.

 

In2006, we began to expand the use of the LensCrafters name by rebranding certainretail locations to “LensCrafters” that we acquired as part of the acquisitionsof three optical retailers in China, which had a combined total of 274 storesacross Asia, including Hong Kong. Hong Kong is one of the most significantChinese luxury markets where middle class and affluent mainland Chinese visitfrequently to purchase luxury goods. Launching LensCrafters as a premium brandin Hong Kong was important for increasing awareness and consumer demand for ourproducts and services. In September 2006, we launched LensCrafters inBeijing, beginning the re-branding strategy of our acquisitions.  By the end of 2007, we rebranded 165locations in China and Hong Kong with the LensCrafters name. Based on thestrategy for 2008, the remaining not yet rebranded stores will maintain theoriginal brand name.

 

*SunglassHut.*With theacquisition of Sunglass Hut in 2001, we became the world’s leading specialtyretailer of sunglasses based on sales, and a specialty retailer of popularlypriced watches. As of March 31, 2008, Sunglass Hut had 1,567 retaillocations in North America, 288 in Australia, New Zealand and South Africa, and115 in the Middle East and Europe. Sunglass Hut operates in-line stores and kiosks inshopping malls, as well as stores in street centers on high-traffic streets andin airports. We have increased sales of Luxottica-manufactured products atSunglass Hut locations from approximately 14.3 percent of total Sunglass Hutnet sales in April 2001 (the first month following the acquisition) to69.4 percent in December 2007, including Oakley products.  In addition to sunglasses that wemanufacture, Sunglass Hut continues to sell a variety of frames manufactured bythird-party vendors, including Maui Jim, Inc. and others.  Although we 

 

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buy products from thirdparties, we do not believe that the loss of any one supplier would have asignificant impact on our future operations as we could easily replace lostsupply with other sunglasses manufactured by us or other third-party vendors.After the acquisition of Sunglass Hut and Cole, we consolidated theadministrative and certain other functions of these businesses with ourexisting business to allow significant synergies between sun and optical retailoperations. Sunglass Hut outlets are located mostly in enclosed malls andairports with an average retail space of approximately 400 square feet perkiosk/store.

 

In thesecond quarter of 2007, we completed the acquisitions of two prominentspecialty sun chains in South Africa, for a total of 65 stores, which will berebranded to Sunglass Hut stores by the end of 2008. Both chains have prominentlocations in shopping centers in urban areas, including Johannesburg and CapeTown, as well as attractive airport locations.

 

*ILORI*. ILORI is our new high-end fashion sunwear retail brand with seven storesin the United States as of March 31, 2008, including flagship stores inthe SoHo neighborhood of New York City and in Beverly Hills, CA. ILORI catersto a different, more exclusive clientele than Sunglass Hut or Sunglass Iconwith higher-priced collections and more pampered, personalized service inluxurious surroundings.

 

*Sunglass Icon*.  Our Sunglass Icon multi-branded sunglassspecialty retail locations offer a full range of eyewear, including brandsowned or licensed by us, as well as eyewear from other designers andbrands. As of March 31, 2008, Sunglass Icon operated 143 locationsthroughout North America (11 of which are operated under license). TheSunglass Icon retail stores are located in premium malls throughout theUnited States, with a concentration primarily in the southwest United States.

 

*Pearle Vision.* With the acquisition of Cole in October 2004,we acquired Pearle Vision, the second-largest optical chain after LensCraftersin North America. Although both brands address the mid- to high-end customerbracket, their positioning is complementary. Pearle Vision focuses on thefactors that made the brand a success: customers’ trust in the doctor’sexperience and the quality of service they receive. Pearle Vision stores aremostly located in strip malls instead of the conventional malls where mostLensCrafters and Sunglass Hut stores are located. In addition, Luxottica hasfranchised Pearle Vision locations located throughout North America.

 

Our relaunching of the Pearle Vision brand in 2004 and2005 was centered on a return to its original values, which had made PearleVision the “Home of Trusted Eyecare” for generations of Americans.

 

A product mix increasingly geared to premium, highvalue-added products has helped restore strong customer relationships, as haveefforts to portray doctors in various advertising campaigns. At the same time,a significant reduction in sales promotions helped improve the positioning ofthe stores and consumer perceptions, resulting in increasing profitability.

 

Sales of Luxottica products at Pearle Vision storesenjoyed strong growth, reaching nearly 78.7 percent of total sales in 2007.Ray-Ban, Prada, Brooks Brothers and Versace were some of the stronger-sellingbrands.

 

In order to centralize services and achieve economiesof scale, most in-store labs were closed, and their work was transferred tonearby LensCrafters labs or to one of our eight large central lens finishingfacilities.

 

Pearle Vision’s franchises are increasingly turning tous as their preferred supplier, not only due to the strength of our brands andthe quality of our products, but also because of Luxottica’s FranchiseAdvantage Program. This program, which is available to franchisees, featuresmarketing solutions, preferential pricing and savings on selected categories ofproducts, including lenses, lab services, contact lenses and accessories, allof which are provided with a high level of service and merchandising support.

 

Wefirmly believe that the Pearle Vision brand has significant growthopportunities in both the United States and Canada, where the brand was strengthenedin 2006 and is now the only optical chain represented throughout Canada.

 

As of March 31,2008, Pearle Vision operated 470 corporate store locations and had 405franchise locations throughout North America.

 

*Licensed Brands.* With the acquisition of Cole, we alsoacquired a group of distribution outlets under the names “Sears Optical” and “TargetOptical” (the “BJ’s Optical” license acquired with Cole was terminated in March 2008),which we refer to as our Licensed Brands. The Licensed Brands optical retaillocations are located in the host stores that bear the names of the hosts. Bothof these brands offer consumers the convenience of taking care of their opticalneeds where they 

 

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shop and have a precise market positioning. Sears, adepartment store with a vast and heterogeneous customer base, has furtherimproved the services that were launched in 2005. In 2006, Ray-Ban wasintroduced in all stores.  In 2007,Target Optical, which appeals to customers who enjoy fashion and novelty,reported improved performance in its 296 Target stores, which are mostly inlarge urban and suburban centers. Efforts were focused on improving service andconsulting by the sales personnel, who adopted a new “take it and try it” salesmethod, as well as on strengthening its fashion positioning by offering brandssuch as Ray-Ban and Vogue.

 

As of March 31,2008, we operated 881 Sears Optical and 304 Target Optical locations throughoutNorth America.

 

*Oakley Stores and Vaults*.  As of March 31, 2008, we operated 55 retailstores in North America under the Oakley Store name, which offer a full rangeof Oakley-branded optics products as well as Oakley apparel, footwear andaccessories. These stores are designed and merchandised to immerse consumers inthe Oakley brand through innovative use of product presentation, graphics,audio and visual elements. In addition to these full-price retail venues, weoperated 30 Oakley Vaults, our Oakley outlet store concept, featuring discontinuedand excess seasonal Oakley-branded merchandise in addition to newer productspriced at full retail. Our retail stores are located in some of the nation’sleading shopping malls and average approximately 2,500 square feet insize.  We had 6 Oakley Stores and Vaultsunder franchise in Mexico as of March 31, 2008.  Outside of North America, as of March 31,2008, we operated 23 corporate-owned Oakley Stores and Vaults and had eightfranchise locations.

 

*The Optical Shop of Aspen*. As of March 31, 2008, we operated20 The Optical Shop of Aspen stores throughout the United States, which areluxury optical retail stores offering fashion and luxury eyewear from a varietyof designers, as well as certain Oakley-owned brands, including Oliver Peoples.

 

*Oliver Peoples*. Our Oliver Peoples subsidiary operates four luxuryoptical retail stores (two in Southern California and two in New York City). Anadditional two Oliver Peoples retail locations are operated by others underlicense, one in Southern California and one in Tokyo.

 

*OPSM, Laubman & Pank andBudget Eyewear*. In Australia and New Zealand, we operate threebrands, which are specialists in the prescription segment: OPSM, Australia’stop eyewear brand for luxury and fashion-minded customers; Laubman &Pank, provider of high-quality eyecare and services; and Budget Eyewear,focused on price-conscious consumers. The three brands operate in all ofAustralia’s states, primarily in larger cities. OPSM is our only brand in NewZealand and operates in the main urban areas. All brands have continued toextend further into the fashion segment through innovative store format,personnel training and product assortment programs that are tailored to theirrespective segments and leverage off of our portfolio of products. In theprescription segment, the three brands have a different positioning whichallows us to cover complementary segments with product offerings catering tothe needs of different consumer categories. Improved understanding of customersand initiatives have helped OPSM achieve a significant increase in sales andhave solidified its position as the best-known brand on the market. Laubman &Pank’s recognition as an optical fashion brand has continued to increase aspromotional programs clearly position the brand as a national chain. The brandis perceived to have a special focus on eye health, resulting from a series ofinitiatives that include TV campaigns and national screening programs. BudgetEyewear has successfully extended its product offerings while remaining thepreferred destination for those wanting good eyewear at lower prices. As of March 31,2008, a total of 507 stores throughout Australia were operated under the threebrands - OPSM (280 stores), Laubman & Pank (134 stores) and BudgetEyewear (73 stores)- including Budget Eyewear’s 20 franchise locations. OPSM isthe market leader in New Zealand, based on corporate-owned store locations,with 39 stores, as of March 31, 2008, operated by the OPSM brand.

 

 *Bright Eyes*.  Bright Eyes,first established in 1985, is one of Australia’s largest and fastest growingsunglass chains, with over 140 sunglass stores across Australia operating underthe Bright Eyes and Sunglass Worx names. As of March 31, 2008, Bright Eyes operated 39 corporate storelocations and 102 franchise locations. The stores are located in highly desirable real estate locations andsell brands such as Oakley, Ray-Ban, Prada, Versace, Maui Jim and Arnette.

 

Wecontinue to explore opportunities to expand our retail operations worldwidethrough the opening of new stores or kiosks, or strategic acquisitions, whenappropriate.

 

*Oakley Internet and TelesalesOperations.* Weuse our Oakley website (*www.oakley.com*)as a complementary sales channel to our Oakley retail operations andinternational distribution, allowing consumers to purchase Oakley products asefficiently as possible. The Oakley website is fully e-commerce capable,allowing consumers to purchase our Oakley products for delivery in the UnitedStates, Canada and Australia. In addition, the Oakley website includesinformation about our Oakley products and innovations, such as HDO®****(High Definition Optics®), and news about theathletes and others who endorse Oakley products. We believe the Oakley websiteserves to increase consumer awareness of the Oakley brand, 

 

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improvecustomer service and increase sales through Oakley’s retail and e-commercechannels. We also maintain a customer service team to respond to telephoneinquiries and make sales directly to consumers.

 

*EyeMed*. With the acquisition of Cole, we also acquired a provider andadministrator of managed vision care services. Managed vision care programs andbenefits were previously sold through the Cole Managed Vision division;renewals and new sales are now serviced through EyeMed Vision Care.  EyeMed Vision Care is one of the largestvision benefits organizations in the United States, serving 3,400 corporations,government entities and insurance companies through a network of optometrists,ophthalmologists, opticians and Luxottica retail stores.

 

In 2007, EyeMed gained 400 new clients with more than7 million new members joining the nearly 140 million people already served byEyeMed through funded and discounted benefit plans.  The primary contributors to EyeMed’s growthare the increasing awareness of the importance of vision care and the expansionof existing relationships with health and ancillary benefit organizations.  EyeMed also focused on targeting the smalleremployer segment.  EyeMed will continueto diversify its product offerings and provider networks to address the needsof its business-to-business customers, while continuing to identify and builddemand in new market segments.

 

**Our Principal Markets**

 

The following table presents our net sales bygeographic market for the periods indicated:

 
| ** **                 | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------|------------|--------------------------------------------|------------|
| ** **                 | ** ** | **(In thousands of Euro)**  | ** ** |
| ** **                 | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Italy Wholesale            |       | 1,506,077                                  |       | 1,321,887 |   | 998,420 |   |
| North America Retail(1)    |       | 2,744,454                                  |       | 2,840,977 |   | 2,632,265 |   |
| North America Wholesale    |       | 328,632                                    |       | 235,526 |   | 179,595 |   |
| Asia-Pacific Retail        |       | 453,223                                    |       | 388,505 |   | 365,867 |   |
| Asia-Pacific Wholesale     |       | 232,338                                    |       | 215,135 |   | 150,926 |   |
| Other Retail               |       | 64,641                                     |       | 64,678 |   | 61,165 |   |
| Other Wholesale            |       | 1,049,788                                  |       | 697,278 |   | 514,031 |   |
| Adjustment/Eliminations(2) |       | (1,413,099                                 | )          | (1,087,828 | ) | (768,006 | ) |
| Total                      |       | 4,966,054                                  |       | 4,676,156 |   | 4,134,263 |   |

 

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(1)             Excludesthe sales of our Things Remembered specialty retail business, which was sold inSeptember 2006. Things Remembered sales for fiscal 2006 (through its dateof sale on September 29, 2006) and 2005 were Euro 157.1 million and Euro236.5 million, respectively.

 

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

 

**Seasonality andEffect of 53-Week Year**

** **

Wehave also historically experienced sales volume fluctuations by quarter due toseasonality associated with the sale of sunglasses, which represented 58.4percent and 57.2 percent of our units sold in 2007 and 2006, respectively. As aresult, our net sales are typically higher in the second quarter, whichincludes sales to customers and increased sales in our Sunglass Hut stores, andlower in the first quarter, as sunglass sales are lower in the cooler climatesof North America, Europe and Northern Asia. We believe that this seasonalityeffect, especially in the wholesale segment, will be offset by our acquisitionof Oakley, which is primarily a wholesale business, because the wholesaleseasonal peaks generally precede the retail seasonal peaks by a few months.  These seasonal variations could affect thecomparability of our results from period to period. Our North American retailfiscal year is either a 53-week year or a 52-week year, which also can affectthe comparability of our results from period to period. When a 53-week yearoccurs, we generally add the extra week to the fourth quarter. A 53-week yearoccurs in five- to six-year intervals and will occur again in fiscal 2008.

 

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**ManufacturingProcess**

 

***Overview***

 

Wemanufacture both metal and plastic frames. In addition to our framemanufacturing capacity, since 1999 we have also produced crystal andpolycarbonate sunglass lenses exclusively for our sunglasses collections.Production is principally carried out in our six Italian manufacturingfacilities. In China, we manufacture certain products distributed mainly by ourNorth American retail group and certain finished products for our wholesalebusiness, mainly in our owned production facilities. Each of our facilities istailored to a specific production technology that we believe allows us toachieve a high level of productivity. With the acquisition of Oakley, we have added manufacturing facilitiesin the United States where we manufacture or assemble most of our Oakleyeyewear products.

 

***Designand Prototype Selection***

 

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

 

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

 

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

 

Allprototypes are subject to review and approval by our licensors and ourdesigners to ensure consistency with the distinctive image of each productline. Our collections consist of both new models and the most successfulexisting models. Each year, we add approximately 1,800 new models to oureyewear collections. The ability to constantly renew our product base hasenabled us to meet consumer demand in each market segment in which our brandsare targeted. See Item 3—“Key Information—Risk Factors.— If we do notcorrectly predict future economic conditions and changes in consumerpreferences, our sales of premium products and profitability will suffer.”

 

Oakley develops and employs innovative technologies,materials and processes in the design, development and manufacture of itsproducts. To date, Oakley has designed its products using primarily in-housestaff in order to speed the concept-to-market timeline and preserve brand imageand authenticity.

 

***Sourcing***

 

Theprincipal raw materials and parts purchased for our manufacturing processinclude plastic resins, metals, lenses and frame parts. We purchase asubstantial majority of our raw materials in Europe and, to a lesser extent, inAsia and the United States. In addition, we use certain external suppliers forframes, eyeglass cases and packaging materials. The Ray-Ban acquisitionprovided us with know-how and sunglass crystal lens manufacturing capabilities.We believe that our ability to produce sunglass crystal lenses is strategicallyimportant given our expanded presence in the sunglass market.

 

Oakley has built strong relationships with its majorsuppliers. With most suppliers, Oakley maintains agreements that prohibitdisclosure of its proprietary information or technology to third parties.Although Oakley relies on outside suppliers for most of the specific moldedcomponents of its glasses, goggles, watches and footwear, it generally retainsownership of the molds used in the production of the components. We believethat most of the components that Oakley uses can be obtained from one or morealternative sources within a relatively short period of time, if necessary ordesired. In addition, to further mitigate risk, Oakley has developed anin-house injection molding capability for sunglass frames.

 

We donot depend on any single supplier for any of our principal raw materials orframes. Although we do not have formal, long-term contracts with our suppliers,we have not experienced any significant interruptions in our supplies. For additionalinformation, see Note 14 to our Consolidated Financial Statements includedin Item 18 of this annual report.  Historically,prices of the principal raw materials used in our manufacturing process havebeen stable.

 

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***Manufacturing***

 

Wehave six frame manufacturing facilities in Italy. Five facilities are locatedin northeastern Italy, the area in which most of the country’s optical industryis based, and the remaining facility is located near Turin. All of ourfacilities are highly automated, which has allowed us to maintain a high levelof production without significant capital outlay. In certain of thesefacilities, we also produce sunglass crystal lenses and polycarbonate lenses.In 2006, we modernized our operations in Italy by building a newapproximately 32,000-square-meter manufacturing facility to produceacetate frames and sunglasses for a total investment of approximately Euro 20.0million. In 2007, we further expanded our manufacturing facilities inItaly by approximately 28,000 square meters in order to rationalize the productproduction flow, for a total investment of approximately Euro 23.4 million. Wewere able to rededicate one of our former facilities to our logistics operationfor a total investment of Euro 6.2 million. From 1998 to 2001, we operated,through our 50 percent-owned joint venture (Tristar Optical Company Ltd.) witha Japanese partner, a facility in China to manufacture prescription frames. In2001, we acquired from our Japanese partner the remaining 50 percent interestin this Chinese manufacturer so that it became one of our wholly-ownedsubsidiaries. In 2006, we increased our manufacturing capacity in China throughthe construction of a new approximately 26,000-square-meter manufacturingfacility to produce both metal and plastic frames for a total investment ofapproximately Euro 20.0 million. After the construction of this new facility,our annual average daily production in China increased by approximately 80percent compared to 2005.  In 2007, wefurther expanded our manufacturing capacity in China by approximately 74,000square meters, for a total investment of approximately Euro 7.2 million. Thepercentage of private label products produced at our facilities in China hasbeen decreasing in favor of increased production of certain of our core,fashion and North American brands. 

 

Overthe past several years, we have consolidated our manufacturing processes bytailoring each of our manufacturing facilities in Italy to a specificproduction technology. This consolidation has allowed us to improve both theproductivity and quality of our operations. We produce plastic frames in ourfacilities in Sedico, Pederobba and Lauriano, while metal frames are producedin our facilities in Agordo and Rovereto. Certain frame parts are produced inour facility in Cencenighe. Our manufacturing facility in China produces bothmetal and plastic frames. In 2007, approximately 59 percent of the framesmanufactured by us were metal-based, and the remainder was plastic.

 

Themanufacturing process for both metal and plastic frames and sunglasses begins withthe fabrication of precision tooling and molds based on prototypes developed byour in-house design and engineering staff. We believe that our in-housecapacity to engineer and produce precision tooling and molds gives us a strongcompetitive advantage by enabling us to reduce the lead time for productdevelopment and thereby adapt quickly to market trends, contain productioncosts and maintain smaller and more efficient production runs so that we canbetter respond to the varying needs of different markets.

 

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

 

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

 

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

 

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

 

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

 

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

 

Weengage in research and development activities relating to our manufacturingprocesses on an on-going basis. As a result of such activities, we haveinvested, and will continue to invest, in automation, thus increasingefficiency while improving quality.

 

The principal manufacturing facility for our newlyacquired Oakley business is located in Foothill Ranch, California, where itmanufactures or assembles most of Oakley’s eyewear products. Oakley has asecond manufacturing facility located in Dayton, Nevada, where it produces theframes used in its X Metal® (a proprietary alloy) eyewear products.

 

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At Oakley’s manufacturing facilities, we own, operateand maintain most of the equipment used in the manufacture of Oakley’s eyewearproducts. Much of the equipment used has been specially designed and adaptedfor Oakley’s manufacturing processes. Manufacturing processes that Oakleybelieves are unlikely to add significant value are currently contracted tooutside vendors. State-of-the-art manufacturing practices allow Oakley torespond quickly to customer demand, offer protection against piracy and enableit to adhere to strict quality-control standards. Oakley has the unique abilityto build customized eyewear products to meet individual consumer demand forunique combinations of frame, lens and lens coating and to ship those productsin less than 48 hours.

 

Oakley utilizes third-party manufacturers to produce its apparel,footwear, watches, electronically-enabled eyewear and certain of its goggles. Costsassociated with research and development activities are expensed when incurredand are not significant.

 

***Lens Finishing Labs***

 

In North America, we have eight central lens finishinglabs that are of strategic importance to our North American retailbusiness.  Combining our broad presencein the market with additional capacity for handling lens finishing work, weanticipate increasing availability of our higher-margin lens treatments toconsumers at our stores. Lens finishing labs are also expected to contribute toa reduction of the time and cost of finishing work provided by third parties.

 

Oakley operates optical lens laboratories in theUnited States, Ireland and Japan where it surfaces prescription lenses. Theselabs provide prescription lenses to the North and South American, European andAsian markets, respectively, enabling it to achieve expeditious delivery,better quality control and higher optical standards.

 

***Quality Control***

 

One ofour key strategic objectives is ensuring the quality of our products, which hasled to the integration of every phase of production. Quality is the criticalfactor in the premium and luxury segments for both wholesale customers andretail consumers.  In 1997, we were amongthe first companies 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.

 

Oakley designs all of its products with the goal of meeting orexceeding their respective industry standards for safety, performance anddurability. Throughout the development process, Oakley optics products undergoextensive testing against standards established specifically for eyewear byANSI and ASTM. These standards relate to product safety and performance andprovide quantitative measures of optical quality, UV protection, lighttransmission and impact resistance. In addition, Oakley performs a broad rangeof durability and mechanical integrity tests on its lens coatings that includeextremes of exposure to UV light, heat, condensation and humidity. Oakley testsits apparel, footwear and accessories against strict guidelines established byASTM and other industry authorities to ensure quality, performance anddurability.

 

**Distribution**

 

Wedistribute our products through both wholesale and retail channels.

 

***Distribution by Wholesale Division***

 

Wecurrently distribute our products in over 130 countries and operate 42 wholly-or majority-owned wholesale distribution subsidiaries strategically located inmajor markets worldwide.  In marketswhere we do not have wholesale distribution subsidiaries, we employapproximately 130 independent distributors.

 

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

 

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

 
| **Subsidiary**                                       | ** ** | **Country of Formation** | ** ** | **Percentage  Ownership** | ** ** |
|------------------------------------------------------|------------|------------------------------------|------------|---------------------------|------------|
| Luxottica Italia S.r.l                               |       | Italy                              |       | 100%                      |       |
| Luxottica India  Eyewear Private Limited             |       | India                              |       | 100%                      |       |
| Luxottica  Fashion Brillen Vertriebs GmbH            |       | Germany                            |       | 100%                      |       |
| Luxottica  Portugal –Comercio de Optica S.A     |       | Portugal                           |       | 100%                      |       |
| Luxottica  France S.A.S                              |       | France                             |       | 100%                      |       |
| Luxottica Iberica S.A                                |       | Spain                              |       | 100%                      |       |
| Luxottica U.K. Ltd.                                  |       | United  Kingdom                    |       | 100%                      |       |
| Luxottica Belgium N.V                                |       | Belgium                            |       | 100%                      |       |
| Luxottica Nordic AB                                  |       | Sweden                             |       | 100%                      |       |
| Oy Luxottica Finland AB                              |       | Finland                            |       | 100%                      |       |
| Luxottica Vertriebsgesellschaft MbH                  |       | Austria                            |       | 100%                      |       |
| Luxottica Norge AS                                   |       | Norway                             |       | 100%                      |       |
| Avant-Garde Optics, LLC                              |       | United  States                     |       | 100%                      |       |
| Oakley, Inc.                                    |       | United  States                     |       | 100%                      |       |
| Oakley Icon Limited                                  |       | Ireland                            |       | 100%                      |       |
| Oliver Peoples, Inc.                                 |       | United  States                     |       | 100%                      |       |
| Eye Safety Systems Inc.                              |       | Australia                          |       | 100%                      |       |
| Oakley Japan KK                                      |       | Japan                              |       | 100%                      |       |
| Oakley Athletic (PTY) Limited                        |       | South Africa                       |       | 100%                      |       |
| Oakley U.K. LTD.                                     |       | United  Kingdom                    |       | 100%                      |       |
| Oakley South Pacific PTY LTD.                        |       | Australia                          |       | 100%                      |       |
| Oakley Canada, Inc.                                  |       | Canada                             |       | 100%                      |       |
| Oakley Brazil LTDA                                   |       | Brazil                             |       | 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                          |       | 75%                       |       |
| Mirari Japan Co Ltd.                                 |       | Japan                              |       | 100%                      |       |
| Luxottica South Africa Pty Ltd.                      |       | South Africa                       |       | 100%                      |       |
| Luxottica (Switzerland) A.G                          |       | Switzerland                        |       | 97%                       |       |
| Luxottica Australia Pty Ltd.                         |       | Australia                          |       | 100%                      |       |
| Luxottica Optics Ltd.                                |       | Israel                             |       | 74.9%                     |       |
| Luxottica Hellas A.E                                 |       | Greece                             |       | 70%                       |       |
| Luxottica Nederland B.V                              |       | The  Netherlands                   |       | 51%                       |       |
| Luxottica  Gozluk Endustri Ve Ticaret Anonim Sirketi |       | Turkey                             |       | 64.8%                     |       |
| Luxottica  Poland Sp. Z.o.o                          |       | Poland                             |       | 100%                      |       |
| Luxottica Central Europe KFT                         |       | Hungary                            |       | 100%                      |       |
| Luxottica South Eastern Europe Ltd.                  |       | Croatia                            |       | 70%                       |       |
| Luxottica Trading and Finance Limited                |       | Ireland                            |       | 100%                      |       |
| Mirarian Marketing Pte Ltd.                          |       | Singapore                          |       | 51%                       |       |
| RayBan Sun Optics India Ltd.(1)                      |       | India                              |       | 70.5%                     |       |
| Luxottica Korea Ltd.                                 |       | South Korea                        |       | 100%                      |       |

 

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(1)             The shares of RayBan Sun Optics are publiclytraded on the BSE Stock Exchange, Mumbai. Since we did not own a 50 percentequity interest in the entity as of December 31, 2006, we accounted forthis entity under the equity method of accounting for the year ending December 31,2006.  Effective as of June 26, 2007, our stake in Ray-Ban SunOptics increased from 44.2 percent to 70.5 percent through the acquisition ofadditional shares in a public tender offer. See Item 4—“Information on theCompany—Business Overview—Recent Developments—Ray Ban Indian Holdings Offer”above for more information.

 

Wemaintain close contact with our distributors in order to monitor sales andcontrol the quality of the points of sale that display our products. Wetypically enter into distribution agreements with importers and distributorsthat establish minimum annual purchases and impose territorial limitations. Inaddition, to the extent permitted by law, we allow distribution only throughspecifically authorized retail channels and qualified sales agents.

 

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

 

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

 

Webelieve that one of our key competitive strengths is our ability to promptlysatisfy customer demand in a timely manner, both prior to and following a sale.In order to further improve our customer service capabilities, we havecentralized our distribution centers in Europe (Italy) and Asia (Japan) and havebegun a process to centralize our wholesale and retail distribution centers inNorth America over time. We believe that centralizing our distribution centersimproves the efficiency of our distribution operations while reducing relatedcosts.

 

Currently, Oakleydistributes its products in the United States through a base of approximately11,000 retail accounts. Retail accounts are comprised of optical stores,sunglass retailers, department stores, sporting goods stores and specialtysports stores, including bike, surf, snow, skate, golf and motor sports stores.

 

Oakley’s sales organization is comprised of acombination of employees and independent sales representatives. Relationshipswith Oakley’s large international, national and regional accounts are managedand serviced by Oakley employees. Independent sales representatives service theremaining base of retailers that carry Oakley’s various product categories.

 

***Distribution by Retail Division***

 

Throughour retail division, we believe we operate the largest group of opticalsuperstores in the United States and Canada based on both sales and storecount. We believe we are the largest specialty retailer of sunglasses in theworld based on 2007 revenues and believe we have become a leading player in theAustralian prescription segment.

 

Inour optical retail stores, customers can choose from a large selection offrames and lenses offering a high level of comfort and fit. In North America,LensCrafters customers can obtain a completed pair of prescription glasses inapproximately one hour because of on-site lens grinding laboratories. In ourSunglass Hut, ILORI, Sunglass Icon and Bright Eyes locations, customers canchoose from a large selection of Luxottica- and third-party-vendor-manufacturedsunglasses. In addition, most locations can assist customers in purchasingother accessories to complement their eyewear purchases. As of March 31,2008, our retail business consisted of 5,627 corporate store locations and 580franchised locations. See “—Products and Services—Retail Operations”above for more information about our retail locations and a breakdown of thegeographic regions.

 

In 2007, units manufactured with our own brand names or our licensedbrands, represented approximately 68.4 percent of the total sales of framesbased on units sold by the retail division. In contrast, when OPSM was acquiredin August 2003, only 3.5 percent of the total sales of frames sold weresupplied by us and, when Cole was acquired in October 2004, less than onepercent of the total sales of frames sold were supplied by us. The retaildivision’s stores sell not only frames that we manufacture but also a widerange of frames, lenses and other ophthalmic products manufactured byother companies.

 

Substantiallyall LensCrafters (excluding the LensCrafters rebranded stores in China), PearleVision and Licensed Brands and OPSM stores have an employed or independentoptometrist on site, allowing the customer to have an eye examination, selectfrom a large range of prescription eyewear and receive the selected frame withprescription lenses from one location. In addition, substantially all of ourLensCrafters stores (excluding the LensCrafters rebranded stores in China),have a lens grinding laboratory on site, which allows our customers to receivea complete set of prescription frames or sunglasses in approximately one hour.

 

**Competition**

 

The prescription frame and sunglasses industry is highly competitiveand fragmented. As we market our products throughout the world, we compete withmany prescription frame and sunglass companies in various local markets. Themajor competitive factors include fashion trends, brand recognition, marketingstrategies, distribution channels and the number and range of products offered.  We believe that our principal competitor inthe design, manufacture and distribution of eyewear 

 

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within the prescription frames market is Safilo Group S.p.A., orSafilo. We believe that our principal competitors in the sunglasses marketinclude Safilo and De Rigo S.A.

 

Several of our most significant competitors in the manufacture anddistribution of eyewear are significant vendors to our retail division. Oursuccess in these markets will depend on, among other things, our ability tomanage an efficient distribution network and to market our products effectivelyas well as the popularity and market acceptance of our brands. See Item 3—“KeyInformation—Risk Factors—If we are unable to successfully introduce newproducts, our future sales and operating performance will suffer” and “—If wefail to maintain an efficient distribution network in our highly competitivemarkets, our business, results of operations and financial condition couldsuffer.”

 

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

 

Similarly, the consumer product markets in whichOakley operates are also highly competitive in the United States and abroad. Webelieve that Oakley’s innovative technology and design, integrated sunglassmanufacturing capabilities, effective brand and product marketing efforts andvigorous protection of its intellectual property rights are important aspectsof competition and are among Oakley’s primary competitive advantages.

 

In the non-prescription sports eyewear market, Oakleycompetes with mostly smaller sunglass and goggle companies in various niches ofthe sports market and a limited number of larger competitors.  We believe Oakley is a leader in this segmentof the market, although various companies, including Marchon Eyewear, Inc.and Safilo Group S.p.A., and numerous smaller brands actively compete with Oakley.

 

**Marketing**

 

Our marketing and advertising activities are designed primarily toenhance the image of Luxottica and our brand portfolio and to drive trafficinto our retail locations. Advertising expenses amounted to approximately sevenpercent of our net sales in each of 2007 and 2006 and approximately six percentof our net sales in 2005.

 

***Marketing Strategy for Our WholesaleDistribution Business***

 

Our marketing strategy in the wholesale distribution business isfocused on promoting our extensive brand portfolio, our corporate image and thevalue of our products. Advertising is extremely important in supporting ourmarketing strategy, and we therefore engage in extensive advertisingactivities, both at the point-of-sale and through various media directed at theend consumer of our products.

 

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

 

Our point-of-sale marketing materials consist of displays, countercards, catalogs, posters and product literature. Many of these materials arelinked to our consumer advertising campaigns. Because the point-of-sale hasbecome increasingly important both as a communication medium and in terms ofthe consumer brand experience, in 2007, we developed a new approach for ourRay-Ban brand with a shop-in-shop modular concept. This concept can be adaptedto the stores we identify as the most suitable, permitting the best delivery ofRay-Ban’s clear and unique brand signature.

 

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

 

Oakley uses less-conventional marketing methods in addition to thosementioned above, including sports marketing, grass-roots sporting events andtargeted product allocations.  We believethe exposure generated by athletes wearing Oakley products during competitionand in other media appearances serves as a more powerful endorsement of productperformance and style than traditional commercial endorsements. Consequently,Oakley will continue to use sports marketing and 

 

30

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endorsement arrangements extensively to achieve exposure that resultsin strong brand recognition and authenticity on a global level.

 

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

 

***Marketing Strategy for Our Retail Business***

 

In addition to the marketing activities described above, we engage inpromotional and advertising activities through our retail business with bothshort- and long-term objectives. Our short-term objectives are to attractcustomers to our stores and promote sales. Our long-term objective is to buildthe image and visibility of our retail brands throughout the world, such as theLensCrafters and Pearle Vision brands in North America, the Sunglass Hut brandworldwide and the OPSM, Laubman & Pank and Budget Eyewear brands inAustralia and New Zealand, thereby encouraging customer loyalty and repeatpurchases. Oakley’s Stores and Vaults rely on similar short-term objectives.Oakley’s long-term objectives are to utilize high profile retail locations todrive brand equity and create awareness for eyewear, apparel, footwear andaccessories marketed under the Oakley brand.

 

We believe that the product quality and service provided by our retailbusiness contribute to our short- and long-term marketing objectives.

 

A considerable amount of our retail business’s marketing budget isdedicated to direct marketing activities, such as communications with customers(*e.g.*, mailings and catalogues). Ourdirect marketing activities benefit from our large database of customerinformation and investment in customer relationships marketing technologies andskills in the United States and in Australia. Another significant portion ofthe marketing budget is allocated to broadcast and print media (*e.g.*, television, radio and magazines) designed to reach thebroad markets in which we operate with image-building messages about our retailbusiness.

 

**Trademarks, Trade Names, Patents and License Agreements**

 

***Trademarks, Trade Names and Patents***

 

Our principal trademarks or trade names include *Luxottica,Ray-Ban, Oakley, Persol, Vogue, Arnette, Revo, LensCrafters, Sunglass Hut,ILORI, Pearle Vision, OPSM, Laubman & Pank, Budget Eyewear*and the Oakley ellipsoid*“O”*and square*“O”*logos. Our principal trademarks are registeredworldwide. Other than *Luxottica, Ray-Ban,Oakley, LensCrafters, Sunglass Hut, Pearle Vision*, *OPSM*and the Oakley ellipsoid*“O”*andsquare*“O”*logos, we do not believe that anysingle trademark or trade name is material to our business or results of operations.*Ray-Ban* products accounted forapproximately 14.8 percent of our net sales in 2007. We believe that ourtrademarks have significant value for the marketing of our products and thathaving distinctive marks that are readily identifiable is important forcreating and maintaining a market for our products; identifying our brands anddistinguishing our products from those of our competitors. Therefore, we utilizea combination of trademarked logos, names and other attributes on nearly all ofour products.

 

LensCrafters has introduced several trademarked lenses in recent yearsthat contain innovative technology, such as FeatherWatesÒ(lightweight, thin and impact resistant lenses), DURALENSÒ(super scratch-resistant lenses), InvisiblesÒ(anti-reflective lenses) and MVP Maximum View ProgressivesÒ(multi-focal lenses without visible lines). LensCrafters purchases these lensesunder non-exclusive arrangements withthird parties. The names of the lenses used by LensCrafters are typicallytrademarked, and the trademarks are typically owned by us. OPSM has trademarkedseveral lenses in recent years that it uses in its advertising. They includeActiviseÒ forcontact lenses, ActiveÒ for polycarbonate eyeglass lenses andInvisiblesÒ formulti-coated eyeglass lenses.

 

We utilize patented and proprietary technologies and precisionmanufacturing processes in the production of our products. As of June 20, 2008,Oakley held a portfolio of over 600 patents worldwide that protect its designsand innovations.  Some of the mostimportant of these patents relate to the following categories:  innovations in dual-spherical lens technologyand the associated optical advances; electronically enabled eyewear; innovationsin frame design and functionality; biased, articulating and dimensionallystable eyewear; and interchangeable lenses.

 

See Item 3 —“Key Information—Risk Factors—If we are unable toprotect our proprietary rights, our sales might suffer, and we may incursignificant costs to defend such rights.”

 

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*** ***

***LicenseAgreements***

*** ***

We have entered into license agreements to manufacture and distributeprescription frames and sunglasses with numerous designers. These licenseagreements have terms expiring through 2022. The table below summarizes theprincipal terms of our most significant license agreements.

 
| **Licensor**                      | ** ** | **Licensed Marks**                                                                                                                                                                                         | ** ** | **Territory**                             | ** ** | **Expiration**                                                                                 |
|-----------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------------------------------------------------------------|
| Burberry Limited                  |       | Burberry  Burberry Black Label**                                                                                                                                                                                |       | Worldwide exclusive license               |       | December 31, 2015                                                                         |
| Bvlgari S.p.A                     |       | Bvlgari                                                                                                                                                                                                         |       | Worldwide exclusive license               |       | December 31, 2010                                                                         |
| Chanel Group                      |       | Chanel                                                                                                                                                                                                          |       | Worldwide exclusive license               |       | March 31, 2011 (renewable until March 31,  2014)                                     |
| Club Monaco Corp.                 |       | Club Monaco                                                                                                                                                                                                     |       | U.S. and Canada exclusive license         |       | March 31, 2012 (renewable until March 31,  2017)                                     |
| Dolce & Gabbana S.r.l    |       | Dolce & Gabbana, D&G                                                                                                                                                                               |       | Worldwide exclusive license               |       | December 31, 2010 (renewable until  December 31, 2015)                               |
| Donna Karan Studio LLC            |       | Donna Karan, DKNY                                                                                                                                                                                               |       | Worldwide exclusive license               |       | December 31, 2009 (renewable until  December 31, 2014)                               |
| Gianni Versace S.p.A              |       | Gianni Versace, Versace,  Versace Sport, Versus                                                                                                                                                                 |       | Worldwide exclusive license               |       | December 31, 2012 (renewable until  December 31, 2022)                               |
| Jones Investment Co. Inc          |       | Anne Klein New York  Lion Head Design  AK Anne Klein                                                                                                                                                            |       | U.S. and rest of world exclusive licenses |       | December 31, 2009                                                                         |
| Paul Smith Limited                |       | Paul Smith  PS Paul Smith                                                                                                                                                                                       |       | Worldwide exclusive license               |       | February 28, 2009                                                                         |
| Prada S.A                         |       | Prada, Miu Miu                                                                                                                                                                                                  |       | Worldwide exclusive license               |       | December 31, 2013 (renewable until  December 31, 2018)                               |
| PRL USAThe Polo/Lauren Company LP |       | Polo by Ralph Lauren   Ralph Lauren  Ralph (Polo Player Design) Lauren   RLX   RL   Ralph   Ralph/Ralph Lauren   Lauren by Ralph Lauren   Polo Jeans Company   The Representation of the Polo Player   Chaps*** |       | Worldwide exclusive license               |       | March 31, 2017                                                                            |
| Retail Brand Alliance, Inc.* |       | Brooks Brothers                                                                                                                                                                                                 |       | Worldwide exclusive license               |       | December 31, 2009                                                                         |
| Salvatore Ferragamo Italia  S.p.A |       | Salvatore Ferragamo  Ferragamo                                                                                                                                                                                  |       | Worldwide exclusive license               |       | December 31, 2008 (renewable until  December 31, 2013)                               |
| Stella McCartney                  |       | Stella McCartney                                                                                                                                                                                                |       | Worldwide exclusive license               |       | (Begins January 1, 2009) December 31, 2014  (renewable until December 31, 2019) |
| Tiffany & Co.            |       | TIFFANY & CO.   Tiffany                                                                                                                                                                                |       | Worldwide exclusive license               |       | December 31, 2017                                                                         |

 

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*                    Retail BrandAlliance, Inc. is indirectly owned and controlled by one of our directors.

 

**             Japan only.

 

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

 

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Under these license agreements, we are required to pay a royalty whichgenerally ranges from five percent to 14 percent of the net sales of therelevant collection, which may be offset by any guaranteed minimum royaltypayments. The license agreements also provide for a mandatory marketingcontribution that generally amounts to between five and ten percent of netsales. Each licensor is responsible for the manner and form of advertising forits collection. These license agreements typically have terms ranging fromthree to ten years, but may be terminated early by either party for a varietyof reasons, including non-payment of royalties, failure to meet minimum salesthresholds, product alteration and, under certain agreements, a change incontrol of Luxottica Group S.p.A.

 

Other than Dolce & Gabbana and D&G and Prada and Miu Miu(which accounted for 5.5 percent and 6.4 percent of our 2007 net sales,respectively), no single designer line accounted for more than five percent ofnet sales for the year ended December 31, 2007.   We believe that early termination of one or asmall number of the current license agreements would not have a materialadverse effect on our results of operations or financial condition. Upon anyearly termination of an existing license agreement, we expect that we wouldseek to enter into alternative arrangements with other designers to reduce anynegative impact of such a termination.

 

**Regulatory Matters**

 

Our products are subject to governmental health and safety regulationsin most of the countries where they are sold, including the United States. Weregularly inspect our production techniques and standards to ensure compliancewith applicable requirements. Historically, compliance with such requirementshas not had a material effect on our operations.

 

In addition, governments throughout the world impose import duties andtariffs on products being imported into their countries. Although in the pastwe have not experienced situations in which the duties or tariffs imposedmaterially impacted our operations, we can provide no assurances that this willbe true in the future.

 

Our past and present operations, including owned and leased realproperty, are subject to extensive and changing environmental laws andregulations pertaining to the discharge of materials into the environment, thehandling and disposition of waste or otherwise relating to the protection ofthe environment. We believe that we are in substantial compliance with theapplicable environmental laws and regulations. However, we cannot predict withany certainty that we will not in the future incur liability underenvironmental statutes and regulations with respect to contamination of sitesformerly or currently owned or operated by us (including contamination causedby prior owners and operators of such sites) and the off-site disposal ofhazardous substances.

 

Our retail operations are also subject to various legal requirements inthe United States, Australia, Canada, New Zealand, Hong Kong, Singapore andMalaysia that regulate the permitted relationships between licensedoptometrists or ophthalmologists, who primarily perform eye examinations andprescribe corrective lenses, and opticians, who fill such prescriptions andsell eyeglass frames.

 

Through our acquisition of Oakley, we produce and sell to the U.S.government, including the U.S. military, and to international governments,certain Oakley and Eye Safety Systems protective eyewear products.  As aresult, our operations are subject to various regulatory requirements,including the necessity of obtaining government approvals for both new and continuingoperations, U.S.-imposed embargoes of sales to specific countries, foreignimport controls, expropriation of assets and various decrees, laws, taxes,regulations, interpretations and court decisions that are not always fullydeveloped and that may be retroactively or arbitrarily applied. Additionally, we could be subject to periodic audits by U.S. governmentpersonnel for contract and other regulatory compliance.

 

**Organizational Structure**

 

We are a holding company, and virtually all of our operations areconducted through our wholly-owned subsidiaries. We operate in two industrysegments: (i) manufacturing and wholesale distribution, and (ii) retaildistribution. In the retail segment, we primarily conduct our operationsthrough LensCrafters, Sunglass Hut, Pearle Vision, Cole Licensed Brands andOPSM.  In the manufacturing and wholesaledistribution segment, we operate through 11 manufacturing plants and 42geographically-oriented wholesale distribution subsidiaries. See “—Distribution”for a breakdown of the geographic regions.

 

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The significant subsidiaries controlled by LuxotticaGroup S.p.A., including holding companies, are:

 
| **Subsidiary**                            | ** ** | **Country of  Incorporation** | ** ** | **Percentage  of  Ownership** | ** ** |
|-------------------------------------------|------------|------------------------------------|------------|-------------------------------|------------|
| **Manufacturing**                         | ** ** | ** **                         | ** ** | ** **                    | ** ** |
| Luxottica S.r.l                           |       | Italy                              |       | 100%                          |       |
| Luxottica Tristar (Dongguan) Optical Co.  |       | China                              |       | 100%                          |       |
| **Distribution**                          | ** ** | ** **                         | ** ** | ** **                    | ** ** |
| Avant-Garde Optics, LLC                   |       | United  States                     |       | 100%                          |       |
| Cole Vision Corporation                   |       | United  States                     |       | 100%                          |       |
| LensCrafters, Inc.                   |       | United  States                     |       | 100%                          |       |
| Sunglass Hut Trading, LLC                 |       | United  States                     |       | 100%                          |       |
| Pearle Vision, Inc.                  |       | United  States                     |       | 100%                          |       |
| OPSM Group Limited                        |       | Australia                          |       | 100%                          |       |
| **Holding companies**                     | ** ** | ** **                         | ** ** | ** **                    | ** ** |
| Luxottica U.S. Holdings Corp.             |       | United  States                     |       | 100%                          |       |
| Luxottica South Pacific Holdings Pty Ltd. |       | Australia                          |       | 100%                          |       |
| Cole National Corporation                 |       | United  States                     |       | 100%                          |       |
| Oakley, Inc.(1)                      |       | United  States                     |       | 100%                          |       |
| Arnette Optic Illusions, Inc.             |       | United  States                     |       | 100%                          |       |
| The United States Shoe Corporation        |       | United  States                     |       | 100%                          |       |

 

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(1)             In addition to being a holding company,Oakley, Inc. is also a manufacturer and a distributor.

 

**Property,Plants and Equipment**

** **

Our corporateheadquarters is located at Via C. Cantù 2, Milan, Italy. Information regardingthe location, use and approximate size of our principal offices and facilitiesas of April 30, 2008 is set forth below:

 
| **Location**                             | ** ** | **Use**                                                                            | ** ** | **Owned/Leased** | ** ** | **Approximate  Area in Square  Feet** | ** ** |
|------------------------------------------|------------|------------------------------------------------------------------------------------|------------|------------------|------------|-------------------------------------------------|------------|
| Milan, Italy                             |       | Corporate Headquarters                                                             |       | Owned            |       | 61,237                                          |       |
| Agordo, Italy(1)(2)                      |       | Administrative offices and manufacturing facility                                  |       | Owned            |       | 926,200                                         |       |
| Mason (Ohio), United States              |       | North American retail division headquarters                                        |       | Owned            |       | 415,776                                         |       |
| Atlanta (Georgia), United States         |       | North American retail division distribution center                                 |       | Owned            |       | 183,521                                         |       |
| Port Washington (NY), United States      |       | U.S. corporate and wholesale headquarters and  wholesale division                  |       | Owned            |       | 140,700                                         |       |
| Foothill Ranch (CA), United States       |       | Oakley headquarters, manufacturing, ophthalmic  laboratory and distribution center |       | Owned            |       | 550,000                                         |       |
| Ontario (CA), United States              |       | Oakley eyewear, apparel and footwear distribution  center                          |       | Leased           |       | 408,000                                         |       |
| Dayton (NV), United States               |       | Oakley manufacturing facility                                                      |       | Owned            |       | 63,000                                          |       |
| Macquarie Park, Australia                |       | Offices                                                                            |       | Leased           |       | 61,496                                          |       |
| Chipping Norton, Australia               |       | Ophthalmic laboratory                                                              |       | Leased           |       | 60,172                                          |       |
| Revesby, Australia                       |       | Distribution center                                                                |       | Leased           |       | 61,054                                          |       |
| Cincinnati (Ohio), United States         |       | Ophthalmic laboratory, warehouse, distribution  center                             |       | Leased           |       | 132,000                                         |       |
| Dallas (Texas), United States            |       | Ophthalmic laboratory, distribution center, office                                 |       | Leased           |       | 128,869                                         |       |
| Memphis (Tennessee), United States       |       | Ophthalmic laboratory                                                              |       | Leased           |       | 59,350                                          |       |
| Columbus (Ohio),  United States(2)       |       | Ophthalmic  laboratory, distribution center                                        |       | Leased           |       | 121,036                                         |       |
| Knoxville  (Tennessee), United States(1) |       | Ophthalmic  laboratory                                                             |       | Leased           |       | 48,880                                          |       |
| London (Hammersmith), UK                 |       | Offices                                                                            |       | Leased           |       | 7,400                                           |       |

 

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| Dongguan, China (1)(3)    |   | Office, manufacturing facility and land                            |   | Owned  |   | 3,589,116 |   |
|---------------------------|--------|--------------------------------------------------------------------|--------|--------|--------|-----------|--------|
| Fukui, Japan              |   | Offices, distribution center                                       |   | Owned  |   | 45,364    |   |
| Shanghai, China           |   | Office, distribution center and warehouse                          |   | Leased |   | 22,927    |   |
| Bhiwadi, India            |   | Manufacturing facility, corporate offices                          |   | Owned  |   | 343,474   |   |
|                      |   |                                                               |   |   |   |      |   |
| Rovereto, Italy(2)        |   | Frame manufacturing facility                                       |   | Owned  |   | 228,902   |   |
| Sedico, Italy(1)          |   | Distribution center                                                |   | Owned  |   | 392,312   |   |
| Cencenighe, Italy         |   | Semi-finished product manufacturing facility                       |   | Owned  |   | 59,892    |   |
| Lauriano, Italy(2)        |   | Frame and crystal lenses manufacturing facility                    |   | Owned  |   | 292,078   |   |
| Pederobba, Italy(1)(2)(4) |   | Frame manufacturing facility                                       |   | Owned  |   | 191,722   |   |
| Sedico, Italy(1)          |   | Frame manufacturing facility                                       |   | Owned  |   | 342,830   |   |
| Izmir, Turkey             |   | Headquarters, offices, warehouse and frame  manufacturing facility |   | Leased |   | 92,750    |   |

 

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(1)                                  Suchfacility is comprised of several different premises located within the samemunicipality.

 

(2)                                  Suchfacility was expanded during 2007.

 

(3)                                  InMay 2007, we began expanding and improving this facility, and we areadding a total of 528,376 square feet. The estimated expenditure for suchexpansion and improvement is approximately****Euro 5.0million, of which Euro 4.2 million has already been paid. Following thefinalization of the expansion, scheduled for July 2008, we anticipate thatproduction capacity at the facility will increase by 20%.

 

(4)                                  25,963square feet of this facility are leased.

 

In 2007, our manufacturing facilities produced acombined total of approximately 41.8 million prescription frames andsunglasses, of which 0.8 million were attributable to the inclusion of prescription frames and sunglasses manufactured by Oakley since the acquisitiondate. In 2006 and 2005, our manufacturing facilities produced a combinedtotal of approximately 37.0 million and 28.5 million prescription frames andsunglasses, respectively.

 

Substantially all of our retail stores areleased.  See “—Products andServices—Retail Operations” above for more information about our retaillocations and a breakdown of the geographic regions.

 

All of our leases expire between 2008 and 2025 andhave terms that we believe are generally reasonable and reflective of marketconditions.

 

We believe that our current facilities (including our manufacturingcapacity) are adequate to meet our present and reasonably foreseeable needs.There are no encumbrances on any of our principal owned properties.

 

**ITEM 4A. UNRESOLVED STAFF COMMENTS**

 

None.

 

**ITEM 5. OPERATING AND FINANCIAL REVIEW ANDPROSPECTS**

 

**Overview**

 

We operate in two industrysegments: (i) manufacturing and wholesale distribution and (ii) retaildistribution. Through our manufacturing and wholesale distribution segment, weare engaged in the design, manufacture, wholesale distribution and marketing ofhouse brand and designer lines of mid- to premium-priced prescription framesand sunglasses. We operate in our retail segment principally through the keybrands LensCrafters, Sunglass Hut, Pearle Vision and OPSM and ourLicensed Brands (Sears Optical and Target Optical) and, since November 14,2007, through Oakley’s retail brands. As of December 31, 2007, the retail segment consisted of 5,885corporate store retail locations and 522 franchised locations as follows:

 

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| ** **                            | ** ** | **North  America** | ** ** | **Europe/  Middle  East** | ** ** | **Australia  / New  Zealand** | ** ** | **China /  Hong  Kong** | ** ** | **Other  (7)** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|--------------------|------------|---------------------------|------------|------------------------------------|------------|------------------------------|------------|----------------|------------|-----------|------------|
| LensCrafters                          |       | 951                |       |                      |       |                               |       | 165                          |       |           |       | 1,116     |       |
| Sunglass Hut and ILORI (1)            |       | 1,738              |       | 110                       |       | 287                                |       | 6                            |       |           |       | 2,141     |       |
| Pearle Vision and Licensed Brands (2) |       | 1,815              |       |                      |       |                               |       |                         |       |           |       | 1,815     |       |
| Oakley retail locations (3)      |       | 107                |       |                      |       |                               |       |                         |       | 39             |       | 146       |       |
| OPSM Group (4)                        |       |               |       |                      |       | 551                                |       |                         |       |           |       | 551       |       |
| Other (5)                             |       |               |       |                      |       | 32                                 |       | 84                           |       |           |       | 116       |       |
| Franchised or Licensed Locations (6)  |       | 414                |       |                      |       | 108                                |       |                         |       |           |       | 522       |       |
|                                  |       |               |       |                      |       |                               |       |                         |       |           |       |      |       |
|                                  |       | 5,025              |       | 110                       |       | 978                                |       | 255                          |       | 39             |       | 6,407     |       |

 

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(1)             IncludesSunglass Icon locations.

 

(2)             Licensedbrands include Sears Optical, Target Optical and BJ’s Optical (BJ’s Optical licenseterminated in March 2008).

 

(3)             IncludesOakley Stores, Oakley Vaults, The Optical Shop of Aspen and Oliver Peoples.

 

(4)             IncludesOPSM, Laubman & Pank and Budget Eyewear.

 

(5)             IncludesBright Eyes.

 

(6)             IncludesPearle Vision, Sunglass Icon and Bright Eyes franchised and licensed locations.

 

(7)             IncludesOakley stores in Japan and South America.

 

LensCrafters, ILORI, Pearle Vision, our Licensed Brands (SearsOptical and Target Optical),as well as the retail brands we acquired with Oakley (Oakley Stores andVaults, Sunglass Icon, The Optical Shop of Aspen and Oliver Peoples),have retail distribution operations located throughout the United States,Canada and Puerto Rico, while OPSM, Laubman & Pank, Budget Eyewear andBright Eyes operate retail outlets located in Australia and New Zealand.Sunglass Hut is a leading retailer of sunglasses worldwide based on sales.  In 2006, we began operating retail locationsin mainland China and currently we have rebranded 165 locations to our premiumLensCrafters brand in mainland China and Hong Kong.  Our net sales consist ofdirect sales of finished products manufactured with our own brand names or ourlicensed brands to opticians and other independent retailers through ourwholesale distribution channel and sales directly to consumers through ourretail division retail channel. Our average retail unit selling price issignificantly higher than our average wholesale unit selling price, as ourretail sales typically include lenses as well as frames.

 

Demand for our products, particularly our higher-end designer lines, islargely dependent on the discretionary spending power of the consumers in themarkets in which we operate. See Item 3—“Key Information—Risk Factors—Ifwe do not correctly predict future economic conditions and changes in consumerpreferences, our sales of premium products and profitability will suffer.” Wehave also historically experienced sales volume fluctuations by quarter due toseasonality associated with the sale of sunglasses. As a result, our net salesare typically higher in the second quarter and lower in the first quarter.

 

As a result of our acquisition of LensCrafters in May 1995 and thesubsequent expansion of our business activities in the United States throughthe acquisitions of the Ray-Ban business, Sunglass Hut, Pearle Vision and theLicensed Brands business and Oakley, 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 Euro/U.S. dollarexchange rate has fluctuated from an average exchange rate of Euro 1.00 =U.S.$1.2444 in 2005 to Euro 1.00 = U.S.$1.2553 in 2006 to Euro 1.00 =U.S.$1.3705 in 2007. Additionally, with the acquisition of OPSM and Bright Eyes(acquired through Oakley), our results of operations have been renderedsusceptible to currency fluctuations between the Euro and the Australiandollar. Although we engage in certain foreign currency hedging activities tomitigate the impact of these fluctuations, they have impacted our reportedrevenues and expenses during the periods discussed herein. See Item 11—“Quantitativeand Qualitative Disclosures About Market Risk—Foreign Exchange Sensitivity” andItem 3—“Key Information—Risk Factors—If the Euro continues to strengthenrelative to certain other currencies, our profitability as a consolidated groupwill suffer.”

 

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**The Oakley Merger**

 

OnNovember 14, 2007, we completed the merger with Oakley, for a totalpurchase price of approximately U.S.$2.1 billion. In accordance with theterms of the merger agreement, Oakley’s outstanding shares of common stock wereconverted into the right to receive U.S.$29.30 per share in cash and Oakleybecame an indirect wholly-owned subsidiary of Luxottica.  The merger was accounted for as a businesscombination for accounting purposes.  For additionalinformation, see Note 5 to our Consolidated Financial Statements includedin Item 18 of this annual report.

 

We believe that ourcombination with Oakley will:

 
| · | leverage  our brand portfolio through global exposure for all Oakley owned and licensed  brands and by selectively applying active lifestyle and account merchandising  optimization;                                                                                                                                                                                                          |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| · | strengthen  our international sales through significant opportunities in Europe and  emerging markets, complementary sales structures in many different markets  and the realization of economies of scale;                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| · | strengthen  our trade channels through Oakley’s experience in the active lifestyle and  sports performance channels and Luxottica’s experience in the optical  channel, as well as through the global key account management and department  store dedicated structure;                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| · | strengthen  our retail operations through the optimization of sales of all our brands through  Luxottica’s and Oakley’s retail chains and improved consumer reach through  enhanced positioning of sun retail brands;                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| · | combine  Luxottica’s and Oakley’s areas of expertise, developing Oakley’s women’s and  prescription eyewear offerings as a result of Luxottica’s expertise, blending  performance and luxury/fashion, creating new eyewear solutions to serve new  customer needs and applying Oakley brand-building and grass-roots marketing  approaches to other portfolio brands; |
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| · | improve  lens technology through the extension of Oakley’s best-in-class research and  development capabilities, new opportunities in prescription sun lenses and  sourcing benefits; and                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| · | strengthen  our sourcing through greater scale, new worldwide opportunities and a faster  time to market.                                                                                                                                                                                                                                                                                      |

 

In connection with theacquisition, we increased our outstanding debt by approximately U.S.$2.2 billion.

 

Since theconsummation of the acquisition, we have begun to implement our strategicintegration plan with respect to Oakley. We immediately launched a full portfolio of project tasks, with specificobjectives, dedicated joint teams and designated accountabilities to addresskey integration and synergy areas, with direct significant involvement of ourtop management.

 

We expect that ourintegration with Oakley will result in synergies in the following areas:

 

·       international wholesaledevelopment;

 

·       developments related tospecific brands (especially Revo and Arnette);

 

·       sourcing retail operationssynergies in the key markets of North America and Asia-Pacific; and

 

·       general and administrativeexpenses.

 

Currently, allintegration project activities are proceeding substantially according to theplan. In particular, specific integration tasks have been completed, includingthe integration of the retail operations in North America, the integration ofthe Oakley dedicated sales force and marketing within the Luxottica commercialinfrastructure in selected European countries and joint sourcing initiatives,while others are in the implementation or detailed planning phase and areexpected to be executed within the planned timeframe.

 

We expect that thetransaction will result in approximately Euro 100 million per year inoperating synergies within three years of the completion of the merger, drivenby revenue growth and efficiencies.  Weexpect to realize approximately Euro 20 million, Euro 60 million and Euro 100million of operating synergies in 2008, 2009 and 2010, respectively.  We are currently on schedule to realize theinitial estimate of such operating synergies. In addition, we anticipateincurring approximately Euro 30 million in one-time charges related to theacquisition and integration, spread out over a two-year period, beginning in2008.

 

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The primary factors thatmay influence our ability to execute our integration plans and realize theanticipated cost savings include:

 

·       difficulty in integratingthe newly-acquired business and operations in an efficient and effectivemanner;

 

·       inability to achievestrategic objectives, cost savings and other benefits from the acquisition;

 

·       the loss of key employeesof the acquired business;

 

·       the diversion of theattention of senior management from our operations;

 

·       liabilities that were notknown at the time of acquisition or the need to address tax or accountingissues;

 

·       difficultyintegrating Oakley’s human resources systems, operating systems, inventorymanagement systems, and assortment planning systems with our systems; and

 

·       the cultural differencesbetween our organization and Oakley’s organization.

 

**Critical Accounting Policies**

 

The preparation of financial statements in conformity with U.S. GAAPrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities as of the date of the financial statements and the reported amountsof revenues and expenses during the reporting period. Our estimates are basedon historical experience and currently available information. Our significantaccounting policies are discussed in Note 1 to our Consolidated FinancialStatements included in Item 18 of this annual report. The following is adiscussion of what management believes are our most critical accountingpolicies:

 

***Revenue Recognition***

 

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.

 

Revenueis recognized when it is realized or realizable and earned. Revenue isconsidered to be realized or realizable and earned when there is persuasiveevidence of an arrangement, delivery has occurred, the sales price is fixed ordeterminable and collectability is reasonably assured.

 

In some countries, the wholesale and retail divisionsoffer the customer 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 SFAS No. 48, “Revenue RecognitionWhen Right of Return Exists,” are satisfied at the date of sale. We haveestimated and accrued for the amounts to be returned in the subsequent period.This estimate is based on our right of return policies and practices along withhistorical data, sales trends and the timing of returns from the original transactiondate when applicable. Changes to these policies and practices or a change inthe trend of returns could lead to actual returns being different from theamounts estimated and accrued.

 

# Also included in retail division revenues are managed vision carerevenues consisting of (i) insurance revenues which are recognized whenearned over the 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. Our insurance contracts requireus to estimate the potential costs and exposures over the life of the agreementsuch that the amount charged to the customers will cover these costs. Tomitigate the exposure risk, these contracts are usually short-term in nature.However, if we do not accurately estimate the future exposure and risksassociated with these contracts, we may suffer losses as we would not be ableto cover our costs incurred with revenues from the customer.

#  

***Income Taxes***

 

Income taxes are recorded in accordance with SFAS No. 109, *Accounting for Income Taxes*, which requires recognition ofdeferred tax assets and liabilities for the expected future tax consequences ofevents that have been included in our consolidated financial statements or taxreturns. Under this method, deferred tax liabilities and assets are determined 

 

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based on the difference between the consolidated financial statementand tax basis of assets and liabilities using enacted tax rates in effect forthe year in which the differences are expected to reverse. A valuationallowance is recorded for deferred tax assets if it is determined that it ismore likely than not that the asset will not be realized. These estimated taxrates and the deferred tax assets, including valuation allowances placed uponthose deferred tax assets, and liabilities recorded are based on information availableat the time of calculation. This information is subject to change due tosubsequent tax audits performed by different taxing jurisdictions and changesin corporate structure not contemplated at the time of calculation, as well asvarious other factors.

 

As of January 1, 2007, weadopted Financial Accounting Standards Board Interpretation No. 48, *Accounting for Uncertainty in Income Taxes — an interpretation of FASBStatement No. 109* (“FIN 48”). FIN 48 provides that a taxbenefit from an uncertain tax position may be recognized when it is more likelythan not that the position will be sustained upon examination, includingresolutions of any related appeals or litigation processes, based on thetechnical merits. In addition, it provides additional requirements regardingmeasurement, de-recognition, disclosure, interest and penalties andclassification. FIN 48 must be applied to all existing tax positions for allopen tax periods as of the date of adoption (see Note 8 to our ConsolidatedFinancial Statements included in Item 18 of this annual report for a tabularreconciliation of uncertain tax positions). The cumulative effect of adoptionof FIN 48 of Euro 8.1 million was recorded as a reduction to retained earningson the date of adoption.  This informationis subject to change due to subsequent tax audits, lapse of open tax periods aswell as various other factors.

 

***Inventories***

 

Our manufactured inventories were approximately 66.2 percent and66.7 percent of total frame inventory for 2007 and 2006, respectively. Allinventories at December 31, 2007 were valued using the lower of cost, asdetermined under a weighted-average method, or market. Inventories are recordednet of allowances for possible losses. These reserves are calculated using various factors including salesvolume, historical shrink results, changes in market conditions and currenttrends. In addition, production schedules are made on similar factors which, ifnot estimated correctly, could lead to the production of potentially obsoleteinventory. As such, actual results could differ significantly from theestimated amounts.

 

***Goodwill and Other Intangible Assets andImpairment of Long-Lived Assets***

 

In connection with various acquisitions, we have recorded as intangibleassets certain goodwill, trade names and certain other identifiableintangibles. At December 31, 2007, the aggregate carrying value ofintangibles, including goodwill, was approximately Euro 3.9 billion orapproximately 54.6 percent of total assets.

 

As acquisitions are an important element of our growth strategy,valuations of the assets acquired and liabilities assumed on the acquisitiondates could have a significant impact on our future results of operations.  Fair values of those assets and liabilitieson the date of the acquisition could be based on estimates of future cash flowsand operating conditions for which the actual results may varysignificantly.  This may lead to, amongother items, impairment charges and payment of liabilities different thanamounts originally recorded, which could have a material impact on futureoperations.

 

SFAS No. 142, *Goodwill and OtherIntangible Assets* (“SFAS No. 142”), sets forth requirementsrelating to accounting for ongoing intangibles. Under SFAS No. 142,goodwill and intangible assets deemed to have an indefinite life are no longeramortized in the same manner as under the previous standards, but rather aretested for impairment annually and, under certain circumstances, between annualperiods. An impairment charge will be recorded if the fair value of goodwilland other intangible assets is less than the carrying value. The calculation offair value may be based on, among other items, estimated future cash flows ifquoted market prices in active markets are not available. We test our goodwillfor impairment annually as of December 31 of each year and any other timea condition arises that may cause us to believe that an impairment hasoccurred. Since impairment tests use estimates of the impact of future events,actual results may differ and we may be required to record an impairment infuture years.

 

Intangibles subject to amortization based on a finite useful lifecontinue to be amortized on a straight-line basis over their useful lives. Ourlong-lived assets, other than goodwill, are tested for impairment wheneverevents or changes in circumstances indicate that the net carrying amount maynot be recoverable. When such events occur, we measure impairment by comparingthe carrying value of the long-lived asset to the estimated undiscounted futurecash flows expected to result from the use of the assets and their eventualdisposition. If the sum of the expected undiscounted future cash flows wereless than the carrying amount of the assets, we would recognize an impairmentloss, if determined to be necessary. Actual results may differ from our currentestimates.

 

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**Recent Accounting Pronouncements**

 

In March 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 161, *Disclosures about Derivative Instruments and Hedging  Activities–an amendment of FASB Statement No. 133*  (“SFAS 161”). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The guidance in SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. We are currently assessing the impact of SFAS 161.

 

In December 2007, the FASB issued SFAS No. 160, *Noncontrolling Interests in Consolidated Financial Statements**– an**amendment to ARB No. 51*,establishing new accounting and reporting standards for noncontrollinginterests (formally known as “minority interests”) in a subsidiary and, whenapplicable, how to account for the deconsolidation of such subsidiary. Amongits key changes, SFAS 160 provides that noncontrolling interests will berecorded as a component of equity, that the consolidated income statements andstatements of comprehensive income will be adjusted to include thenoncontrolling interest and that certain disclosures are to be updated.  The statement is effective for the fiscalyears and interim periods within those years beginning on or after December 15,2008.  Earlier adoption isprohibited.  We have minority interestsin certain subsidiaries and as such are currently evaluating the effect ofadoption.

 

In December 2007, the FASB issued SFAS No. 141(R), *Business Combinations-Revised* (“SFAS 141(R)”), which revisesSFAS 141. The significant changes include a change from the “cost allocationprocess” to determine the value of assets and liabilities to a full fair valuemeasurement approach. In addition, acquisition-related expenses will beexpensed as incurred and not included in the purchase price allocation, andcontingent liabilities will be separated into two categories - contractual andnon-contractual – and accounted for based on the category into which thecontingency falls. This statement applies prospectively and is effective forbusiness combinations for which the acquisition date is on or after thebeginning of the first annual reporting period beginning after December 15,2008.  Since it will be appliedprospectively, it will not have an effect on the current financial statements;however, since we participate in numerous business combinations annually, webelieve this statement after the adoption date will have a significant effecton future operations.

 

In February 2007, the FASB issued SFAS No. 159,*The Fair Value Option for Financial Assets andFinancial Liabilities—Including an amendment of FASB Statement No. 115*,**which allows us to record at fair value financial assetsand liabilities, with any changes being recorded in earnings.  This can be done on aninstrument-by-instrument basis in most circumstances, is irrevocable afterelection for that instrument and must be applied to the entire instrument.  The adoption of such standard is effectivefor fiscal years beginning after November 15, 2007 and is not expected tohave a material effect on our consolidated financial statements.

 

InSeptember 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*, which establishesa definition of fair value, establishes a framework for measuring fair valueand expands disclosures about fair value measurements. SFAS No. 157 doesnot require new fair value measurements but clarifies the definition, methodand disclosure requirements of previously issued standards that address fairvalue measurements. Additionally, in February 2008, the FASBissued FASB Staff Position (“FSP”) No. 157-2 (“FSP 157-2”), which delaysthe effective date of SFAS No. 157 to fiscal years beginning after November 15,2008 and interim periods with those fiscal years for all nonfinancial assetsand liabilities, except those that are recognized or disclosed at fair value inthe financial statements on a recurring basis (at least annually) until January 1,2009 for calendar year-end entities. We will adopt this Statement except as itapplies to nonfinancial assets and liabilities as noted in FSP 157-2 beginningin fiscal year 2008. We are currently evaluating the effect that the adoptionof SFAS No. 157, as it relates to nonfinancial assets and liabilities,will have on our results of operations, financial position or cash flows.

 

In September 2006, the FASB issued SFAS No. 158,*Employer’s Accounting for Defined Benefit Pensionand Other Postretirement Plans—an amendment of FASB Statements No. 87, 88,106 and 132(R)*,**which requiresus to recognize an asset or liability for the funded status (the differencebetween the fair value of plan assets and benefit obligation, which for definedbenefit pension plans is deemed to be the projected benefit obligation) of itsretirement plans and recognize changes in the funded status annually throughother comprehensive income (loss).  Thestatement also changes the date in which the funded status can be measured(eliminating the 90-day window) with limited exceptions. The effective date ofthe recognition of the funded status is for years ending after December 15,2006.  See Note 10 to our ConsolidatedFinancial Statements included in Item 18 of this annual report for theeffect of adoption. The effective date for the change in acceptable measurementdate is for fiscal years ending after December 15, 2008. We are currentlyevaluating the impact of changing the measurement date on our consolidatedfinancial statements.

 

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**Results of Operations**

 

The following table sets forth, for the periods indicated, thepercentage of net sales represented by certain items included in our statementsof consolidated income:

 
| ** **                                                 | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                 | ** ** | **2007**                                   | ** ** | **2006(1)** | ** ** | **2005(1)** | ** ** |
| Net Sales                                                  |       | 100.0                                      | %          | 100.0 | % | 100.0 | % |
| Cost of Sales                                              |       | 31.7                                       |       | 31.8 |   | 33.2 |   |
| Gross Profit                                               |       | 68.3                                       |       | 68.2 |   | 66.8 |   |
| Operating Expenses:                                        |       |                                       |       |   |   |   |   |
| Selling and Advertising                                    |       | 41.7                                       |       | 41.7 |   | 42.5 |   |
| General and Administrative                                 |       | 9.8                                        |       | 10.4 |   | 10.3 |   |
| Total                                                      |       | 51.5                                       |       | 52.0 |   | 52.7 |   |
| Income From Operations                                     |       | 16.8                                       |       | 16.2 |   | 14.1 |   |
| Other Income (Expense)—Net                            |       | (1.1                                       | )          | (1.7 | ) | (1.0 | ) |
| Provision For Income Taxes                                 |       | (5.5                                       | )          | (5.1 | ) | (4.8 | ) |
| Minority Interests in Income of  Consolidated Subsidiaries |       | (0.3                                       | )          | (0.2 | ) | (0.2 | ) |
| Net Income From Continuing Operations                      |       | 9.9                                        |       | 9.2 |   | 8.0 |   |
| Discontinued Operations                                    |       | 0.0                                        |       | (0.1 | ) | 0.3 |   |
| Net Income                                                 |       | 9.9                                        |       | 9.1 |   | 8.3 |   |

 

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(1)            Resultsof Things Remembered, our former specialty gift business, which was sold in September 2006,are reclassified as discontinued operations and are not included in resultsfrom continuing operations for 2006 and 2005.

 

For additional financial information by operating segment andgeographic region, see Note 13 to our Consolidated Financial Statementsincluded in Item 18 of this annual report.

 

**Comparison of the fiscal year ended December 31, 2007 to thefiscal year ended December 31, 2006**

 

***Net Sales****.*  Net sales increased by Euro 289.9 million, or 6.2 percent, toEuro 4,966.1 million during 2007 from Euro 4,676.2 million in 2006. Of suchincrease, Euro 87.0 million isattributable to the inclusion of net sales of Oakley for the period from November 14,2007, which was the date of the closing of the Oakley acquisition (“acquisitiondate”), until the end of the year. The remaining increase in net salesprimarily resulted from the strong performance of the manufacturing andwholesale segment, which was partially offset by Euro 36.7 million in negative currencyfluctuations between the Euro, which is our reporting currency, and othercurrencies in which we conduct our business, particularly the U.S. dollar.

 

Netsales in the retail segment decreased by Euro 31.9 million, or 1.0 percent, toEuro 3,262.3 million in 2007 from Euro 3,294.2 million in 2006. The decrease innet sales for the period is primarily attributable to the strengthening of theEuro, mainly versus the U.S. dollar, which decreased net sales for the periodby Euro 250.1 million. The net decrease in sales created by the foreigncurrency fluctuations offset the growth in net sales in 2007 mainly due to thefollowing: (i) a Euro 28.5 million increase attributable to the inclusionof Oakley’s net sales related to its retail operations for the period from theacquisition date; (ii) a 0.2 percent increase in same-store sales; (iii) theaddition of Euro 15.4 million in sales from the approximately 70 new Canadianretail stores which were acquired in June 2006, and therefore owned foronly a portion of 2006; (iv) the addition of Euro 44.5 million in salesfrom approximately 90 new U.S. retail stores which were acquired in February 2007;and (v) a Euro 62.9 million increase in net sales from the “Asia-Pacific”retail business, of which Euro 15.8 million in net sales was due to the newlyacquired stores in China and the remaining amount was mainly attributable tosales growth in Asia-Pacific.

 

Netsales to third parties in the manufacturing and wholesale segment increased byEuro 321.8 million, or 23.3 percent, to Euro 1,703.8 million in 2007 from Euro1,382.0 million in 2006. Of such increase, Euro 58.5 million is attributable tothe inclusion of Oakley net sales for the period from the acquisition date, andthe remaining increase was mainly attributable to increased sales of ourRay-Ban brand as well as the continued success of sales of branded products ofour designer lines, such as Prada, Dolce & Gabbana, Versace andBvlgari, and the launch of new products from our license agreements withBurberry and Ralph Lauren. These increases occurred primarily in the Europeanand North American markets, which, together, accounted for approximately 78.1percent and 78.5 percent of our net sales to third parties in our manufacturingand wholesale segment in 2007 and 2006, respectively. This increase waspartially offset by the strengthening of the Euro, mainly versus the U.S.dollar, which decreased net sales by Euro 46.5 million.

 

During 2007, net sales inthe retail segment accounted for approximately 65.7 percent of total net sales,as compared to approximately 70.4 percent of net sales in 2006. This decreasein retail net sales as a percentage of total net sales is primarily 

 

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attributable to a significant increase in net sales tothird parties in our manufacturing and wholesale segment, which grew by 23.3percent in 2007, and to negative currency effects, which primarily affected netsales in the retail segment, which are primarily concentrated in North America,Australia and China, where the Euro is not the functional currency.

 

On a geographic basis,which includes Oakley from the date of acquisition, combined retail andmanufacturing and wholesale operations in the United States and Canadacomprised 61.5 percent, or Euro 3,053.6 million, of total net sales in 2007,which decreased as compared to net sales in the United States and Canada ofEuro 3,076.4 million in 2006, mainly due to the negative impact of thestrengthening of the Euro compared to the U.S. dollar. Net sales for operationsin Asia-Pacific comprised 11.8 percent of total net sales and totaled Euro584.2 million in net sales during 2007, as compared to Euro 498.4 million in2006, which represented a 17.2 percent increase in net sales, mainly due to thenewly acquired stores in China. Net sales for the rest of the world comprised26.7 percent of total net sales and accounted for Euro 1,328.3 million of netsales during 2007, which represented an increase in net sales of Euro 226.9million or 20.6 percent as compared to 2006. The increase in net sales for therest of the world was primarily attributable to strong performance in almostall major European markets.

 

During 2007, net sales tothird parties in our manufacturing and wholesale segment in Europe comprised59.9 percent of our total net sales in this segment and experienced an increaseof 20.2 percent from Euro 849.8 million in 2006 to Euro 1,021.1 million in2007. Net sales to third parties in our manufacturing and wholesale segment inthe United States and Canada comprised 18.1 percent of our total net sales inthis segment in 2007 and experienced an increase in its local currency of 44.6percent from U.S.$295.5 million in 2006 to U.S.$427.2 million in 2007. In Euro,net sales in the United States and Canada increased by 31.3 percent because thelocal currency increase was offset by the strengthening of the Euro compared tothe U.S. dollar. Net sales to third parties in our manufacturing and wholesalesegment in the rest of the world comprised 21.9 percent of our total net salesin this segment and experienced an increase of 25.9 percent from Euro 296.8million in 2006 to Euro 373.5 million in 2007.

 

During 2007, net sales inthe retail segment in the United States and Canada comprised 84.1 percent ofour total net sales in this segment. In Euro, net sales in the United Statesand Canada decreased by 3.4 percent because the local currency increase wasoffset by the strengthening of the Euro compared to the U.S. dollar. In U.S.dollars, retail net sales in the United States and Canada experienced anincrease of 5.5 percent from U.S.$3,566.4 million in 2006 to U.S.$3,763.7million in 2007. Net sales in the retail segment in the rest of the worldcomprised 15.9 percent of our total net sales in this segment and experiencedan increase of 14.3 percent from Euro 453.2 million in 2006 to Euro 517.9million in 2007.

 

***Costof Sales.*** Cost of sales increased by Euro 87.9 million,or 5.9 percent, to Euro 1,575.6 million in 2007, from Euro 1,487.7 million in2006, primarily attributable to our overall sales growth and the inclusion of Oakley’s cost of sales for the period fromthe acquisition date of Euro 37.6 million. As a percentage of net sales, cost of sales decreased to 31.7percent in 2007, as compared to 31.8 percent in 2006. In 2007, excluding the frames manufactured at our acquired Oakleyfacilities, the average number of frames produced daily in our facilitiesincreased to approximately 175,800, as compared to 154,900 in 2006, which wasattributable to increased production in both the Italian and Chinesemanufacturing facilities.

 

***GrossProfit.*** Our gross profit increased by Euro 202.0 million,or 6.3 percent, to Euro 3,390.4 million in 2007 fromEuro 3,188.5 million in 2006, of which Euro49.3 million is attributable to the inclusion of Oakley’s gross profit for theperiod from the acquisition date. Asa percentage of net sales, gross profit increased to 68.3 percent in2007 from 68.2 percent in 2006.

 

***OperatingExpenses.*****Total operatingexpenses increased by Euro 124.7 million, or 5.1 percent, to Euro 2,557.1million in 2007 from Euro 2,432.5 million in 2006, of which Euro 45.6 million is attributable to theinclusion of Oakley’s operating expenses for the period from the acquisitiondate.******As a percentage of netsales, operating expenses decreased to 51.5 percent in 2007 from 52.0 percentin 2006 primarily due to the maintenance of strong cost controls in ourmanufacturing and wholesale segment.

 

Selling and advertisingexpenses (including royalty expenses) increased by Euro 120.8 million, or 6.2percent, to Euro 2,069.3 million in 2007 from Euro 1,948.5 million in 2006,primarily due to increases in sales, for which we were required to payadditional commissions to sales associates and royalty expenses to designers ofour licensed brands of Euro 65.7 million and Euro 25.1 million, respectively. Euro 28.7 million of the increase isattributable to the inclusion of Oakley’s selling and advertisingexpenses (including royalty expenses)for the period from the acquisition date. As a percentage of net sales,selling and advertising expenses remained flat at 41.7 percent both in 2007 andin 2006.

 

General andadministrative expenses, including intangible asset amortization, increased byEuro 3.8 million, or 0.8 percent, to Euro 487.8 million in 2007 from Euro 484.0million in 2006, primarily due to an increase of Euro 16.9 million attributable to 

 

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the inclusion of Oakley generaland administrative expenses, including intangible asset amortization, for the period from the acquisition date andwas partially offset by a one time gain of Euro 20.0 million due to a realestate sale in Milan, Italy in May. As a percentage of net sales,general and administrative expenses decreasedto 9.8 percent in 2007 from 10.4 percent in 2006.

 

***Incomefrom Operations.*****For thereasons described above, income fromoperations in 2007 increased by Euro 77.3 million, or 10.2 percent, to Euro833.3 million from Euro 756.0 million in 2006, of which Euro 3.7 million is attributable to theinclusion of Oakley’s income of operations for the period from the acquisition date. As a percentage of netsales, income from operations increased to 16.8 percent in 2007 from 16.2 percentin 2006. Income from operations without the one-time gain from the real estatesale described in the previous paragraph would have been equal to Euro 813.3million, or 16.4 percent of net sales, with an increase of Euro 57.3 million, or 7.6 percent, ascompared to 2006.

 

***OtherIncome (Expense) – Net.*** Other income (expense) - net was Euro(52.6) million in 2007 as compared to Euro (77.8) million in 2006, of whichEuro (10.9) million is attributable tothe inclusion of Oakley’s other income (expense) - net for the period from the acquisition date.This decrease in net expense is mainly attributable to a net realized andunrealized foreign exchange transaction and remeasurement gain in 2007 ascompared to a loss in 2006. Net interest expense was Euro 72.4 million in 2007as compared to Euro 60.8 million in 2006, attributable to an increase inoutstanding indebtedness.

 

***NetIncome from Continuing Operations***. Income before taxesincreased by Euro 102.5 million, or 15.1 percent, to Euro 780.7 million in 2007from Euro 678.2 million in 2006, despite the inclusion of Oakley’s income before taxes for the periodfrom the acquisition date of Euro (7.2) million. We expect Oakley infuture periods to have a positive impact on net income from continuingoperations. As a percentage ofnet sales, income before taxes increased to 15.7 percent in 2007 from 14.5percent in 2006. Minority interests increased to Euro 15.0 million in 2007 fromEuro 8.7 million in 2006. Our effective tax rate was 35.0 percent in 2007, ascompared to 35.2 percent in 2006.

 

Net income fromcontinuing operations increased by Euro 61.5 million, or 14.3 percent, to Euro492.2 million in 2007 from Euro 430.7 million in 2006, despite the inclusion ofOakley’s net income for the period fromthe acquisition date of Euro (4.7) million. Net income from continuingoperations as a percentage of net sales increased to 9.9 percent in 2007 from9.2 percent in 2006.

 

Basic earnings per sharefrom continuing operations were Euro 1.08 in 2007 as compared to Euro 0.95 in2006. Diluted earnings per share from continuing operations were Euro 1.07 in2007 as compared to Euro 0.94 in 2006.

 

***DiscontinuedOperations***. Discontinued operations resulted in a loss in2006 mainly due to the seasonal nature of the operations of the discontinuedThings Remembered business, in which substantially all operational profits wererealized during the second and fourth quarters. The operations were sold beforethe fourth quarter of 2006.

 

***NetIncome.*** Net income increased by Euro 67.9 million, or16.0 percent, to Euro 492.2 million in 2007 from Euro 424.3 million in 2006. Net income as a percentage of netsales increased to 9.9 percent in 2007 from 9.1 percent in 2006.

 

Basic earnings per share were Euro 1.08 in 2007as compared to Euro 0.94 in 2006. Diluted earnings per share were Euro 1.07 in2007 as compared to Euro 0.93 in 2006.

 

**Comparison of the fiscal year ended December 31,2006 to the fiscal year ended December 31, 2005**

 

***Net Sales*.**  Net sales increased 13.1 percent to Euro4,676.2 million during 2006 as compared to Euro 4,134.3 million in 2005. Theincreases in our net sales primarily resulted from the strong performance inboth the retail and the manufacturing and wholesale segments, which waspartially offset by approximately Euro 34.9 million (equivalent to 0.9 percent)in negative currency fluctuations between the Euro, which is our reportingcurrency, and other currencies in which we conduct our business, including theU.S. dollar and the Australian dollar. After the effect of currency fluctuations, the manufacturing andwholesale segment had an increase in net sales to third parties ofapproximately Euro 307.0 and the retail segment had an increase in net sales tothird parties of approximately Euro 234.9 million.  Currency fluctuations offset the net salesfor the manufacturing and wholesale segment by approximately Euro 1.9 millionand by approximately Euro 33.0 million for the retail segment.

 

Netsales in the retail segment increased by 7.6 percent to Euro 3,294.2 millionfor 2006 from Euro 3,061.7 million in 2005. Euro 208.1 million of this increasewas attributable to the positive performance of the North American retailoperations primarily due to: (i) a 7.1 percent increase in same-storesales; and (ii) the addition of U.S.$26.7 million in sales from theapproximately 70 new Canadian retail outlets which were acquired in June 2006,which was partially offset by a 

 

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negative exchange rateeffect of Euro 25.0 million. An additional Euro 20.2 million of the increasewas attributable to an increase in net sales in the Asia-Pacific retailbusiness, primarily due to Euro 11.3 million in additional net salescontributed by the newly acquired stores in China.

 

Netsales to third parties in the manufacturing and wholesale segment increased by28.6 percent to Euro 1,382.0 million for 2006 as compared to Euro 1,075.0million in 2005. This increase was mainly attributable to increased sales ofour Ray-Ban brand as well as the continued success of sales of branded productsof our designer lines, such as Prada and Bvlgari, and the continued developmentof new branded products such as Dolce & Gabbana (which we begandistributing in October 2005). These increases occurred primarily in theEuropean and North American markets, which account for approximately 78.5percent of our net sales to third parties in our manufacturing and wholesalesegment.

 

On a geographic basis, combined retail andmanufacturing and wholesale operations in the United States and Canada resultedin net sales of Euro 3,076.4 million in 2006, comprising 65.8 percent of totalnet sales and an increase of Euro 264.5 million or 9.4 percent as compared to2005. Net sales for operations in “Asia-Pacific” were Euro 498.4 million during2006 as compared to Euro 461.2 million in 2005, which represented an 8.1percent increase in net sales. Net sales for the rest of the world accountedfor the remaining Euro 1,101.4 million of net sales during 2006, whichrepresented a 27.9 percent increase in net sales as compared to 2005. Theincrease in the rest of the world was primarily attributable to strongperformance in almost all major European markets that led to an increase insales of Euro 190.4 million in 2006 as compared to 2005.

 

During2006, net sales in the retail segment accounted for approximately 70.4 percentof total net sales, as compared to approximately 74.0 percent of net sales in2005. This decrease in retail net sales as a percentage of total net sales isattributable to a significant increase in net sales to third parties in ourmanufacturing and wholesale segment, which grew by 28.6 percent in 2006.

 

***Costof Sales.*** Cost of sales increased by 8.3 percent to Euro1,487.7 million in 2006, from Euro 1,373.1 million in 2005, primarilyattributable to our overall sales growth. As a percentage of net sales, cost ofsales decreased to 31.8 percent from 33.2 percent.  This decrease as a percentage of net saleswas primarily attributable to thechange in sales mix resulting from increased sales of our Ray-Ban brandand sales of branded products of our designer lines, Prada, Bvlgari and Dolce &Gabbana, which carry a higher gross margin than other lines, increasedefficiency in our manufacturing facilities leveraging the fixed cost structureto produce more frames, and****increased production tocover the additional demand for our products**.** In 2006, the average number of framesproduced daily in Luxottica’s facilities was approximately 154,900 as comparedto 115,000 for the same period of 2005, attributable to increased production inthe Tristar facility, as well as improved productivity in our Italianfactories.

 

***GrossProfit.*** For thereasons described above, gross profit increased by 15.5 percent to Euro 3,188.5million in 2006 from Euro 2,761.2 million in 2005. As a percentage of netsales, gross profit increased to 68.2 percent in 2006 from 66.8 percent in2005, primarily due to the increase in gross profit of the manufacturing andwholesale segment**.**

 

***Operating Expenses.*****Total operating expenses increased by 11.6 percent to Euro2,432.5 million in 2006 from Euro 2,179.8 million in 2005. As a percentage ofnet sales, operating expenses decreased to 52.0 percent in 2006 from 52.7percent in 2005 primarily attributable to the increase in net sales whilemaintaining strong cost controls in both our manufacturing and wholesale andour retail segments.

 

Selling and advertising expenses (includingroyalty expenses) increased by 11.0 percent to Euro 1,948.5 million in 2006,from Euro 1,755.5 million in 2005, primarily due to increased net sales. As apercentage of net sales, selling and advertising expenses decreased to 41.7percent in 2006 from 42.5 percent in 2005, primarily attributable to a reducedcommissions percentage relative to sales earned by the wholesale sales forceand to lower store costs in the North American retail business leveraging thefixed cost store structure by an increase in same store sales. As we integratethe newly acquired stores in both Canada and China, we expect to furtherrealize a reduction in selling expenses as a percentage of sales.

 

General and administrative expenses,including intangible asset amortization, increased by 14.1 percent to Euro484.0 million in 2006 from Euro 424.3 million in 2005. This includesapproximately Euro 48.0 million of expense relating to stock options expensedin accordance with SFAS No. 123(R), which we adopted on January 1,2006, as compared to Euro 22.7 million in 2005 (calculated according to APB25).  As a percentage of net sales,general and administrative expenses increased to 10.4 percent in 2006 from 10.3percent in 2005.

 

***Income from Operations.*****For the reasons described above, income from operations for2006 increased by 30.0 percent to Euro 756.0 million from Euro 581.4 million in2005.  As a percentage of net sales,income from operations increased to 16.2 percent in 2006 from 14.1 percent in2005.

 

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Operatingmargin, which is income from operations divided by net sales, in themanufacturing and wholesale segment increased to 26.0 percent in 2006 from 23.2percent in 2005. This increase in operating margin is attributable to lowersales commissions as a percentage of sales and higher gross profit due to amore favorable brand mix, partially offset by higher advertising expenses(including royalty expenses).

 

Operating margin in the retail segmentincreased to 13.1 percent in 2006 from 11.6 percent in 2005.  This increase in operating margin isattributable to lower store costs in the North American retail business, aswell as increased net sales in the North American retail business due to thefixed cost store structure.

 

***Other Income (Expense)-Net.*****Other income (expense)-netwas Euro (77.8) million in 2006 as compared to Euro (42.1) million in 2005.This increase in other income (expense)-net is mainly attributable to netrealized and unrealized foreign exchange transaction and remeasurement lossesin 2006 as compared to gains on similar items in 2005. Net interest expense wasEuro 60.8 million in 2006 as compared to Euro 60.5 million in 2005 attributableto an increase in interest rates which offset a decrease in outstandingindebtedness.

 

***Net Income from ContinuingOperations*.** Income before taxes increased by 25.7 percent to Euro 678.2 million in2006 from Euro 539.3 million in 2005. As a percentage of net sales, incomebefore taxes increased to 14.5 percent in 2006 from 13.0 percent in 2005.Minority interest decreased to Euro 8.7 million in 2006 from Euro 9.3 millionin 2005.  The Company’s effective taxrate was 35.2 percent in 2006, as compared to 37.0 percent in 2005 due to areduction in taxes in foreign jurisdictions. The most significant portion of the benefit is due to the adoption inAustralia of a consolidated tax regime, which resulted in an increase in thetax basis of certain assets. We have completed our evaluation of the impact ofadoption of FIN 48, *Accounting for Uncertaintyin Income Taxes—an interpretation of FASB Statement No. 109*.  See “—Income Taxes” above for a more detaileddiscussion.

 

Net income from continuingoperations increased by 30.2 percent to Euro 430.7 million in 2006 from Euro330.8 million in 2005. Net income from continuing operations as a percentage ofnet sales increased to 9.2 percent in 2006 from 8.0 percent in 2005.

 

Basic earnings per share from continuingoperations for 2006 were Euro 0.95 as compared to Euro 0.73 in 2005. Dilutedearnings per share from continuing operations for 2006 were Euro 0.94 ascompared to Euro 0.73 in 2005.

 

***Discontinued Operations.***Discontinued operations resulted in income in 2005 and a loss in 2006 mainlyattributable to the seasonal nature of the operations of the Things Remembereddiscontinued business, which results in substantially all operational profitsbeing realized during the fourth quarter. The operations were sold before thefourth quarter of 2006. In addition, the sale resulted in an accrual recordedby the Company for a potential tax liability.

 

***Net Income******.***  Net income increased by24.0 percent to Euro 424.3 million in 2006 from Euro 342.3 million in 2005. Netincome as a percentage of net sales increased to 9.1 percent in 2006 from 8.3percent in 2005.

 

Basic earnings per share for 2006 were Euro0.94 as compared to Euro 0.76 in 2005. Diluted earnings per share for 2006 wereEuro 0.93 as compared to Euro 0.76 in 2005.

 

**Taxes**

** **

Our effective tax rates forthe fiscal years ended December 31, 2007, 2006 and 2005 were approximately35.0 percent, 35.2 percent and 37.0 percent, respectively. For fiscal year2007, we received a tax benefit of 5.3 percent related to the businessreorganization of certain Italian companies resulting in the release ofdeferred tax liabilities, which was partially offset by an increase of 2.1 percentin our 2007 tax liability due to the change in the Italian statutory tax rates.For fiscal year 2006, the taxrate included the results from the adoption of a change in the tax law inAustralia, which introduced a tax consolidation regime for wholly-owned groupentities. The tax consolidation rules effectively pushed down the cost ofacquiring an entity (or group of entities) to the assets that the entity (orgroup) owns. This results in the resetting of the cost basis of the assets fortax purposes and, for OPSM, in the related increases in fixed assets andintangibles as of the date of tax consolidation in December 2006, whenOPSM filed its consolidated 2005 tax return, providing a one-time permanentbenefit to the tax provision. For fiscal year 2005, we received a net permanentbenefit caused by our compliance with an Italian law that allows for the stepup in tax basis of certain intangible assets, which benefit offset theaggregate effect of different rates in foreign jurisdictions.

 

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**Liquidityand Capital Resources**

 

***CashFlows***

*** ***

*Operating Activities**.*  The Company’s cashprovided by operating activities was Euro 342.8 million, Euro 603.3 million andEuro 605.7 million for 2007, 2006 and 2005, respectively. The Euro 260.5million decrease in 2007 as compared to 2006 was primarily attributable toadvance payments from us of U.S.$199.0 million to a certain designer for futurecontracted minimum royalties in January 2007 and to payments for incometaxes which in 2007 generated a cash out-flow of approximately Euro 92.1million in 2007. The Euro 2.4 million decrease in 2006 as compared to 2005 wasprimarily attributable to increased net income, partially offset by advancepayments we made to a certain designer for future contracted minimum royalties,increases in accounts receivable and inventory and tax payments to comply withan Italian tax law allowing for the step-up in tax basis of certain intangibleassets.

 

Depreciationand amortization were Euro 232.8 million in 2007 as compared to Euro 220.8million in 2006. This increase was primarily attributable to increased fixedassets due to the acquisition of new stores that occurred in 2007, newinvestments (mainly leasehold improvements) in the wholesale segment and theacquisition of Oakley, which accounted for a Euro 7.7 million increase from theacquisition date.

 

Deferred taxeswere Euro 45.0 million in 2007 as compared to Euro 72.5 million in 2006. Thisdecrease was primarily attributable to the reorganization of certain Italiansubsidiaries which resulted in the release of deferred tax liabilities,partially offset by the increase in our 2007 tax liability due to the change inthe Italian statutory tax rates, which resulted in the reduction of deferredtax assets. Non-cash stock-based compensation expenses were Euro 42.1 millionas compared to Euro 48.0 million in 2006. The decrease was primarilyattributable to the completion in 2006 of the vesting period of the 2004performance plan (expenses associated with this plan were none in 2007 and Euro24.5 million in 2006), partially offset by the recognition of a full year ofexpense for the two 2006 performance plans granted in the second half of 2006(expenses associated with these plans were Euro 34.1 million in 2007 and Euro17.6 million in 2006). The lower increase in accounts receivable of Euro 55.7million in 2007 as compared to Euro 83.1 million in 2006 was mainly due to theimprovement of DSO (days of sale outstanding) in the wholesale segment. Theinventory increase of Euro 41.9 million in 2007 (Euro 27.7 million in 2006) wasmainly due to the growth in the inventory level caused by the slowdown in netsales experienced in the last months of the year. The decrease in accountspayable by Euro 31.0 million in 2007 was mainly caused by an improvement in thepayment terms negotiated in 2006 with some vendors which accounted for the 2006increase in accounts payable. Accrued expenses and other were Euro 9.4 millionin 2007 as compared to Euro 25.2 million in 2006. The decrease was mainly dueto the discontinuance in 2006 of the extended warranty soldseparately by the retail division in North America. The decrease in income taxpayable of Euro 92.1 million (increase of Euro 5.9 million in 2006) wasprimarily attributable to the timing of tax payments executed in 2007 ascompared to 2006.

 

*Investing Activities.* The Company’s cash used in investing activities was Euro 1,800.0million, Euro 263.7 million and Euro 166.4 million in 2007, 2006 and 2005,respectively. The increase of Euro 1,536.3 million in 2007 as compared to 2006was primarily attributable to the acquisition of Oakley which occurred in November 2007,for a total purchase price of US $2.1 billion, partially offset by the sale ofThings Remembered, which occurred in 2006 and which generated a cash inflow ofapproximately Euro 128 million in 2006. Total 2007 acquisitions, net of theacquired cash and cash equivalents, generated a cash outflow of Euro 1,491.1million and was mainly due to the Oakley acquisition, as well as theacquisition of the D.O.C Optics optical retail business for approximately Euro83.7 million (U.S.$110.2 million) in cash, the acquisition of two specialty sun chains in South Africa, forapproximately Euro 10 million and some other minor acquisitions in the retailsegment in Australia and New Zealand. Total 2006 acquisitions, net ofacquired cash and cash equivalents, generated a cash outflow of Euro 134.1million, mainly due to the acquisition of Shoppers Optical, a Canadian-basedoptical chain, for approximately Euro 48.7 million, the acquisition of BeijingXueliang Optical Technology Co. Ltd. for approximately Euro 17.0 million, theacquisition of Ming Long Optical for approximately Euro 29.0 million and theacquisition of Modern Sight Optics for approximately Euro 14.0 million.

 

Our capitalexpenditures were Euro 334.8 million in 2007 as compared to Euro 272.2 millionin 2006. The increase was primarily attributable to the investment inmanufacturing facilities for the wholesale division and the opening, remodelingand relocation of stores in the retail division. Capital expenditures were Euro49.7 million in the three-month period ended March 31, 2008. We believethat 2008 annual capital expenditures will be approximately Euro 300.0 million,in addition to investments for any acquisitions. We will pay for these future capitalexpenditures with our currently available borrowing capacity and availablecash.

 

Cash received from disposals of property,plant and equipment was Euro 29.7 million in 2007 as compared to Euro 21.6million in 2006. Cash provided by the disposal of fixed assets is primarilyattributable to the sale of a building located in Milan in May 2007.Acquisitions of intangible assets resulted in a use of cash of Euro 3.9 millionin 2007 compared to Euro 1.1 million in 2006.

 

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*FinancingActivities.* The Company’s cash generated from/(used in) financingactivities was Euro 1,427.2 million, Euro (349.9) million and Euro (350.0)million in 2007, 2006 and 2005, respectively. Cash generated from financing activities in 2007 consistedprimarily of the proceeds of Euro 2,145.4 million from debt incurred for theacquisition of Oakley and for long-term repayments of maturing debt. Cash usedin financing activities in 2006 consisted primarily of the proceeds of Euro84.1 million from long term debt which were used to partially repay long-termmaturing debt.  Cash used in financing activities for 2005 consistedprimarily of net long-term repayments on maturing debt of approximately Euro254.4 million. Dividends paid to our shareholders in 2007, 2006 and 2005 wereEuro 191.1 million, Euro 131.4 million and Euro 103.5 million, respectively.

 

***Our Indebtedness***

 

We manage our financing requirements bymaintaining an adequate level of liquidity and committed and uncommittedfinancing facilities.  To this end, wetake a series of actions to ensure compliance with these financingrequirements.  In particular:

 

·                          Ourtreasury department monitors our cash flow forecast in conjunction with ourliquidity and financing credit lines;

 

·                          Weutilize debt instruments and other credit lines in order to obtain funding forour operations;

 

·                          Wemaintain adequate access to liquidity in our bank accounts;

 

·                          Wemonitor our liquidity risk in order to avoid unacceptable concentrations ofsuch risk.

 

Our debt agreements contain certain covenants, including covenants thatrestrict our ability to incur additional indebtedness. We do not currentlyexpect to require any additional financing that would require us to obtainconsents or waivers of any existing restrictions on additional indebtedness setforth in our debt agreements.

 

Our credit facilities contain certain financial covenants includingratios of Net Financial Position (“NFP”) (as defined in the agreements) toshareholders’ equity, NFP to EBITDA (earnings before interest, taxes anddepreciation as defined in the agreements) and EBITDA to net financial charges(as defined in the agreements).  As of March 31,2008, we were in compliance with these financial covenants and we expect tocontinue to be in compliance in the foreseeable future periods. We believe thatafter giving effect to any additional financing that we may incur, suchrestrictions would not materially affect our compliance with these covenants,our ability to incur the additional debt or our future business operations.

 

The Company has relied primarily upon internally generated funds, tradecredit and bank borrowings to finance its operations and expansion.

 

*Bank Overdrafts*

 

Bank overdrafts representnegative cash balances held in banks and amounts borrowed under variousunsecured short-term lines of credit obtained by the Company and certain of itssubsidiaries through local financial institutions. These facilities are usuallyshort-term in nature or contain evergreen clauses with a cancellation noticeperiod. Certain of these subsidiaries’ agreements require a guaranty fromLuxottica Group S.p.A. Interest rates on these lines vary based on the countryof borrowing, among other factors. The Company uses these short-term lines ofcredit to satisfy its short-term cash needs.

 

Group total indebtednesswas Euro 2,871.8 million as of December 31, 2007. Available additionalborrowings under credit facilities as of such date were Euro 474.0 million.

 

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

 

OnSeptember 3, 2003, Luxottica U.S. Holdings Corp. (“U.S. Holdings”) closeda private placement of U.S.$300 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 each of the Series B and Series C Notes accrues at 4.45percent per 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 required annual prepayments beginning on September 3,2006 through the applicable dates of maturity. The Notes are guaranteed on asenior unsecured basis by the Company and Luxottica S.r.l., the Company’swholly-owned subsidiary. The Notes can be prepaid at U.S. Holdings’s optionunder certain circumstances. The proceeds from the Notes were used for therepayment of outstanding debt and for other working capital needs. The Notescontain certain financial and operating covenants. As of December 31,2007, the Company was in compliance with all of its applicable covenants,including calculations of financial covenants when applicable.

 

Inconnection with the issuance of the Notes, U.S. Holdings entered into threeinterest rate swap agreements with Deutsche Bank AG (collectively, the “DB Swap”).The three separate agreements’ notional amounts and interest payment datescoincide with those of the Notes. The DB Swap exchanged the fixed rate of theNotes for a floating rate of the six-month LIBOR rate plus 0.66 percent for theSeries A Notes and the six-month LIBOR rate plus 0.73 percent for the Series Band Series C Notes. U.S. Holdings terminated all three agreementscomprising the DB Swap in December 2005.

 

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*The Euro 200 Million CreditFacility with Banca Intesa and Related Interest Rate Swaps*

 

In September 2003, the Company enteredinto a credit facility with Banca Intesa S.p.A. of Euro 200 million. The creditfacility included a Euro 150 million term loan, which required 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 (5.315 percent on December 31,2007). The revolving loan provides borrowing availability of up to Euro 50million; amounts borrowed under the revolving portion can be borrowed andrepaid until final maturity. As of December 31, 2007, 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 (4.988 percent on December 31,2007). The final maturity of the credit facility is September 30, 2008.The Company can select interest periods of one, two or three months. The creditfacility contains certain financial and operating covenants. As of March 31,2008, the Company was in compliance with all of its applicable covenants,including calculations of financial covenants when applicable. Under thiscredit facility, Euro 85 million was outstanding as of December 31, 2007.

 

In June 2005, the Company entered intofour interest rate swap transactions with various banks with an aggregateinitial notional amount of Euro 120 million, which began to decrease by Euro 30million every six months starting on March 30, 2007 (“Intesa OPSM Swaps”).These swaps expire on September 30, 2008. The Intesa OPSM Swaps wereentered into as a cash flow hedge on a portion of the Banca Intesa Euro 200million unsecured credit facility discussed above. The Intesa OPSM Swapsexchange the floating rate of Euribor for an average fixed rate of 2.45 percentper annum.

 

*The Amended Euro 1,130 Million and U.S.$325Million Credit Facility and Related Interest Rate Swaps*

 

On June 3, 2004, the Company and U.S. Holdings entered into acredit facility with a group of banks providing for loans in the aggregateprincipal amount of Euro 740 million and U.S.$325 million. The facilityconsists of three tranches (Tranche A, Tranche B and Tranche C). On March 10,2006, this agreement was amended to increase the available Tranche C borrowingsto Euro 725 million, decrease the interest margin and define a new maturitydate of five years from the date of the amendment for Tranche B and Tranche C.Tranche A is a Euro 405 million amortizing term loan requiring repayment ofnine equal 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 U.S.$325 million which was drawn upon on October 1, 2004 by U.S.Holdings to finance the purchase price for the acquisition of ColeNational.  Amounts borrowed under TrancheB will mature in March 2012. Tranche C is a revolving credit facility ofEuro 725 million-equivalent multi-currency (Euro/U.S. dollar). Amounts borrowedunder Tranche C may be repaid and reborrowed with all outstanding balancesmaturing in March 2012. On December 31, 2007, U.S.$645 million (Euro441.7 million) had been drawn from Tranche C by U.S. Holdings and U.S.$185million (Euro 125.7 million) by Luxottica Group S.p.A. 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 accruing onU.S. dollar-denominated loans based on the corresponding LIBOR rate, both plusa margin between 0.20 percent and 0.40 percent based on the “Net Debt/EBITDA”ratio, as defined in the agreement. The interest rate on December 31, 2007was 4.976 percent for Tranche A, 5.449 percent for Tranche B and 5.239 percentfor Tranche C amounts borrowed in U.S. dollars. This credit facility containscertain financial and operating covenants. The Company was in compliance withthose covenants as of March 31, 2008. Under this credit facility, Euro1,059.9 million was borrowed as of December 31, 2007.  In February 2008, we exercised an optionincluded in the amendment to extend the maturity date of Tranches B and C to March 2013.  For additional information, see Note 9to our Consolidated Financial Statements included in Item 18 of thisannual report.

 

In June 2005, theCompany entered into nine interest rate swap transactions with an aggregateinitial notional amount of Euro 405 million with various banks, which began todecrease by Euro 45 million every three months starting on June 3, 2007 (“ClubDeal Swaps”). These swaps expire on June 3, 2009. The Club Deal Swaps wereentered into as a cash flow hedge on Tranche A of the credit facility discussedabove. The Club Deal Swaps exchange the floating rate of Euribor for an averagefixed rate of 2.48 percent per annum.

 

During the fourth quarterof 2007, the Group entered into thirteen interest rate swap transactions withan aggregate initial notional amount of U.S.$325 million with various banks (“TrancheB Swaps”). These swaps will expire on March 10, 2012. The Tranche B Swapswere entered into as a cash flow hedge on Tranche B of the credit facilitydiscussed above. The Tranche B Swaps exchange the floating rate of LIBOR for anaverage fixed rate of 4.62 percent per annum.

 

In December 2005, the Company entered into an unsecured creditfacility with Banca Popolare di Verona e Novara Soc. Coop. a R.L (LLC). The18-month credit facility consisted of a revolving loan that provided borrowingavailability of up to Euro 100 million. The final maturity of the creditfacility was June 1, 2007. We repaid the outstanding amount on thematurity date with the proceeds of a new unsecured credit facility with BancaPopolare di Verona e Novara Soc. Coop. a R.L. The new 18-month credit facilityconsists of a revolving loan that provided borrowing availability of up to Euro100 million. Amounts borrowed under the revolving portion can be borrowed andrepaid until final maturity. As of December 31, 2007,

 

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Euro 100 million was borrowed under this credit facility. Interestaccrues on the revolving loan at Euribor (as defined in the agreement) plus0.25 percent (4.980 percent on December 31, 2007). The Company can selectinterest periods of one, three or six months. The final maturity of the creditfacility is December 3, 2008.

 

*TheU.S.$1,500 Million Credit Facility, U.S.$500 Million Bridge Loan and RelatedInterest Rate Swaps*

 

To finance the acquisition of Oakley, on October 12,2007, we and our subsidiary U.S. Holdings entered into two credit facilitieswith a group of banks providing for certain term loans and a short-term bridgeloan for an aggregate principal amount of U.S.$2.0 billion. The term loanfacility is a five-year term loan of U.S.$1.5 billion, with options to extendthe maturity on two occasions for one year each time. The Mandated LeadArrangers and Bookrunners for the term loan are Intesa San Paolo S.p.A., TheRoyal Bank of Scotland plc, UniCredit Markets and Investment Banking (actingthrough Bayerische Hypo – und Vereinsbank AG – Milan Branch) (acting also asFacility Agent) and Citigroup N.A. (acting also as Documentation Agent). Theterm loan facility is divided into two facilities, Facility D and Facility E.Facility D consists of an amortizing term loan in an aggregate amount ofU.S.$1.0 billion, made available to U.S. Holdings, and Facility E consists of abullet term loan in an aggregate amount of U.S.$500 million, made available tothe Company. Each facility has a five-year term, with options to extend thematurity on two occasions for one year each time. The term loan has a spread ofbetween 20 and 40 basis points over LIBOR, depending on the Group’s ratio ofdebt to EBITDA, except for the period between the date of the first utilizationdate and the calculation of the covenants for the first six months of 2008, forwhich the spread is fixed at 40 basis points. Interest accrues on the term loanat LIBOR (as defined in the agreement) plus 0.40 percent (5.503 percent forFacility D and 5.458 percent for Facility E on December 31, 2007). Thefinal maturity of the credit facility is October 12, 2012.  This credit facility contains certainfinancial and operating covenants. The Company was in compliance with thosecovenants as of March 31, 2008. U.S.$1.5 billion was borrowed under thiscredit facility as of December 31, 2007.

 

During the fourth quarter of 2007, we entered into teninterest rate swap transactions with an aggregate initial notional amount ofU.S.$500 million with various banks (“Tranche E Swaps”). These swaps willexpire on October 12, 2012. The Tranche E Swaps were entered into as acash flow hedge on Facility E of the credit facility discussed above. The TrancheE Swaps exchange the floating rate of LIBOR for an average fixed rate of 4.26percent per annum.

 

The short term bridge loan facility is for anaggregate principal amount of U.S.$500 million. This facility is underwrittenby Bank of America Securities Limited and UniCredit Market and InvestmentBanking (acting through Bayerische Hypo – und Vereinsbank AG – Milan Branch).Interest accrues on the short term bridge loan at LIBOR (as defined in theagreement) plus 0.15 percent (5.208 percent on December 31, 2007). Thefinal maturity of the credit facility was eight months from the firstutilization date. On April 29, 2008, we and our subsidiary U.S. Holdingsentered into an amendment and transfer agreement to this facility. The terms ofsuch amendment agreement among other things, reduced the total facility amountfrom U.S. $500 million to U.S. $150 million, and provide for a final maturitydate that is eighteen (18) months from the effective date of the agreement.

 

*The Euro 250 Million Revolving Credit Facility*

 

On May 29, 2008, we enteredinto a Euro 250 million revolving credit facility agreement, guaranteed by oursubsidiary U.S. Holdings, with Intesa Sanpaolo S.p.A. as agent and IntesaSanpaolo S.p.A., Banca Popolare di Vicenza S.c.p.A. and Banca Antonveneta S.p.A.as lenders.  The final maturity of the credit facility is May 29, 2013. The creditfacility is a Euro 250 million revolving facility, which will require repaymentof equal quarterly instalments of principal of Euro 30 million starting August 29,2011 and a last repayment of Euro 40 million on the final maturity date.Interest accrues at Euribor (as defined in the agreement) plus a margin between0.40 percent and 0.60 percent based on the “Net Debt/EBITDA” ratio, as definedin the agreement.

 

***Our Working Capital***

 

Set forth below is certain information regarding our working capital(total current assets minus total current liabilities):

 

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| ** **          | ** ** | **As of December 31,**    | ** ** |
|---------------------|------------|------------------------------------------|------------|
| ** **          | ** ** | **2007**                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **          | ** ** | **(In millions of Euro)** | ** ** |
| Current Assets      |       | 1,910.6                                  |       | 1,493.5 |   | 1,604.6 |   |
| Current Liabilities |       | (2,159.2                                 | )          | (1,425.3 | ) | (1,235.7 | ) |
| Working Capital     |       | (248.6                                   | )          | 68.2 |   | 368.9 |   |

 

The increase in working capital in 2005 reflects the repayment ofmaturing debt and the refinancing of current debt maturities with long-termdebt.  In 2007 and 2006, working capitaldecreased due to an increase in the current portion of long-term debt scheduledto mature in 2008 and 2007, respectively.

 

We believe that the financial resources available to us will besufficient to meet our currently anticipated working capital and capitalexpenditure requirements for the next 12 months.

 

We do not believe that the relatively moderate rates of inflation whichhave been experienced in the geographic markets where we compete have had asignificant effect on our net sales or profitability. In the past, we have beenable to offset cost increases by increasing prices, although we can give noassurance that we will be able to do 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 to time, derivative financial instruments,principally interest rate and currency swap agreements, as part of our riskmanagement policy to reduce our exposure to market risks from changes in foreignexchange rates and interest rates. Although we have not done so in the past, wemay enter into other derivative financial instruments when we assess that therisk can be hedged effectively.

 

**Contractual Obligations and Commercial Commitments**

 

We are party to numerous contractual arrangements consisting of, amongother things, royalty agreements with designers, leases for retail store,plant, warehouse and office facilities, as well as certain data processing andautomotive equipment, and outstanding borrowings under credit agreements andfacilities with financial institutions to finance our operations. Thesecontractual arrangements may contain minimum annual commitments. A morecomplete discussion of the obligations and commitments is included in Notes 9and 15 to our Consolidated Financial Statements included in Item 18 of thisannual report.

 

The following table summarizes the scheduled maturities of ourlong-term debt, minimum lease commitments under non-cancelable operating leasesand minimum payments under non-cancelable royalty arrangements, purchasecommitments (including long-term) and endorsement contracts as of December 31,2007. The table does not include pension liabilities. Our pension plans arediscussed in Note 10 to our Consolidated Financial Statements included inItem 18 of this annual report.

 
| ** **                                  | ** ** | **Payments Due by Period** | ** ** |
|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                  | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | **After** | ** ** | ** ** | ** ** |
| **(in millions of Euro)**    | ** ** | ** **                                | ** ** | ** ** | ** ** | **3 to 5** | ** ** | **5** | ** ** | ** ** | ** ** |
| **Contractual Obligations**            | ** ** | **1 Year**                           | ** ** | **1 to 3 Years** | ** ** | **Years** | ** ** | **Years** | ** ** | **Total** | ** ** |
| Long-Term Debt and Current Maturities(1)(2) |       | 792.6                                     |       | 279.1 |   | 1,646.9 |   | 0.5 |   | 2,719.1 |   |
| Interest Payments(3)                        |       | 87.9                                      |       | 131.5 |   | 83.8 |   | — |   | 303.2 |   |
| Operating Leases                            |       | 240.9                                     |       | 395.7 |   | 260.0 |   | 328.1 |   | 1,224.7 |   |
| Minimum Royalty Arrangements                |       | 85.5                                      |       | 154.7 |   | 89.4 |   | 128.5 |   | 458.1 |   |
| Long-Term Purchase Commitments              |       | 4.6                                       |       | 12.0 |   | 1.5 |   | — |   | 18.1 |   |
| Endorsement Contracts                       |       | 5.9                                       |       | 3.2 |   | 0.3 |   | — |   | 9.4 |   |
| Total                                       |       | 1,217.4                                   |       | 976.2 |   | 2,081.9 |   | 457.1 |   | 4,732.6 |   |

 

50

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| (1)    |   | As described  previously, our long-term debt has certain financial and operating covenants  that may cause the acceleration of future maturities if we do not comply with  them. We were in compliance with these covenants as of December 31, 2007. In  addition, the above table does not take into account the February 2008  extension of the Amended Euro 1,130 Million and U.S.$325 Million Credit  Facility as described above.      |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (2)    |   | The  calculation of Long-Term Debt and Current Maturities includes capital lease obligations,  pursuant to which the following amounts are scheduled to become due and  payable: Euro 0.9 million (less than 1 year) and Euro 0.9 million (1 to 3  years).                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (3)    |   | These  amounts do not include interest payments due under our various revolving  credit facilities as the amounts to be borrowed in future years are uncertain  at this time. In addition, interest rates used to calculate the future  interest due on our variable interest rate term loans were calculated based  on the interest rate as of December 31, 2007 and assume that we make all  scheduled principal payments as they mature. |

 

 

At December 31, 2007, we had available funds of approximately Euro291.4 million under our unused short-term lines of credit. Substantially all ofthese lines have terms of less than one year, but they have been renewed annuallyin prior years. In addition, certain U.S. subsidiaries obtained various lettersof credit from banks outstanding of Euro 30.9 million as of December 31,2007. Most of these letters of credit are used as security in risk managementcontracts or store leases. Most contain annual evergreen clauses under whichthey are automatically renewed unless the bank is notified of non-renewal. Asof December 31, 2007, substantially all of our outstanding letters ofcredit mature within one year.

 

**ITEM 6. DIRECTORS, SENIOR MANAGEMENT ANDEMPLOYEES**

 

**Directors and Senior Management**

 

The Board of Directors of Luxottica Group S.p.A. currently consists of14 members, each of whom was appointed at the shareholders’ meeting held on June 14,2006.

 

The current term of the Board of Directors expires at the time of theapproval of the statutory financial statements as of and for the year ended December 31,2008.

 

Set forth below is certain information regarding the directors andsenior management of Luxottica Group S.p.A.:

 
| ** **            | ** ** | ** ** | ** ** | **Senior  Manager (1) or** | ** ** | ** **                                                    |
|-----------------------|------------|------------|------------|--------------------------------------|------------|---------------------------------------------------------------|
| ** **            | ** ** | ** ** | ** ** | **Director (2)**                     | ** ** | ** **                                                    |
| **Name**              | ** ** | **Age**    | ** ** | **Since**                            | ** ** | **Position**                                                  |
| Leonardo Del  Vecchio |       | 72         |       | 1961                                 |       | Chairman of  the Board of Directors                           |
| Andrea  Guerra        |       | 42         |       | 2004                                 |       | Chief  Executive Officer and Director                         |
| Enrico  Cavatorta     |       | 46         |       | 1999/2003                            |       | Chief  Financial Officer and Director                         |
| Roberto  Chemello     |       | 53         |       | 1979                                 |       | Group  Operations Director and Director                       |
| Luigi  Francavilla    |       | 70         |       | 1968                                 |       | Group  Product and Design Director and Deputy Chairman        |
| Roger  Abravanel      |       | 61         |       | 2006                                 |       | Director                                                      |
| Tancredi  Bianchi     |       | 79         |       | 1990                                 |       | Director                                                      |
| Mario Cattaneo        |       | 77         |       | 2003                                 |       | Director                                                      |
| Claudio  Costamagna   |       | 52         |       | 2006                                 |       | Director                                                      |
| Claudio Del  Vecchio  |       | 50         |       | 1978                                 |       | Director                                                      |
| Sergio Erede          |       | 67         |       | 2004                                 |       | Director                                                      |
| Sabina  Grossi        |       | 42         |       | 2003                                 |       | Director                                                      |
| Gianni Mion           |       | 62         |       | 2004                                 |       | Director                                                      |
| Lucio  Rondelli       |       | 83         |       | 1990                                 |       | Director                                                      |
| Colin Baden           |       | 45         |       | 1999                                 |       | President,  Oakley                                            |
| Frank  Baynham        |       | 54         |       | 1987                                 |       | Executive  V.P. and General Manager LensCrafters, Retail N.A. |
| Chris Beer            |       | 41         |       | 2003                                 |       | Chief  Operating Officer, Retail, Australia/NZ                |

 

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| Michael A. Boxer           |   | 46 |   | 1993 |   | Senior V.P.  and General Counsel N.A.                       |
|----------------------------|--------|----|--------|------|--------|-------------------------------------------------------------|
| Kerry  Bradley             |   | 51 |   | 1988 |   | Chief  Operating Officer of Retail N.A.                     |
| Alessandro  Curotti        |   | 48 |   | 2007 |   | Group  General Counsel and Corporate Secretary              |
| Fabio  D’Angelantonio |   | 38 |   | 2005 |   | Group  Marketing Director                                   |
| Jack S.  Dennis            |   | 62 |   | 1982 |   | Chief  Financial and Administrative Officer of Retail N.A.  |
| Valerio  Giacobbi          |   | 43 |   | 1991 |   | Executive  V.P. Retail N. A.                                |
| Giuseppe La  Boria         |   | 49 |   | 2001 |   | Head of  Wholesale Europe and South                    |
| Seth  McLaughlin           |   | 45 |   | 1994 |   | Senior V.P.  and General Manager Pearle Vision, Retail N.A. |
| George  Minakakis          |   | 50 |   | 1994 |   | Chief  Operating Officer of Retail Greater China            |
| Antonio  Miyakawa          |   | 41 |   | 1993 |   | Executive  Vice President, Wholesale and Marketing          |
| D. Scott  Olivet           |   | 44 |   | 2005 |   | Chief  Executive Officer, Oakley                            |
| Nicola Pelà           |   | 45 |   | 2005 |   | Group Human  Resources Director                             |
| Carlo  Privitera           |   | 38 |   | 2005 |   | Chief  Information Technology Officer                       |

 

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| (1)    |   | For  our senior managers, the periods listed in the table reflect periods of  affiliation with Luxottica Group S.p.A. or any of its predecessors and  affiliates, and not necessarily the period since they were appointed to their  current position. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                   |
| (2)    |   | For  our directors, the periods listed in the table reflect their respective  periods of directorship with Luxottica Group S.p.A. or any of its  predecessors.                                                                                         |

 

Executive officers serve at the discretion of the Board of Directors. Messrs. Rondelli, Bianchi, Cattaneo,Mion, Abravanel, Costamagna, Claudio Del Vecchio and Erede and Ms. Grossiare all non-executive directors. In addition, Messrs. Rondelli,Bianchi, Cattaneo, Mion, Abravanel and Costamagna are also independentdirectors under Italian law.

 

Pursuant to Italian law, we maintain a Board ofStatutory Auditors, elected at the shareholders’ meeting, composed of threeexperts in accounting matters who are required to have no other affiliationwith Luxottica Group S.p.A. and who must satisfy certain professional and otherstandards. The Board of Statutory Auditors is required to verify that we: (i) complywith applicable law and our bylaws; (ii) respect the principles of correctadministration; (iii) maintain adequate organizational structure, internalcontrols and administrative and accounting systems; (iv) ensure that ouraccounting system represents the facts in a fair and true manner; and (v) complywith the Italian Code of Corporate Governance. Although members of the Board of Statutory Auditors are required toattend the meetings of the Board of Directors and of the shareholders, they arenot deemed to be members of the Board of Directors and do not vote on matterssubmitted to such meetings. Effective as of June 14, 2006, the members ofthe Board of Statutory Auditors are Marco Reboa, Chairman, Giorgio Silva andEnrico Cervellera. There are also two alternate members of the Board of StatutoryAuditors, Francesco Nobili and Mario Magenes.  Such alternate members willreplace current members who leave their position during the current term. Thecurrent term of the Board of Statutory Auditors expires at the time of theapproval of the statutory financial statements as of and for the year ended December 31,2008.

 

See “—Summary of the Significant Differences Between Our CorporateGovernance Practices and the Corporate Governance Standards of the New YorkStock Exchange” below for more information regarding the designation of theBoard of Statutory Auditors to act as our audit committee.

 

Pursuant toItalian law, we also maintain a Human Resources Committee, elected within themembers of the Board of Directors. The Human Resources Committee hasverification, advisory and proposal-making functions, including: (i) recommendingto the Board the aggregate remuneration payable to the Company’s Directors anddetermining the remuneration criteria for the top management of the Company andof the entire Group, (ii) reviewing the Luxottica Group employees’incentive plans and the criteria for the composition of the management bodiesof the relevant subsidiaries. Effective as of February 19, 2007, themembers of the Human Resources Committee are non-executive directors GianniMion, Roger Abravanel, Claudio Costamagna and Sabina Grossi, three of whom areindependent. Although the Human Resources Committee does not have a specificterm, its term is co-extensive with the term of our Board of Directors since itsmembers are also members of our Board of Directors.

 

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See “—Summary of the Significant Differences Between Our CorporateGovernance Practices and the Corporate Governance Standards of the New YorkStock Exchange” below for more information regarding the designation of theHuman Resources Committee to act as our compensation committee.

 

A short biography of each of our Directors and executive officers isset forth below:

 

**Leonardo Del Vecchio**is the founder of our operations and has been Chairman of the Board since theGroup was formed in 1961. In 1986, the President of the Republic of Italyconferred on Mr. Del Vecchio the honor of Cavaliere dell’Ordine al “Meritodel Lavoro” (Knight of the Order for Labor Merit). In May 1995, hereceived an honorary degree in Business Administration from the Venice Ca’Foscari University. In 1999, he received a Master “honoris causa” inInternational Business from MIB- Management School in Trieste, and in 2002, hereceived an honorary degree in Managerial Engineering from the University ofUdine. In March 2006, Mr. Del Vecchio received another honorarydegree in Materials Engineering from Politecnico of Milan. Mr. Del Vecchio is also a director ofAssicurazioni Generali S.p.A., Beni Stabili S.p.A., vice chairman of theSurveillance Committee of Fonciere des Regions and a director of DelfinS.a.r.l.

 

**Andrea Guerra** wasappointed a Director and Chief Executive Officer of the Company on July 27,2004. Prior to joining the Company, Mr. Guerra was with MerloniElettrodomestici since 1994, where, from 2000, he was its Chief ExecutiveOfficer. Prior to being at Merloni, Mr. Guerra worked for Marriott Italiawhere he became Director of Marketing. Mr. Guerra is also director of thenew Parmalat S.p.A., DEA Capital S.p.A. and of Banca Nazionale del LavoroS.p.A. He received a degree in Business Administration from the “La Sapienza”University of Rome in 1989.

 

**Enrico Cavatorta** hasbeen a Director of the Group since 2003. He has been Chief Financial Officersince he joined the Group in 1999, and he is a director of the principalsubsidiaries of the Company. Prior to joining Luxottica, Mr. Cavatorta waswith Piaggio S.p.A., most recently as Group Controller, responsible forplanning and control. From 1993 to 1996, Mr. Cavatorta was a consultantwith McKinsey & Co., having joined the firm from Procter &Gamble Italy, where he worked from 1985 to 1993, most recently as Controller. Mr. Cavatortagraduated with the highest honors from the LUISS University in Rome with abachelor’s degree in Business Administration.

 

**Roberto Chemello**joined the Group in 1979. He is a Director and Group Operations Director of theCompany and Chief Executive Officer of Luxottica S.r.l., our principaloperating subsidiary. Prior to 1985, Mr. Chemello was Chief FinancialOfficer of the Company, and, until July 27, 2004, he was Chief ExecutiveOfficer of the Company. Mr. Chemello graduated with a degree in BusinessAdministration from the Ca’ Foscari University in Venice.

 

**Luigi Francavilla**joined the Group in 1968, has been Deputy Chairman since 1981 and is the GroupProduct and Design Director.  Inaddition, he is Chairman of Luxottica S.r.l., our principal operatingsubsidiary. From 1972 to 1977, Mr. Francavilla was General Manager ofLuxottica S.r.l. and, from 1969 to 1971, he served as Technical General Managerof Luxottica S.r.l. In April 2000, he received an honorary degree inBusiness Administration from Constantinian University.

 

**Roger Abravanel**hasbeen a director since 2006. He worked at McKinsey & Company from 1972until June 2006. Mr. Abravanel is also involved in internationalconsulting projects for the high direction on strategic, organizational andoperational development issues. He graduated with a degree in Engineering fromthe Politecnico di Milano and received a Masters in Business Administrationfrom Insead in Fontainebleau (with High Distinctions).  He is author of several studies and articleson business organization and a director of Banca Nazionale del Lavoro S.p.A.,Marazzi Group S.p.A. and Teva Pharmaceutical Industries Ltd.

 

**Tancredi Bianchi** hasbeen a Director since 1990 and is emeritus Professor of Credit and Banking atthe Bocconi University in Milan where he was a professor from 1978 to 2003. In1959, he qualified for University teaching and began teaching Banking Techniqueat the Venice University (“Ca’ Foscari”), as well as the Pisa and Rome (“LaSapienza”) Universities. He has been a member of the Board of Directors ofMontedison, Credito Bergamasco (where he was Executive Vice Chairman, ChiefExecutive Officer and Chairman from 1981 and 1989), Credito Emiliano, CreditoRomagnolo and Cassa di Risparmio di Verona S.p.A. From 1982 until 2003, Mr. Bianchiwas Chairman of the Italian Private Banking Association, and from 1991 to 1998,he was Chairman of the Italian Banking Association, where he is now HonoraryChairman.

 

**Mario Cattaneo** has been a Director since2003. He is emeritus professor of Corporate Finance at the Catholic Universityof Milan. He was a director of Eni S.p.A. from 1998 until 2005 and ofUnicredito from 1999 until 2005 and Statutory Auditor of the Bank of Italy from1991 until 1999.  He is the vice chairmanof Euromobiliare Asset Management SGR S.p.A. and Euromobiliare AlternativeInvestment SGR S.p.A. and he is a member of the Board of Directors of BraccoS.p.A. and Sella Holding Banca S.p.A. Furthermore, Mr. Cattaneo is thechairman of the Board of Statutory Auditors of 

 

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Italiana Assicurazioni S.p.A.,Intesa Mediofactoring S.p.A. and Sara Assicurazioni S.p.A. He is an auditor ofMichelin Italiana S.p.A. and a member of the Surveillance Committee of UBIBanca S.C.p.A.

 

**Claudio Costamagna**has been a Director since 2006. He held executive positions in internationalcompanies such as Montedison, Citigroup and Goldman Sachs. Mr. Costamagnais currently Chairman of ALUB (Association of graduates from Bocconi) and adirector of Bvlgari S.p.A. and DEA Capital S.p.A.

 

**Claudio Del Vecchio,**a son of Leonardo Del Vecchio, joined the Group in 1978 and has been a Directorsince 1981. From 1979 to 1982, he managed our Italian and German distributionoperations. From 1982 until 1997, he was responsible for all businessoperations of the Group in North America. He also serves as a Director of U.S.Holdings, a key subsidiary in North America. Claudio Del Vecchio is Chairmanand Chief Executive Officer of Retail Brand Alliance, Inc., the owner ofBrooks Brothers.

 

**Sergio Erede** hasbeen a Director since 2004. Mr. Erede graduated magna cum laude from theUniversity of Milan in 1962 with a degree in jurisprudence and obtained anLL.M. from Harvard Law School in 1964. From 1965 to 1969, he was head of thelegal department of IBM Italia S.p.A. Prior to such time, Mr. Erede was anattorney at the law firm of Sullivan & Cromwell from 1964 to 1965, andthe law firm of Hale & Dorr from 1963 to 1964. In 1999, he founded thelaw firm of Bonelli, Erede & Pappalardo (which is the successor bymerger to the firm of Erede e Associati), a leading firm in Italian financialtransactions. Additionally, he is a member of the Board of Directors ofManifatture Lane Gaetano Marzotto & Figli S.p.A., Interpump GroupS.p.A., Autogrill S.p.A., Carraro S.p.A., Gruppo Editoriale L’Espresso S.p.A.,Società Italo Britannica L. Manet–i - H. Roberts S.p.A., Manuli RubberIndustries S.p.A., AON Italia S.p.A. and Gruppo IPG Holding S.r.l.Additionally, Mr. Erede is vice chairman of the Board of Directors ofBanca Nazionale del Lavoro S.p.A. and a member of the Surveillance Committeeand of the Audit Committee of Fonciere des Regions.

 

**Sabina Grossi** hasbeen a Director since 2003. She joined Luxottica Group S.p.A. in 1996 and wasHead of Investor Relations, a position which she held from 1996 until 2004.Prior to joining Luxottica Group S.p.A., she was a financial analyst withCaboto Sim S.p.A. from 1994 until 1996. From 1991 to 1993, Ms. Grossi wasan 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. Ms. Grossi is currently amember of the Board of Directors of Molmed S.p.A.

 

**Gianni Mion** has beena Director since 2004. He is Chief Executive Officer of Edizione Holding S.p.A.(the investment company of the Benetton family), a position he has held since1986. Prior to joining Edizione Holding S.p.A., Mr. Mion was the ChiefFinancial Officer of Marzotto S.p.A. from 1985 to 1986, Managing Director ofFintermica S.p.A. from 1983 to 1985, Vice President of Gepi S.p.A. from 1974 to1982, controller of McQuay Europa S.p.A. from 1972 to 1974 and an auditor atthe accounting firm of KPMG from 1967 to 1972. He has been chief executiveofficer of Edizione Holding S.p.A. since 1986 and prior to that he was thechief executive officer of Sintonia S.p.A. Mr. Mion also sits on the Board of Directors of Benetton Group,Autogrill S.p.A., Sintonia S.A., Schemaventotto S.p.A., Atlantia S.p.A.,Aeroporti di Roma S.p.A., Burgo Group S.p.A. and Telecom Italia S.p.A. Mr. Miongraduated from the Venice University Ca’ Foscari with a degree in BusinessAdministration and is a Certified Public Accountant.

 

**Lucio Rondelli** hasbeen a Director of the Company since 1990. Mr. Rondelli was the Chairmanof UniCredito Italiano S.p.A until 2001, having held various positions with thebank continuously from 1947. Mr. Rondelli is currently Chairman ofAssiparos GPA and Banca Italease and a director of Spafid. In 1976 he receivedthe honor of Cavaliere di Gran Croce dell’Ordine (Knight of the Great CrossOrder) for merit to the Republic of Italy and in 1988 the President of theRepublic of Italy conferred on him the honor of Cavaliere dell’Ordine al “Meritodel Lavoro” (Knight of the Order for Labor Merit). Mr. Rondelli serves asChairman of Assiparos GPA S.p.A. and is Director in Spafid and Arca SGR S.p.A.

 

**Colin Baden** joinedOakley in February 1996 as Director of Design and served as Vice Presidentof Design from February 1997 to February 1999. In February 1999,Mr. Baden was named President. Prior to joining Oakley, Mr. Baden wasa partner at Lewis Architects of Seattle, Washington for six years and beganadvising Oakley on company image and design issues in 1993.

 

**Frank Baynham** hasbeen Executive Vice President and General Manager LensCrafters, LuxotticaRetail North America since March 2008. From 1999 to March 2008, he served as Executive Vice President,Stores of Retail North America. Mr. Baynham has held various other seniorexecutive roles since joining LensCrafters in 1987. Prior to 1987, he worked inmarketing for Procter and Gamble and was a captain in the U.S. Army. Mr. Baynhamgraduated with a degree in Finance from Murray State University.

 

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**Chris Beer**is ChiefOperating Officer of Luxottica Retail — Australia/NZ. Mr. Beer has held thisposition since 2003, having had 22 years of experience with the OPSM Group(later acquired by Luxottica). He held senior executive positions in sales andoperations before being appointed International HR Manager for the OPSM Groupin 1999 and General Manager Retail for OPSM Australia in 2001. Mr. Beeroversees group operations, marketing, merchandise, distribution andmanufacturing for the Australia/NZ Region.

 

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

 

**Kerry Bradley** hasbeen Chief Operating Officer of Retail North America since 2002, prior to whichhe served as Executive Vice President of LensCrafters since June of 1998. Mr. Bradleyis responsible for all LensCrafters, Sunglass Hut, Cole and EyeMed sales,marketing and operations. Mr. Bradley has held various other seniorexecutive roles since joining LensCrafters in 1988. Mr. Bradley has aMaster’s degree in Business from the University of Edinburgh, Scotland and aB.S. degree in Business from Auburn University in Alabama.

 

**Alessandro Curotti**joinedthe Group as General Counsel and Corporate Secretary in 2007. Prior to joiningLuxottica he served as a corporate lawyer at companies such as Telecom Italia,Telecom Italia Mobile and Montedison. He received his law degree from theUniversity of Siena.

 

**Fabio D’Angelantonio**hasbeen Group Marketing Director since 2005. After experience with the EuropeanUnion and in the Olivetti Marketing Department in Brussels and Madrid, Mr. D’Angelantonioled the international department from 1995 to 2000 for the Belgian publishinghouse Editions Hemma (part of the Havas-Vivendi group). At the beginning of2000, Mr. D’Angelantonio joined Ciaoweb (Fiat-Ifil group) where he heldthe position of Channel Manager, eventually moving to Merloni Elettrodomestici,today Indesit Company, where he held increasingly senior positions ending inBrand & Advertising Manager, responsible for the management of theentire brand portfolio for the group. After receiving a degree in BusinessAdministration in 1994 from the LUISS University in Rome, he completed an MBAin International Management at the UBI in Brussels in 1999.

 

**Jack S. Dennis** hasbeen Chief Financial and Administrative Officer of Retail North America since2001, prior to which time he served as Chief Financial Officer of LensCrafterssince 1992 and Chief Administrative Officer since 1999. Prior to 1992, he wasController of LensCrafters, Vice President of Finance in several divisions ofU.S. Shoe, and a Senior Audit Manager with Arthur Andersen & Co. Mr. Dennisgraduated with a degree in Accounting from the University of Kentucky.

 

**Valerio Giacobbi** hasbeen Executive Vice President Retail North America since 2001. Prior to 2001,he was General Affairs Manager of Luxottica Group S.p.A. since 1991. Mr. Giacobbigraduated with a degree in Business Administration from the Ca’ FoscariUniversity in Venice.

 

**Giuseppe La Boria**joined Luxottica Group S.p.A. in 2001 as Head of Sales for Europe and South.Prior to joining Luxottica Group S.p.A., Mr. La Boria worked in Safilo S.p.A.as Sales Manager for Italy, during which period he was also responsible for allthe commercial and marketing aspects of the Diesel Shades launch.

 

**Seth McLaughin** hasbeen Senior Vice President and General Manager Pearle Vision, Luxottica RetailNorth America since March 2008. From October 2004 to March 2008, he served as Senior VicePresident, Consumer Marketing of Luxottica Retail North America. From July 1998to October 2004, he served as Vice President, Consumer Marketing. Prior tojoining the Luxottica Group he worked at Boston Consulting Group, from 1990 to1994, and in strategic consulting for Procter & Gamble, from 1984 to1990. Mr. McLaughin has a Bachelor of Science degree from Iowa StateUniversity.

 

**GeorgeMinakakis** has been Chief Operating Officer for GreaterChina since September 2006. He has been with Luxottica for 13 years, mostrecently in Canada as Senior Vice President and General Manager of our retailoperations. Prior to Luxottica, Mr. Minakakis worked with PepsiCo for 7years. He holds a Masters Degree in Business Administration from AthabascaUniversity, Alberta, Canada.

 

**Antonio Miyakawa** iscurrently the Executive Vice President of Wholesale and Marketing for LuxotticaGroup S.p.A., a position he held since 2003. Previously he was head of ourAsian wholesale operations, a position he has held since 1999. Prior to this heserved as Executive Vice President of Luxottica’s Japanese operations. Prior tojoining Luxottica Group 

 

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S.p.A., Mr. Miyakawa was a junior consultant for Compact S.r.l.(an Italian consulting firm) working on various Luxottica matters.

 

**D. Scott Olivet**joinedOakley in October 2005 as its Chief Executive Officer and as an Oakleydirector. From August 2001 to October 2005, he served as Nike Inc.’sVice President, Nike Subsidiaries and New Business Development where he led,developed and executed the company’s multi-branding strategy including the ColeHaan, Converse, Hurley, Starter and Bauer-Nike Hockey brands. Prior to Nike, Mr. Olivetserved as The Gap, Inc.’s Senior Vice President of Real Estate, StoreDesign and Construction, responsible for The Gap, Banana Republic and Old Navybrands from 1998 to 2001. He worked with Bain & Company from 1984 to1998, serving as a partner and head of the firm’s worldwide practice inorganizational effectiveness and change management from 1993 to 1998.** **Mr. Olivet received his B.A. inGovernment from Pomona College and his M.B.A. from the Graduate School ofBusiness, Stanford University.

 

**Nicola Pelà** has beenGroup Human Resources Director since 2005. Prior to joining the Company, he wasHuman Resources Director of Eli Lilly from 2001 to 2003, first in Indianapolisand later in Brussels, and VP HR Director for Italy of SmithKline Beecham from2000 to 2001. He was HR Manager in various Italian companies such as Olivetti Group, Fiat Group and Barilla Group from1988 to 2000. Mr. Pelà has a bachelor’s degree in Law with honors and amaster’s degree in Business Administration from CUOA.

 

**CarloPrivitera**joined Luxottica in 2005 as Group Industrial Supply Chain Director.  Since January 2008, he has beenthe Chief Information Technology Officer. From December 2001 to February 2005,Mr. Privitera served in various capacities, including Planning Manager andProduction Control & Logistic Director of Fiat Group and itssubsidiaries. From 1996 to 2001, he served as Senior Manager in EfesoConsulenze. Mr. Privitera has a bachelor degree in Engineering from thePolitecnico in Milan. He also holds a master’s degree from Osaka University.

 

**Compensation**

 

Set forth below is information regarding total compensation paid to themembers of our Board of Directors and our Board of Statutory Auditors forservices rendered to Luxottica Group S.p.A. and our subsidiaries during 2007:

 

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| **Name**                                                                 | ** ** | **Base  Compensation  (Euro)** | ** ** | **Other  Compensation  (Euro)** | ** ** | **Total  Compensation  (Euro)** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Leonardo Del Vecchio*Chairman of the Board of Directors*                 |       | 721,198                        | (1)        | 636,348                         | (8)        | 1,357,546                       |       |
| Luigi Francavilla*Group Product and Design Director and Deputy Chairman* |       | 139,200                        | (2)        | 1,614,045                       | (8)(9)(10) | 1,753,245                       |       |
| Andrea Guerra*Chief Executive Officer and Director*                      |       | 899,994                        | (3)        | 1,709,902                       | (9)(10)    | 2,609,896                       |       |
| Enrico Cavatorta*Chief Financial Officer and Director*                   |       | 81,198                         |       | 708,081                         | (8)(9)(10) | 789,279                         |       |
| Roberto Chemello*Group Operations Director and Director*                 |       | 81,198                         |       | 1,550,480                       | (8)(9)(10) | 1,631,678                       |       |
| Roger Abravanel* Director*                                          |       | 91,198                         | (4)        | —                          |       | 91,198                          |       |
| Tancredi Bianchi*Director*                                               |       | 99,115                         | (5)        | —                          |       | 99,115                          |       |
| Mario Cattaneo*Director*                                                 |       | 99,115                         | (5)        | —                          |       | 99,115                          |       |
| Claudio Costamagna*Director*                                             |       | 90,365                         | (4)        | —                          |       | 90,365                          |       |
| Claudio Del Vecchio*Director*                                            |       | 81,198                         |       | —                          |       | 81,198                          |       |
| Sergio Erede*Director*                                                   |       | 81,198                         |       | —                          |       | 81,198                          |       |
| Sabina Grossi*Director*                                                  |       | 81,198                         |       | 323                             | (10)       | 81,521                          |       |
| Gianni Mion*Director*                                                    |       | 81,198                         |       | —                          |       | 81,198                          |       |
| Lucio Rondelli*Director*                                                 |       | 104,115                        | (6)        | —                          |       | 104,115                         |       |
| Marco Reboa*Chairman of the Board of Statutory Auditors*                 |       | 105,000                        |       | —                          |       | 105,000                         |       |
| Enrico Cervellera*Member of the Board of Statutory Auditors*             |       | 70,000                         |       | —                          |       | 70,000                          |       |
| Giorgio Silva*Member of the Board of Statutory Auditors*                 |       | 90,000                         | (7)        | —                          |       | 90,000                          |       |

 

----

(1)           Compensation paid as Director and Chairman ofthe Board of Directors.

 

(2)           Compensation paid as Director and DeputyChairman.

 

(3)           Compensation paid as Director and ChiefExecutive Officer.

 

(4)           Compensation paid as Director and member of theHuman Resources Committee.

 

(5)           Compensation paid as Director and member of theInternal Control Committee.

 

(6)           Compensation paid as Director and Chairman ofthe Internal Control Committee.

 

(7)           Includescompensation paid as auditor and for services rendered as member of theSupervisory Body created pursuant to legislative decree 231/2001.

 

(8)           Includes compensation paid for servicesrendered in subsidiary companies.

 

(9)           Includes compensation paid as employee. Thiscompensation also includes the bonus paid in 2007.

 

(10)     Includes fringe benefits granted (such as insurancepremiums and cars).

 

57

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Aggregate compensation paid by us to oursenior management (who are not directors) as a group (16 people) wasapproximately Euro 24.2 million in 2007, of which Euro 10.3 million related toone-time payments to Oakley senior management made in connection with theOakley acquisition and approximately Euro 1.0 million represented provision fortermination indemnities and social security charges required by Italian law.Members of this group were also granted options to purchase an aggregate of160,000 of our ordinary shares at a weighted average exercise price of Euro24.05 per share in 2007. These options expire on March 6, 2016. Theaggregate amount set aside or accrued during the year ended December 31,2007 to provide pension and retirement benefits for our directors who are alsomembers of our management was Euro 1.4 million. Our directors who are not membersof management do not receive such benefits.

 

With the exception of termination benefitsprovided for Mr. Guerra, our Chief Executive Officer, as described below,none of our directors have service contracts with the Company or any of itssubsidiaries providing for benefits upon termination of employment.

 

In case of termination other than for goodcause, we will pay our Chief Executive Officer a separation allowance, inaddition to providing for termination indemnities provided by Italian law, inthe amount of two times the sum of:

 

·                 annual base salary, provided as a sumof annual base remuneration and director’s emoluments; and

 

·                 variable pay, corresponding to theaverage bonus compensation received in the three years (or shorter period, asthe case may be) preceding his termination.

 

This separation allowance is also due in the case of termination forcause or in the case our Chief Executive Officer terminates the employmentrelationship within the 60 days following one of the events listed below thatleads to a reduction in responsibilities and tasks assigned:

 

·                 substantial change to the authoritygiven to the Chief Executive Officer; and

 

·                 change of control.

 

**Employees**

 

As of December 31, 2007, we employedapproximately 64,000 employees worldwide, of whom approximately 40,000 wereemployed in the United States and Canada, 9,000 were employed in Italy, 12,000were employed in Asia-Pacific, 2,000 were employed in Europe and 1,000 wereemployed in subsidiaries located in other countries. As of such date,approximately 18,000 were employed in our manufacturing and wholesale segment, approximately45,000 were employed in our retail segment and approximately 1,000 wereemployed at corporate. Substantially all of our employees in Italy are coveredby collective bargaining agreements. Other than those Pearle Vision employeessubject to collective bargaining agreements described below, none of ouremployees in the United States are covered by collective bargaining agreements.We have enjoyed generally good relations with our employees.

 

Employment agreements in Italy are generallycollectively negotiated between the national association of companies within aparticular industry and the respective national unions. Individual companiesmust enter into contracts with their employees based on the relevant collectiveagreement. The agreement for optical workers, which is part of the nationaltextile agreement, covers approximately 6,450 of our employees. This agreementwas renewed in 2008 resulting in an average wage increase rate of approximatelythree percent per year. In addition to the national collective bargainingagreement for workers, we typically enter into separate local contracts withlabor unions representing our employees. In December 2006, we renewed a localagreement with optical workers, supplementing the terms of the national textilecontract. The new agreement provided for new profitability targets for employeevariable wages.

 

Italian law provides that, upon terminationof employment, employees are entitled to receive certain compulsory severancepayments based on their compensation levels and length of employment. As of December 31,2007, we had established a reserve of Euro 51.6 million for such severancepayments, which is reflected in our consolidated financial statements.

 

Pearle Vision currently has two collectivebargaining agreements in place. One collective bargaining agreement, betweenPearle Vision and the Local 888, United Food and Commercial Workers (the “888CBA”), has been extended (by agreement) while the parties are negotiating a newagreement. The 888 CBA covers approximately 16 Pearle Vision employees holdingthe positions of Lab Associate, Lead Lab Associate, Sales Associate andOptician. The other collective bargaining agreement, between Pearle Vision andthe Local 108, Retail, Wholesale and Department Store Union (the “108 

 

58

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CBA”), has also been extended (by agreement) while the parties arenegotiating a new agreement. The 108 CBA covers approximately 60 Pearle Visionemployees holding the positions of Lab Associate, Lead Lab Associate and SalesAssociate.

 

**Share Ownership**

 

Set forth below is certain informationconcerning the beneficial ownership of our ordinary shares as of May 13,2008, by each of our directors and executive officers who beneficially owns inexcess of one percent of our outstanding ordinary shares.

 
| **Shareholder**      | ** ** | **Issuer**             | ** ** | **Shares owned as of  May 13, 2008** | ** ** | **Percentage  Ownership** | ** ** |
|----------------------|------------|------------------------|------------|---------------------------------------------------------------|------------|---------------------------|------------|
| Leonardo Del Vecchio |       | Luxottica Group S.p.A. |       | 314,403,339                                                   | (1)        | 67.9                      | %          |
| Luigi Francavilla    |       | Luxottica Group S.p.A. |       | 5,540,400                                                     | (2)        | 1.2                       | %          |

 

----

(1)        Shares held of record byDelfin S.a.r.l., an entity established and controlled by Mr. Del Vecchio. Mr. DelVecchio holds voting and investment power over the shares held by such entity.

 

(2)        Includes 3,434,900 sharesheld by Mr. Francavilla and 2,105,500 shares that are issuable uponexercise of vested stock options.

 

Except as otherwise indicated above, each ofour directors and our executive officers owns less than one percent of ouroutstanding ordinary shares.

 

In addition, setforth below is certain information regarding share ownership for our directorsand our senior managers (who are not directors) as a group, prepared anddisclosed as required by applicable Italian law:

 
| **Shareholder**             | ** ** | **Shares held at the  beginning of 2007** | ** ** | **Shares bought during  2007** | ** ** | **Shares sold  during 2007** | ** ** | **Shares held at********the end of 2007** | ** ** |
|-----------------------------|------------|--------------------------------------------------------------------|------------|------------------------------------------|------------|----------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                  | ** ** | ** **                                                         | ** ** | ** **                               | ** ** | ** **                             | ** ** | ** **                                                         | ** ** |
| Leonardo Del Vecchio        |       | 314,803,339                                                        | (1)        |                                     |       | 400,000                                |       | 314,403,339                                                        | (1)        |
| Luigi Francavilla           |       | 3,434,900                                                          | (2)        |                                     |       |                                   |       | 3,434,900                                                          | (2)        |
| Roberto Chemello            |       | 1,077,875                                                          | (3)        |                                     |       |                                   |       | 1,077,875                                                          | (3)        |
| Claudio Del Vecchio         |       | 3,475,000                                                          | (4)        |                                     |       | 94,000                                 |       | 3,381,000                                                          | (5)        |
| Sabina Grossi               |       | 7,400                                                              |       | 4,800                                    |       |                                   |       | 12,200                                                             |       |
| Senior  Managers as a group |       | 30,400                                                             |       | 523,800                                  |       | 352,795                                |       | 201,405                                                            |       |

 

----

(1)           Shares held by Leonardo Del Vecchio throughDelfin S.a.r.l. Mr. Del Vecchio holds voting and investment power over theshares held by such entity.

 

(2)           3,364,800 shares are held in usufruct with Mr. Francavilla’swife. Mr. Francavilla and his wife hold voting and investment power overthese shares.

 

(3)           Shares held by Filuni S.A., an entityestablished and controlled by Mr. Chemello. Mr. Chemello holds votingand investment power over the shares held by such entity.

 

(4)           Includes 134,000 represented by ADRs, 30,000 ofwhich are held through the Del Vecchio Family Foundation. Mr. Del Vecchioholds voting and investment power over the shares held through this foundation.

 

(5)           Includes 40,000 represented by ADRs, 10,000 ofwhich are held through the Del Vecchio Family Foundation. Mr. Del Vecchioholds voting and investment power over the shares held through this foundation.

 

In March 1998, we adopted an employeestock option plan providing for the issuance of options covering up to12,250,000 ordinary shares of nominal value Euro 0.06 each. As a result of thechange in the par value of our ordinary shares from Lire to Euro, which wasapproved by our shareholders at the annual meeting held on June 26, 2001,the number of ordinary shares available for issuance under the plan was reducedto 10,798,642. Our Board of Directors administers the stock option plan. Thepurpose of the plan is to provide additional incentives to our key employees.Grants under the stock 

 

59

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option plan may be of non-qualified options and/or incentive stockoptions. Under the plan, the Board of Directors may not grant an option for aterm of more than nine years from the date of grant, or for a term that expiresafter March 31, 2011. The exercise price of these options is equal to themarket value of the underlying ordinary shares on the date of grant, defined asthe higher of (i) the closing market price of our ADRs on the business dayimmediately preceding the date of the grant, and (ii) the average of theclosing market prices for each business day during the 30-day period ending onthe date of the grant. Options granted under the plan generally becomeexercisable in three equal installments beginning on January 31 of theyear after the date of grant and expire nine years after such date.

 

In September 2001, we adopted anadditional employee stock option plan providing for the issuance of optionscovering up to 11,000,000 ordinary shares of nominal value Euro 0.06 each. Thepurpose and administration of the 2001 stock option plan are similar to thoseof the 1998 stock option plan, with the only significant difference being thatthe latest option termination date is March 31, 2017.

 

In July 2006, we adopted an additionalemployee stock option plan providing for the issuance of options covering up to20,000,000 ordinary shares of nominal value of Euro 0.06 each. The purpose ofthe plan is to provide additional incentives to key employees of the Group. Theexercise price of these options is equal to the market value of the underlyingordinary shares on the date of grant, defined as either (i) the average ofthe closing market prices for each business day during the 30-day period endingon the date of the grant or, if higher, (ii) the closing market price ofour ADRs on the business day immediately preceding the date of the grantdepending on the tax jurisdiction of the beneficiary. Options granted under theplan generally become exercisable three years after the date of grant and expirenine years after such date.

 

See Item 7—“Major Shareholders and RelatedParty Transactions—Related Party Transactions—Shareholder Plan” below forinformation regarding another stock option plan for our top management.

 

As of December 31, 2007, there were 13separate grants outstanding under the option plans described above, detailed asfollows:

 
| ** **                   | ** ** | **Number of  ordinary shares  underlying  options granted(1)** | ** ** | **Exercise  Price(1)** | ** ** | **Expiration Date** | ** ** | **Options held  by officers  and directors  (1)** | ** ** |
|------------------------------|------------|-------------------------------------------------------------------------------|------------|------------------------|------------|--------------------------|------------|------------------------------------------------------------------|------------|
| **1999 Grant**               |       | 3,679,200                                                                     |       | Euro                   |       | 4.38                     |       | January 31,  2008                                           |       | 14,000 |   |
| **2000 Grant**               |       | 2,142,200                                                                     |       | Euro                   |       | 9.52                     |       | January 31,  2009                                           |       | 32,400 |   |
| **2001 Grant**               |       | 2,079,300                                                                     |       | U.S.$                  |       | 15.20                    |       | January 31,  2010                                           |       | 23,100 |   |
| **2002 Grant**               |       | 2,348,400                                                                     |       | U.S.$                  |       | 17.80                    |       | January 31,  2011                                           |       | 23,100 |   |
| **2003 Grant**               |       | 2,397,300                                                                     |       | Euro                   |       | 10.51                    |       | January 31,  2012                                           |       | 71,000 |   |
| **2004 Grant**               |       | 2,035,500                                                                     |       | Euro                   |       | 13.79                    |       | January 31,  2013                                           |       | 422,100 |   |
| **2004 Performance Grant**   |       | 1,000,000                                                                     |       | U.S.$                  |       | 18.59                    |       | January 31,  2012                                           |       | 310,000 |   |
| **2004 Shareholder Grant**   |       | 9,600,000                                                                     |       | Euro                   |       | 13.67                    |       | December 31,  2014                                          |       | 9,200,000 |   |
| **2005 Grant**               |       | 1,512,000                                                                     |       | Euro                   |       | 16.89                    |       | January 31,  2014                                           |       | 144,000 |   |
| **2006 Grant**               |       | 1,725,000                                                                     |       | Euro                   |       | 22.19                    |       | January 31,  2015                                           |       | 700,000 |   |
| **2006 Performance Grant 1** |       | 3,500,000                                                                     |       | Euro                   |       | 22.09                    |       | July 27,  2015                                              |       | 2,200,000 |   |
| **2006 Performance Grant 2** |       | 9,500,000                                                                     |       | Euro                   |       | 20.99                    |       | July 27,  2015                                              |       | 9,250,000 |   |
| **2007 Grant**               |       | 1,745,000                                                                     |       | Euro                   |       | 24.05                    |       | March 6,  2016                                              |       | 160,000 |   |

 

----

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

 

*Stockoptions held by directors and senior managers*

######  

Setforth below is certain information regarding stock options held by ourdirectors and our senior managers (who are not directors) as a group, preparedand disclosed as required by applicable Italian law.

 

60

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| ** **                                                 | ** ** | **Options held at the beginning of 2007** | ** ** | **Options granted during 2007** | ** ** | **Options exercised during 2007** | ** **                                                           | **Options  expired  during 2007** | ** ** | **Options held at the end of 2007** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|------------------------------------------------|------------|--------------------------------------------------|----------------------------------------------------------------------|----------------------------------------|------------|-------------------------------------------------------------------|------------|
| **Name and  Position**                                | ** ** | **Number of  options**                                             | ** ** | **Average  exercise  price**                   | ** ** | **Average  expiration  date**                    | ** **                                                           | **Number of  options**            | ** ** | **Average  exercise  price**                                      | ** ** | **Average  expiration  date** | ** ** | **Number  of  options** | ** ** | **Average  exercise  price** | ** ** | **Average  market  price at  exercise** | ** ** | **Number of  options** | ** ** | **Number of  options** | ** ** | **Average  exercise  price** | ** ** | **Average  expiration  date** | ** ** |
|                                                       |       |                                                                    |       |                                           |       |                                             |                                                                 |                                   |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Enrico                                                     |       | 93,500                                                                  |       | €                                         | 20.08      |                                             | 2014                                                                 |                                   | —     |                                                              | —     |   | — |   | — |   | — |   | — |   | — |   | 93,500 |   | € | 20.08 |   | 2014 |   |
| Cavatorta,                                                 |       |                                                                    |       |                                           |       |                                             |                                                                 |                                   |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Chief Financial Officer and Director                       |       | 1,200,000                                                               |       | €                                         | 13.67      |                                             | 2014 (exercise subject to the  achievement of certain targets)       |                                   | —     |                                                              | —     |   | — |   | — |   | — |   | — |   | — |   | 1,200,000 |   | € | 13.67 |   | 2014 (exercise subject to the  achievement of certain targets) |   |
|                                                       |       |                                                                    |       |                                           |       |                                             |                                                                 |                                   |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                       |       | 1,100,000                                                               |       | €                                         | 20.99      |                                             | 2015 (exercise subject to the  achievement of certain targets)       |                                   | —     |                                                              | —     |   | — |   | — |   | — |   | — |   | — |   | 1,100,000 |   | € | 20.99 |   | 2015 (exercise subject to the  achievement of certain targets) |   |
|                                                       |       |                                                                    |       |                                           |       |                                             |                                                                 |                                   |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Roberto                                                    |       | 140,500                                                                 |       | €                                         | 17.98      |                                             | 2014                                                                 |                                   | —     |                                                              | —     |   | — |   | — |   | — |   | — |   | — |   | 140,500 |   | € | 17.98 |   | 2014 |   |
| Chemello,                                                  |       |                                                                    |       |                                           |       |                                             |                                                                 |                                   |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Group Operations Director                                  |       | 2,000,000                                                               |       | €                                         | 13.67      |                                             | 2014  (exercise subject to the achievement of  certain targets) |                                   | —     |                                                              | —     |   | — |   | — |   | — |   | — |   | — |   | 2,000,000 |   | € | 13.67 |   | 2014 (exercise subject to the  achievement of certain targets) |   |
|                                                       |       |                                                                    |       |                                           |       |                                             |                                                                 |                                   |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                       |       | 1,100,000                                                               |       | €                                         | 20.99      |                                             | 2015 (exercise subject to the  achievement of certain targets)       |                                   | —     |                                                              | —     |   | — |   | — |   | — |   | — |   | — |   | 1,100,000 |   | € | 20.99 |   | 2015 (exercise subject to the  achievement of certain targets) |   |
|                                                       |       |                                                                    |       |                                           |       |                                             |                                                                 |                                   |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Luigi                                                      |       | 140,500                                                                 |       | €                                         | 17.98      |                                             | 2014                                                                 |                                   | —     |                                                              | —     |   | — |   | — |   | — |   | — |   | — |   | 140,500 |   | € | 17.98 |   | 2014 |   |
| Francavilla,                                               |       |                                                                    |       |                                           |       |                                             |                                                                 |                                   |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Group Product and Design Director and Deputy Chairman      |       | 2,000,000                                                               |       | €                                         | 13.67      |                                             | 2014 (exercise subject to the  achievement of certain targets)       |                                   | —     |                                                              | —     |   | — |   | — |   | — |   | — |   | — |   | 2,000,000 |   | € | 13.67 |   | 2014 (exercise subject to the  achievement of certain targets) |   |
|                                                       |       |                                                                    |       |                                           |       |                                             |                                                                 |                                   |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                       |       | 1,500,000                                                               |       | €                                         | 20.99      |                                             | 2015 (exercise subject to the  achievement of certain targets)       |                                   | —     |                                                              | —     |   | — |   | — |   | — |   | — |   | — |   | 1,500,000 |   | € | 20.99 |   | 2015 (exercise subject to the  achievement of certain targets) |   |
|                                                       |       |                                                                    |       |                                           |       |                                             |                                                                 |                                   |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Andrea  Guerra,  Chief Executive Officer and Director |       | 2,000,000                                                               |       | €                                         | 13.67      |                                             | 2014 (exercise subject to the  achievement of certain targets)       |                                   | —     |                                                              | —     |   | — |   | — |   | — |   | — |   | — |   | 2,000,000 |   | € | 13.67 |   | 2014 (exercise subject to the  achievement of certain targets) |   |
|                                                       |       |                                                                    |       |                                           |       |                                             |                                                                 |                                   |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                       |       | 2,500,000                                                               |       | €                                         | 20.99      |                                             | 2015 (exercise subject to the  achievement of certain targets)       |                                   | —     |                                                              | —     |   | — |   | — |   | — |   | — |   | — |   | 2,500,000 |   | € | 20.99 |   | 2015 (exercise subject to the  achievement of certain targets) |   |
|                                                       |       |                                                                    |       |                                           |       |                                             |                                                                 |                                   |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sabina  Grossi,  Director                             |       | 55,200                                                                  |       | €                                         | 10.98      |                                             | 2010                                                                 |                                   | —     |                                                              | —     |   | — |   | 4,800 |   | € | 4.38 |   |   | (a) | — |   | 50,400 |   | € | 10.82 |   | 2011 |   |
|                                                       |       |                                                                    |       |                                           |       |                                             |                                                                 |                                   |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Senior Managers                                            |       | 1,312,600                                                               |       | €                                         | 16.26      |                                             | n.a.                                                                 |                                   | 160,000    |                                                              | €     | 24.05 |   | 2016 |   | 307,800 |   | € | 10.69 |   | € | 23.17 |   | — |   | 1,164,800 |   | € | 18.71 |   | n.a. |   |
|                                                       |       |                                                                    |       |                                           |       |                                             |                                                                 |                                   |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                       |       | 610,000                                                                 |       | €                                         | 14.12      |                                             | 2012 (exercise subject to the  achievement of certain targets)       |                                   | —     |                                                              | —     |   | — |   | 300,000 |   | € | 13.66 |   | € | 25.06 |   | — |   | 310,000 |   | € | 12.63 |   | 2012 (exercise subject to the  achievement of certain targets) |   |
|                                                       |       |                                                                    |       |                                           |       |                                             |                                                                 |                                   |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                       |       | 2,400,000                                                               |       | €                                         | 13.67      |                                             | 2014 (exercise subject to the  achievement of certain targets)       |                                   | —     |                                                              | —     |   | — |   | 400,000 |   | € | 13.67 |   |   | (b) | — |   | 2,000,000 |   | € | 13.67 |   | 2014 (exercise subject to the  achievement of certain targets) |   |
|                                                       |       |                                                                    |       |                                           |       |                                             |                                                                 |                                   |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                       |       | 5,250,000                                                               |       | €                                         | 21.45      |                                             | 2015 (exercise subject to the  achievement of certain targets)       |                                   | —     |                                                              | —     |   | — |   | — |   | — |   | — |   | — |   | 5,250,000 |   | € | 21.45 |   | 2015 (exercise subject to the  achievement of certain targets) |   |

 

----

(a)           The options wereexercised and the underlying shares were not sold. The price of our ordinaryshares as reported on the MTA on the day of the exercise was Euro 22.89 pershare.

 

(b)          The underlying shareswere partially sold. The average sale price was Euro 24.14 per share.

 

61

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*Luxottica Group S.p.A. 2008 Performance Shares Plan*

 

In May 2008, a performanceshares plan for the top managers of the Company and other companiesdirectly or indirectly controlled by the Company to be identified by the Board (the “Plan”) was adopted. The Plan isintended to strengthen the loyalty of our key employees and to recognize theircontributions to our success on a medium- to long-term basis. The beneficiariesof the Plan will be granted the right to receive ordinary shares, withoutconsideration, at the end of a three-year vesting period and subject toachievement of certain Company performance targets to be determined by ourBoard. The Plan will have a term of five years, during which the Board mayresolve to issue different grants to the Plan’s beneficiaries. The Plan coversa maximum of 6,500,000 ordinary shares. Each annual grant will not exceed2,000,000 ordinary shares. On May 13, 2008, the Board of Directors granted atotal of 1,203,600 rights to receive ordinary shares.  Employees whoreceived awards under the Plan were directors, officers and other managers withhighly strategic roles who were selected by the Board of Directors upon thedirect recommendation of our Human Resources Committee.

 

**Summary of the Significant DifferencesBetween Our Corporate Governance Practices and the Corporate GovernanceStandards of the New York Stock Exchange**

 

*Overview*

 

On November 4, 2003, the New York StockExchange (the “NYSE”) established new corporate governance rules forlisted companies. Under these NYSE rules, we are permitted, as a listed foreignprivate issuer, to adhere to the corporate governance standards of our homecountry in lieu of certain NYSE corporate governance rules, so long as wedisclose the significant ways in which our corporate governance practicesdiffer from those followed by U.S. companies under the NYSE listing standards.

 

Our corporate governance practices aregoverned principally by the Italian Code of Corporate Governance, amended in March 2006,issued 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”). Underthese Italian Corporate Governance Policies, we are permitted not to complywith certain rules and regulations, as long as we disclose the reason fornon-compliance.

 

The following is a brief summary of thesignificant differences between our corporate governance practices inaccordance with the Italian Corporate Governance Policies and those followed byU.S. companies under the NYSE listing standards.

 

*Composition of Board of Directors;Independence*

 

The NYSE listing standards provide that theboard of directors of a U.S. listed company must consist of a majority ofindependent directors and that certain committees must consist solely ofindependent directors. A director qualifies as independent only if the boardaffirmatively determines that the director has no material relationship withthe company, either directly or indirectly. The listing standards enumerate anumber of relationships that preclude independence. In addition, non-managementdirectors of a U.S. listed company are required to meet at regularly scheduledexecutive sessions without management.

 

The Italian Corporate Governance Policiesrecommend that an “adequate number” of non-executive and independent directorsserve on the board of directors of an Italian company, but do not require theboard of directors to consist of a majority of independent directors. Italianlaw requires that at least one director or, in the event the board of directorsis composed of more than seven members, at least two directors must fulfill therequirements to be independent.

 

The standards for determining directorindependence under the Italian Corporate Governance Policies are substantiallysimilar to the NYSE listing standards for U.S. listed companies. The ItalianCorporate Governance Policies require our non-executive directors to meet atexecutive sessions without management once per year, unless the reason for anynon-compliance is disclosed.

 

Based on standards under the ItalianCorporate Governance Policies, our Board of Directors has determined that,among its 14 members, 6 directors are independent. This number of independentdirectors complies with the “adequate number” of non-management directorsrecommended by the Italian Corporate Governance Policies. Our non-managementdirectors do not have regularly scheduled executive sessions withoutmanagement, as our Lead Independent Director, Lucio 

 

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Rondelli, has determined that it is not necessary to convene suchsessions, considering the high number of meetings of the Board of Directors andthe Internal Control Committee.

 

*Board Committees*

 

The NYSE listing standards require a U.S.listed company to have an audit committee, a nominating/corporate governancecommittee and a compensation committee. Each of these committees must consistsolely of independent directors and must have a written charter that addressescertain matters specified in the listing standards. The NYSE listing standardscontain detailed requirements for the audit committees of U.S. listedcompanies. Some, but not all, of these requirements also apply to non-U.S.listed companies such as us. Italian law, on the other hand, requires neitherthe establishment of board committees nor the adoption of written committeecharters. However, the Italian Corporate Governance Policies do require theestablishment of a Compensation Committee, with certain exceptions, as discussedbelow.

 

Italian law does not require Italian listedcompanies to have an audit committee, but does require companies to appoint aBoard of Statutory Auditors. The Board of Directors has designated the Board ofStatutory Auditors as the appropriate body to act as the “Audit Committee,” asdefined in the Sarbanes-Oxley Act, SEC regulations and the NYSE listingstandards. It operates in accordance with Italian law, the Company’s By-lawsand the “Regulations Governing the Duties of the Board of Statutory Auditors inaccordance with U.S. Audit Committee Requirements.” The Board of StatutoryAuditors has acted as the Audit Committee since the annual meeting ofshareholders on June 14, 2006. Additional information regarding our Boardof Statutory Auditors is set forth below.

 

With respect to the nomination of directors,Italian law requires that each Italian listed company file with its registeredoffice, at least 10 days before its ordinary meeting of stockholders, a list ofthe personal and professional qualifications of each proposed director nominee.The Italian Corporate Governance Policies also recommend that, if an Italianlisted company appoints a committee to select, or recommend the selection bythe board of directors of, director nominees for the next ordinary meeting ofstockholders, a majority of this committee be comprised of non-executivedirectors. The Company has elected not to appoint a committee to select, orrecommend the selection of, director nominees.

 

The Italian Corporate Governance Policiesrequire that Italian listed companies appoint a Compensation Committee and thata majority of this committee be comprised of non-executive directors, unlessthe reason for any non-compliance is disclosed. Our Human Resources Committeeperforms the functions of a compensation committee, including the review of ourofficers’ compensation and our stock option plans. On February 19, 2007,the Board of Directors of the Company, appointed new members of the HumanResources Committee among non-executive members of the Board, three of whichwere independent directors, to comply with the provisions of the amendedItalian Corporate Governance Policies.

 

For more information on the resolutionadopted by the Company to comply with the provisions of the Corporate GovernancePolicies, as amended on March 2006, please see our annul report oncorporate governance available on the company website.

 

*Internal Control Committee*

 

The Italian Corporate Governance Policiesalso require the establishment of an Internal Control Committee. Our InternalControl Committee consists of three independent directors. The committee hasinvestigative, advisory and proposal-making functions concentrating on, amongother matters, the internal control system and the proper use of accounting principlesin conjunction with our administration managers and auditors. The committeereports to the Board of Directors at least twice a year. The members of theInternal Control Committee are Lucio Rondelli, Mario Cattaneo and TancrediBianchi.

 

*Board of Statutory Auditors*

 

Our Board of Statutory Auditors consists ofthree regular members and two alternate members.The Board of Statutory Auditorsis appointed by our stockholders and serves for a period of three years.Italian law establishes the qualifications of candidates that may be appointedas members of the Board of Statutory Auditors, including the requirement thatmembers not concurrently serve on the listed company’s board of directors. OurBy-Laws are required to ensure that at least one member of the Board ofStatutory Auditors may be elected by our minority stockholders. Our By-Lawscomply with this requirement by providing that at least one regular member, whoshall serve as chairman, and one alternate member may be elected by ourminority stockholders in accordance with Italian law.

 

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The Board of Statutory Auditors oversees ourcompliance with our By-Laws and applicable laws and the adequacy of ourinternal control system and accounting and administrative system. The Board ofStatutory Auditors is required to attend all meetings of our stockholders andthe meetings of our Board of Directors. The Board of Statutory Auditors is alsorequired to notify CONSOB if we fail to comply with our By-Laws or anyapplicable laws.

 

*Corporate Governance Guidelines;Certification*

 

The NYSE listing standards require U.S.listed companies to adopt, and post on their websites, a set of corporategovernance guidelines. The guidelines must address, among other things,director qualification standards, director responsibilities, director access tomanagement and independent advisers, director compensation, directororientation and continuing education, management succession and an annualperformance evaluation of the Board of Directors. In addition, the chiefexecutive officer of a U.S. listed company must certify to the NYSE annuallythat he or she is not aware of any violations by the company of the NYSE’scorporate governance listing standards. The certification must be disclosed inthe company’s annual report to stockholders.

 

Italian Corporate Governance Policies requirethat listed companies annually report to their shareholders at the ordinarymeeting on their corporate governance system. Our Company complies with suchrequirement. You may find our Annual Report on Corporate Governance on ourwebsite at *www.luxottica.com*.

 

*Code of Business Conduct and Ethics*

 

The NYSE listing standards require each U.S.listed company to adopt, and post on its website, a code of business conductand ethics for its directors, officers and employees. Under SEC rules, allcompanies required to submit periodic reports to the SEC, including us, mustdisclose in their annual reports whether they have adopted a code of ethics fortheir chief executive officer and senior financial officers. In addition, theymust file a copy of the code with the SEC, post the text of the code ontheir website or undertake to provide a copy upon request to any person withoutcharge. There is significant, though not complete, overlap between the code ofbusiness conduct and ethics required by the NYSE listing standards and the codeof ethics for the chief financial officer and senior financial officersrequired by the SEC’s rules.

 

In accordance with SEC rules we haveadopted a Code of Ethics, which contains provisions in compliance with SECrequirements. Our Code of Ethics is available on our website at *www.luxottica.com*.

 

*Stockholder Approval of Equity CompensationPlans*

 

The NYSE listing standards require U.S.listed companies to seek stockholder approval for certain equity compensationplans. Italian law requires Italian listed companies to submit any capitalincreases of shares reserved for issuance under their equity compensation plansto stockholders for their approval at the meeting of stockholders. Inaccordance with Italian law, our stockholders approved capital increases ofshares reserved for issuance under our existing stock option plans in 1998,2001 and 2006.

 

**ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTYTRANSACTIONS**

 

**Major Shareholders**

 

The following tablesets forth, as of May 13, 2008, the beneficial ownership of ordinaryshares by each person known by us to beneficially own two percent or more ofthe outstanding ordinary shares (including ordinary shares represented byADSs):

** **
| **Identity of Person or Group** | ** ** | **Amount of  Shares Owned** | ** ** | **Percent of  Class** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------|------------|----------------------------|------------|
| Leonardo Del Vecchio                                |       | 320,838,125(1)                        |       | 69.31%                     |       |
| Giorgio Armani                                      |       | 22,724,000(2)                         |       | 4.91%                      |       |
| Harris Associates L.P                               |       | 9,436,900                             |       | 2.04%(3)                   |       |

 

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(1)           314,403,339 shares are held through Delfin S.a.r.l.; Mr. DelVecchio holds voting and investment power over the shares 

 

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heldby such entity. See “Item 6 -  Directors,Senior Management and Employees - Share Ownership.” 6,434,786 shares are heldby our subsidiary Arnette Optic Illusions, Inc.; in accordance withItalian law, such shares are treated as treasury shares and Mr. DelVecchio, as our majority shareholder, is the beneficial owner of such treasuryshares.

 

(2)           Including 13,514,000 shares represented by ADSs, and 9,210,000 sharesrepresented by ordinary shares. Of those, 9,010,000 ordinary shares are helddirectly and 200,000 ordinary shares are held indirectly through Giorgio ArmaniS.p.A.

 

(3)           Based on the ownership disclosure as reported by Harris Associates L.P.to the Company and CONSOB on April 9, 2008.

 

Withthe exception of the treasury shares held by Mr. Del Vecchio, whichaccording to Italian law have no voting rights, the shares held by Mr. DelVecchio and our other directors and executive officers have the same votingrights as the shares held by other shareholders.

 

Mr. Del Vecchio is our controllingshareholder and serves as Chairman of our Board of Directors. We are nototherwise directly or indirectly owned or controlled by anothercorporation or by any foreign government.

 

As of April 3, 2008, approximately 9.7 percentof our ordinary shares were held in the form of ADSs by approximately 11,400record holders.

 

To the best of our knowledge, to date thereare no arrangements which may result in a change of control of LuxotticaGroup S.p.A.

 

**Related Party Transactions**

 

*Fixed Assets*

 

In connection with the acquisition of ourheadquarters building in Milan, our subsidiary entered into an agreement leasinga portion of this building to our Chairman for Euro 0.5 million annually. Theexpiration date of this lease is 2010.

 

*License Agreements*

 

We have a worldwide exclusive licenseagreement to manufacture and distribute ophthalmic products under the Brooks Brothersname. The Brooks Brothers trade name is owned by Retail Brand Alliance, Inc.(“RBA”), which is controlled by Claudio Del Vecchio, one of our directors. Thelicense agreement expires in 2009. Royalties paid to RBA for such agreementwere Euro 0.9 million, Euro 1.3 million and Euro 0.5 million in the years endedDecember 31, 2007, 2006 and 2005, respectively.

 

In July 2004, we signed a worldwideexclusive license agreement to manufacture and distribute ophthalmic productsunder the name of Adrienne Vittadini. The Adrienne Vittadini trade name wasowned by RBA until November 2006 when the license was sold by RBA to aparty that is unaffiliated with the Company. For the years ended December 31,2006 and 2005, royalties paid to RBA for such agreement were Euro 1.0 millionand Euro 0.9 million, respectively.

 

*ServiceRevenues*

 

During the years ended December 31, 2007, 2006and 2005, U.S. Holdings performed certain services for RBA. Amounts receivedfor the services provided for those years were Euro 0.2 million, Euro 0.7million and 0.6 million, respectively.

 

*Shareholder Plan*

 

On September 14, 2004, our Chairman andmajority shareholder, Mr. Leonardo Del Vecchio, had allocated shares heldthrough La Leonardo Finanziaria S.r.l., now held through Delfin S.a.r.l, bothItalian holding companies of the Del Vecchio family, representing 2.11 percent(or 9.6 million shares) of the Company’s currently authorized and issued sharecapital, to a stock option plan for our top management at an exercise price ofEuro 13.67 per share (see Note 11 to the Consolidated Financial Statementsincluded in Item 18 of this annual report). The stock options to be issuedunder the stock option plan vested upon the achievement of certain economicobjectives by June 30, 2006, and, as such, the holders of these 

 

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options became entitled to exercise such options beginning on that dateuntil termination in 2014. In 2007, 400,000 options from this grant wereexercised.

 

*Transactions with Former Chairman of Oakley*

 

Certain of our Oakley associates performservices for a company owned by the former chairman of Oakley. Total billingsfor services rendered by Oakley were Euro 0.4 million since the date weacquired Oakley. The agreement can be terminated at any time with a 30-daywritten notice. In addition, Oakley may incur other costs on behalf of theformer chairman and such company that are paid by a prepaid deposit orreimbursed by the former chairman and such company after such amounts are paidby Oakley. As of December 31, 2007, the aggregate amount due from theformer chairman and such company he controls was approximately Euro 0.1million.

 

Oakley leases an aircraft from a differentcompany owned by the former chairman of Oakley. The annual lease payment isapproximately Euro 0.1 million and Oakley bears all costs and expenses ofoperating and maintaining the aircraft. The lease is expected to terminate in January 2009.Additionally, with respect to the aircraft lease, Oakley entered into timesharing agreements with the former chairman and various other entitiescontrolled by him whereby Oakley is reimbursed for costs of the aircraft whenutilized by the former chairman or his various companies.

 

**ITEM 8. FINANCIAL INFORMATION**

 

**Financial Statements**

 

See Item 18—“Financial Statements.”

 

**Legal Proceedings**

 

The Company and its subsidiaries are involvedin the following legal and regulatory proceedings of which the timing andoutcomes are inherently uncertain, and such outcomes could have a materialadverse effect on the Company’s business, financial position or operatingresults.

 

*CaliforniaVision Health Care Service Plan Lawsuit*

 

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 and EYEXAM, allege various statutory violations relating to theconfidentiality of medical information and the operation of LensCrafters’stores in California, including violations of California laws governingrelationships among opticians, optical retailers, manufacturers of frames andlenses and optometrists, and other unlawful or unfair business practices. Theaction seeks unspecified damages, statutory damages of U.S.$1,000 per classmember, disgorgement, restitution of allegedly unjustly obtained sums, punitivedamages and injunctive relief, including an injunction that would prohibitdefendants from providing eye examinations or other optometric services atLensCrafters stores in California.

 

The parties have reached a settlement which offers arange of benefits, including store vouchers and a cash-back option, along withcertain enhancements to LensCrafters’ business practices. On February 4,2008, the Court gave preliminary approval to a class action settlement. Ahearing to address final approval will take place in July 2008. If thesettlement is given final approval, and no appeals are taken, this matter willbe resolved.

 

Although we believe that our operationalpractices and advertising in California comply with California law, if thesettlement does not receive final approval and this action results in anadverse decision, LensCrafters and EYEXAM may have to modify or cease theiractivities in California. Further, LensCrafters and EYEXAM might be required topay damages and/or restitution, the amount of which might have a materialadverse effect on our 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 alleged various statutoryviolations related to the operation of Pearle Vision Centers in California,including violations of 

 

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Californialaws governing relationships among opticians, optical retailers, manufacturersof frames and lenses and optometrists, false advertising and other unlawful orunfair business practices. The action sought unspecified damages, disgorgement,restitution of allegedly unjustly obtained sums, civil penalties and injunctiverelief, including an injunction that would have prohibited defendants from providingeye examinations or other optometric services at Pearle Vision Centers inCalifornia.

 

On July 18, 2007, the trial court entered a finaljudgment and permanent injunction, pursuant to a stipulation of the parties,dismissing the case. The judgment required modification to Pearle Vision’sadvertising, and the payment by the Company of $2.5 million for attorneys’ feesand costs of investigation. The payment was made in August 2007. Thejudgment does not bar Pearle Vision from advertising the availability of eyeexams and other optometric services provided by Pearle VisionCare at PearleVision optical stores.

 

*Cole Consumer Class Action Lawsuit*

 

In June 2006, in*Seiken v.Pearle Vision, Inc. et al*, Cole and its subsidiaries were sued by aconsumer in a purported class action which alleges various statutory violationsrelated to the operation of Pearle Vision and its affiliated HMO, PearleVisionCare in California. The claims and remedies sought are similar to thoseasserted in the LensCrafters and EYEXAM case. In December 2006, the courtgranted the defendants’ motion to dismiss the complaint but allowed theplaintiff an opportunity to replead. Defendants moved to dismiss the amendedcomplaint in February 2007, and a hearing on the motion was held in March 2007.Such motion to dismiss was denied. Recently, the parties reached an agreementin principle to settle this case, subject to court approval. The proposedsettlement provides a store voucher at Pearle Vision or LensCrafters to eachclass member and the payment of attorneys’ fees and costs. A hearing to addresspreliminary approval of the settlement will take place in August 2008. Ahearing for final approval has not yet been scheduled. Although we believe thatour operational practices in California comply with California law, if thesettlement does not receive final approval and this action results in anadverse decision, Pearle Vision or Pearle VisionCare may have to modify orcease their activities in California. In addition, the Cole subsidiaries mightbe required to pay damages and/or restitution, the amount of which might have amaterial adverse effect on our operating results, financial condition and cashflow.

 

*OakleyShareholder Lawsuit*

 

On June 26, 2007, the Pipefitters Local No. 636Defined Benefit Plan filed a purported class action complaint, on behalf of itself and all othershareholders of Oakley, against Oakley and its Board of Directors inCalifornia Superior Court, County of Orange. The complaint alleged, among other things, that the defendantsviolated their fiduciary duties to shareholders by approving Oakley’s mergerwith Luxottica and claimed that the price per share fixed by the mergeragreement is inadequate and unfair. The defendants filed demurrers to thecomplaint, which the Court granted without prejudice. On September 14,2007, the plaintiff filed an amended complaint containing the same allegationsas the initial complaint and adding purported claims for breach of the duty ofcandor. Because we believed the allegations were without merit, on October 9,2007, the defendants demurred to the amended complaint. Rather than respond to that demurrer, theplaintiff admitted that its claims were moot and on January 4, 2008 fileda motion for attorneys’ fees and expenses. The hearing for this motion,originally scheduled for March 27, 2008, took place on April 17, 2008.On May 29, 2008, the Court issued a ruling denying the plaintiff’s motionfor attorneys’ fees and expenses in its entirety. The court did not rule onthe defendants’ demurrer to the amended complaint. Although the Court has notyet dismissed the action, but has rather indicated that it will set a furtherstatus conference sometime in the next sixty days, it is unlikely there will befurther proceedings with respect to the action as both sides have informed the Courtthat the underlying case is now moot and should be dismissed. However, if forany reason the Court does not indicate an intent to dismiss the actionfollowing the status conference, we intend to refile the demurrer seeking tohave the action dismissed.

 

*Fair CreditReporting Act Litigation*

 

In January 2007,a complaint was filed against Oakley in the United States District Court forthe Central District of California, alleging willful violations of the Fair andAccurate Credit Transactions Act related to the inclusion of credit cardexpiration dates on sales receipts. Plaintiff later filed an amended complaintadding two of Oakley’s wholly-owned subsidiaries as additional defendants. Plaintiffpurports to sue on behalf of a putative class of Oakley’s customers, but nomotion seeking class action status has yet been filed. The Oakley defendantshave denied any liability. Recently, the Oakley defendants entered into aproposed settlement arrangement with Plaintiff which, if approved by the court,would result in the settlement of this action, with a complete release in favorof the Oakley defendants, with no cash payment to the purported class members,but rather an agreement by Oakley to issue vouchers for the purchase ofproducts at Oakley retail stores during a limited period of time. The aggregateretail value of the vouchers would depend on how many purported class 

 

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members submit valid claims. The proposed settlement also provides forthe payment of attorneys’ fees and claim administration costs by the Oakleydefendants. A motion seeking court approval of the foregoing settlement will befiled shortly.

 

It is the opinion of management that theoutcome of existing claims against us will not have a material adverse effecton our consolidated financial position or results of operations. However, theoutcome of these litigation claims is inherently uncertain, and there can be noassurance that one or more of these actions, if adversely determined, will nothave a material adverse effect on our business, results of operations andfinancial condition. In addition, we may be subject to material claims,judgments or proceedings in the future which, if adversely determined, may havea material adverse effect on our business, results of operations and financialcondition. See Item 3—“Key Information—Risk Factors—If we become subject toadverse judgments or determinations in legal proceedings to which we are, ormay become, a party, our future profitability could suffer through a reductionof sales or increased costs.”

 

**Dividend Distributions**

 

See Item 3—“Key Information—Dividends” andItem 10—“Additional Information—Dividends.”

 

**Significant Changes**

 

Except as otherwise indicated above, nosignificant changes have occurred since the date of our annual financialstatements included in this Form 20-F.

 

**ITEM 9. THE OFFER AND LISTING**

 

Our ordinary shares were approved for tradingon the Milan Stock Exchange on December 4, 2000. Our ADSs were admittedfor trading on the NYSE on January 24, 1990. Our ADSs are evidenced byADRs issuable by Deutsche Bank Trust Company Americas, as depositary, pursuantto a Deposit Agreement.

 

The table below sets forth, for the periodsindicated, high and low closing prices of the ADSs on the NYSE (in U.S.dollars) and ordinary shares on the Milan Stock Exchange (in Euro).

 
| ** **         | ** ** | **New York Stock Exchange** | ** ** | **Milan Stock Exchange** | ** ** |
|--------------------|------------|--------------------------------------------|------------|------------------------------------|------------|
| ** **         | ** ** | **(in U.S.$)**                        | ** ** | **(in Euro)**                 | ** ** |
| ** **         | ** ** | **High**                                   | ** ** | **Low**                            | ** ** | **High** | ** ** | **Low** | ** ** |
|               |       |                                       |       |                               |       |   |   |   |   |
| **2003**           |       | 18.15                                      |       | 10.23                              |       | 14.82 |   | 9.25 |   |
| **2004**           |       | 20.39                                      |       | 15.18                              |       | 15.51 |   | 12.43 |   |
| **2005**           |       | 25.83                                      |       | 19.69                              |       | 21.94 |   | 15.11 |   |
| **2006**           |       |                                       |       |                               |       |   |   |   |   |
| First Quarter      |       | 29.05                                      |       | 24.90                              |       | 24.12 |   | 20.37 |   |
| Second Quarter     |       | 30.54                                      |       | 24.36                              |       | 24.19 |   | 19.30 |   |
| Third Quarter      |       | 29.47                                      |       | 25.32                              |       | 23.25 |   | 20.15 |   |
| Fourth Quarter     |       | 31.39                                      |       | 29.31                              |       | 24.46 |   | 22.53 |   |
| Year 2006     |       | 31.39                                      |       | 24.36                              |       | 24.46 |   | 19.30 |   |
| **2007**           |       |                                       |       |                               |       |   |   |   |   |
| First Quarter      |       | 32.81                                      |       | 29.70                              |       | 24.92 |   | 22.72 |   |
| Second Quarter     |       | 38.64                                      |       | 32.00                              |       | 28.78 |   | 23.91 |   |
| Third Quarter      |       | 39.38                                      |       | 33.02                              |       | 28.79 |   | 23.87 |   |
| Fourth Quarter     |       | 37.19                                      |       | 30.84                              |       | 26.35 |   | 21.33 |   |
| December 2007 |       | 33.58                                      |       | 30.84                              |       | 22.86 |   | 21.48 |   |
| Year 2007     |       | 39.38                                      |       | 29.70                              |       | 28.79 |   | 21.33 |   |
| **2008**           |       |                                       |       |                               |       |   |   |   |   |
| January 2008  |       | 30.92                                      |       | 24.80                              |       | 21.15 |   | 17.01 |   |
| February 2008 |       | 28.49                                      |       | 24.58                              |       | 19.19 |   | 16.65 |   |
| March 2008    |       | 27.26                                      |       | 23.15                              |       | 18.00 |   | 14.80 |   |
| April 2008    |       | 28.10                                      |       | 24.26                              |       | 18.14 |   | 15.36 |   |
| May 2008      |       | 29.62                                      |       | 26.85                              |       | 19.40 |   | 17.17 |   |

 

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The high and low closing prices of the ADSs on theNYSE for the first quarter of 2008 were U.S.$30.92 and U.S.$23.15,respectively. The high and low closing prices of the ordinary shares on theMilan Stock Exchange for the first quarter of 2008 were Euro 21.15 and Euro14.80, respectively.

 

**ITEM 10. ADDITIONAL INFORMATION**

 

**Articles of Association and Amended and Restated By-Laws**

 

*Our Objectives*

 

Our Articles of Association provide that LuxotticaGroup S.p.A.’s principal objectives are, among other things, (i) theownership and management of other companies or entities both in Italy andabroad, (ii) financing and managerial coordination of the owned companiesand entities and (iii) providing credit support for our subsidiaries. TheLegislative Decree No. 58 of February 24, 1998 regulating the Italianfinancial markets (“Decree No. 58”) and our Amended and Restated By-Laws****contain, among other things, provisions to the followingeffect:

 

*Directors*

 

The Board of Directors is invested with the fullestpowers for ordinary and extraordinary management of the company, except for theacts that the law reserves for shareholders’ meetings. Compensation of thedirectors is approved by the ordinary shareholders at the annual meeting ofshareholders. The compensation of directors who also serve as executiveofficers is determined by the Board of Directors with the favorable opinion ofthe Board of Statutory Auditors.

 

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

 

Directors are required to report to the otherdirectors or to the Board of Statutory Auditors any transactions involving theCompany in which such director or a party affiliated with such directormay have an interest. Our directors usually abstain from voting on matters inwhich they have an interest (including their compensation), but there is norequirement under Italian law to abstain from such vote.

 

**Rights Attaching to Ordinary Shares**

 

*Dividends*

 

We are required to pay an annual dividend on the ordinaryshares if approved by a majority of shareholders at the ordinary meeting thatmust be held within the time specified by the law in force from time to time.Before dividends may be paid with respect to the results of any year incompliance with Italian law, an amount equal to five percent of our net incomefor such year must be set aside to the legal reserve until the reserve,including amounts set aside during prior years, is equal to at least one-fifthof the nominal value of our issued share capital. See Item 3—“KeyInformation—Dividends.”

 

Future determinations as to dividends will dependupon, among other things, our earnings, financial position and capitalrequirements, applicable legal restrictions and such other factors as the Boardof Directors and shareholders may determine. Dividends are usually paid inaccordance with the dates set annually by Borsa Italiana S.p.A. Dividends whichare not collected within five years of the date on which they become payableare forfeited in favor of the Company. Dividends are paid to those persons whohold the ordinary shares through an intermediary on a dividend payment datedeclared at the shareholders’ meeting. The intermediary, upon request by theshareholder, issues a certified statement of account allowing the shareholderto collect the dividends.

 

If dividends are not distributed and an appropriatereserve is created, the shareholders can adopt a resolution, at anextraordinary meeting, to convert such reserve into capital. In this case, theshares resulting from the increase are attributable to the shareholders inproportion to their ownership before the increase.

 

*Notification of the Acquisition of Shares and Voting Rights*

 

Pursuant to Italian securities laws and CONSOB (theItalian securities regulatory authority) implementing regulations thereof, anyperson acquiring any interest in excess of two percent in the votingshares of a listed company must give notice to CONSOB and the company whoseshares are acquired. The voting rights attributable to the shares in respect of

 

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whichsuch notification has not been made may not be exercised. Any resolution takenin violation of the foregoing may be annulled if the resolution would not havebeen passed in the absence of such votes.

 

In addition, any person whose aggregate shareholdingin a listed company exceeds or falls below two percent, five percent,seven and a half percent, ten percent and successive percentage multiplesof five, respectively, of the listed company’s voting share capital isobligated to notify CONSOB and the listed company whose shares are acquired ordisposed. For the purpose of calculating these ownership thresholds, sharesowned by any person, irrespective of whether the relative voting rights areexercisable by such person or by a third party, are taken into considerationand, except in certain circumstances, account should also be taken of sharesheld through, or shares the voting rights of which are exercisable by,subsidiaries, fiduciaries or intermediaries. For the purpose of calculating theownership thresholds of five percent, ten percent, 25 percent,50 percent and 75 percent, shares which: (i) a person may,directly or indirectly, acquire or sell; and (ii) a person may acquire pursuantto the exercise of a warrant or conversion right which is exercisable within60 days, should also be taken into account. The notification obligation isto be repeated when such person, upon the exercise of the right referred to in (i) or(ii) above, acquires or disposes of shares which cause his aggregateownership in the listed company to exceed or fall below the relevantthresholds. Notification should be made (except in certain circumstances)within five trading days of the event that gives rise to the notificationobligation.

 

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 who the laterparty to exceed the limit is, the limitation on voting rights will, subject todifferent 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 any agreement which governs thevoting rights of the shares of a listed company or of its parent company issubject to the notification of such agreement to CONSOB, the publication of asummary of such agreement in the press and the filing of the agreement with theRegister of Enterprises, in each case, within five days, ten days and15 days, respectively, of the date of the agreement. Failure to complywith the foregoing requirements will render the agreement null and void and thevoting rights of the relative shares cannot be exercised.

 

The agreements subject to the above include thosewhich: (i) regulate the exercise of, or prior consultation for theexercise of voting rights in, a listed company or its controlling company; (ii) containlimitations on the transfer of shares or securities which grant the right to purchaseor subscribe for shares; (iii) provide for the purchase of shares orsecurities mentioned in (ii);  (iv) haveas their object or effect the exercise (including joint exercise) of a dominantinfluence over the company; or (v) aim to encourage or frustrate atakeover bid or equity swap, including commitments relating tonon-participations in a takeover bid.

 

Any agreement of the nature described above can havea legal maximum term of three years (and may be renewed for an additionalthree-year term at its expiration), and if executed for an unlimited term shallotherwise expire three years after its execution. Any such agreement executedfor an unlimited term can be terminated by a party upon six months’ priornotice. In the case of a public tender offer, shareholders who intend toparticipate in the tender offer may withdraw from the agreement without notice.CONSOB Regulation 11971/99 contains provisions which govern the method andcontent of the notification and publication of the agreements as well as anysubsequent amendments thereto.

 

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*General Meetings*

 

Meetings of the shareholders may be held at our executive offices in Italy, in any country inthe European Union or in the United States, following publication of notice ofthe meeting, including the agenda, in the “Gazzetta Ufficiale della RepubblicaItaliana” or, alternatively, in one of the following daily newspapers: “Il Sole24Ore,” “Il Corriere della Sera” or “la Repubblica” at least 30 days beforethe date fixed for the meeting. Deutsche Bank Trust Company Americas will mailto all record holders of ADRs a notice containing a summary of the informationcontained in any notice of a shareholders’ meeting received by DeutscheBank Trust Company Americas. See “—Documents on Display.”

 

Meetings of shareholders may be either ordinarymeetings or extraordinary meetings. Shareholders’ meetings may be called by theBoard of Directors or the Board of Statutory Auditors. In the case of a listedcompany in Italy, shareholders’ meetings must be promptly convened upon therequest of holders representing at least ten percent of the issued andoutstanding share capital, provided that the request contains a summary of thematters to be discussed. The Board of Directors may, however, resolve not toconvene a meeting if the interest of Luxottica so requires. In this case, thecompetent Court, on appeal by the shareholders who have asked for such meeting,can order by decree, after having conferred with the Board of Directors and theBoard of Statutory Auditors, that such meeting be convened.

 

Holders of ordinary shares are entitled to attendand vote at ordinary and extraordinary shareholders’ meetings. Each holder isentitled to cast one vote for each ordinary share held. Votes may be castpersonally or by proxy, in accordance with applicable Italian regulation.However, the voting rights of ordinary shares held in breach of applicable lawmay in some cases not be exercised.

 

Ordinary shareholders’ meetings must be convened atleast once a year to approve the annual financial statements of LuxotticaGroup S.p.A. Our By-Laws provide that the meeting for the approval of thefinancial statements can be convened within the time specified by the law inforce from time to time.

 

At ordinary shareholders’ meetings, shareholdersresolve upon dividend distribution, if any, appoint the Directors, StatutoryAuditors and external auditors, determine their remuneration and vote onbusiness matters submitted by the Directors.

 

The quorum required, in person or by proxy, for anordinary meeting, upon first notice is at least 50 percent of the totalnumber of issued and outstanding ordinary shares, while on second call there isno quorum requirement. Resolutions at ordinary meetings may be adopted, infirst and second calls, by a simple majority of ordinary shares represented atsuch meeting.

 

To the extent provided by law, shareholders whorepresent at least 1/40 of the share capital issued and outstanding mayrequest, within five days from the publication of the agenda, a supplement ofthe agenda provided that the request contains a summary of the matters to bediscussed.

 

Extraordinary meetings of shareholders may be calledto vote upon, among other things, proposed amendments to the By-Laws, capitalincreases, mergers, spin-offs, issuance of debentures, appointment of receiversand similar extraordinary actions. Extraordinary shareholders’ meetings shallbe properly convened when, in the case of the first meeting, shareholdersrepresenting at least one-half of our share capital are present at the meeting,and in the case of the second and third (and any subsequent) meetings,shareholders representing, respectively, more than one-third and one-fifth ofour share capital are present at the meeting. Resolutions are adopted on first,second and third call of extraordinary shareholders meetings with theaffirmative vote of holders of at least two-thirds of the shares represented atthe meeting.

 

Pursuant to our By-laws, subject to the concurrentcompetence of the extraordinary meeting of stockholders, the Board also has theauthority over resolutions in connection with mergers and demergers inaccordance with Articles 2505 and 2505 *bis*and 2506 *ter*of the Civil Code,the establishment or termination of branches, the determination of whichdirectors shall be authorized to represent the Company, the reduction of theoutstanding capital stock in the event of withdrawal of a stockholder, theamendment of the By-Laws to comply with legal requirements, or the transfer ofthe principal place of business within the national territory.

 

The meeting notice period of 30 days is reducedto, respectively, 20 days with respect to meetings convened at the requestof minority shareholders and meetings convened to resolve upon LuxotticaGroup S.p.A.’s dissolution, and 15 days for meetings convened pendinga public tender offer launched with respect to our ordinary shares. The noticemay specify a date for a second meeting in the event that a quorum is not obtainedat the first meeting. Notice of any subsequent meeting that must be held within30 days from the previously adjourned meeting, must be published at leasteight days prior to the date of the meeting. In addition, a meeting will bedeemed duly convened if shareholders representing 100 percent of

 

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LuxotticaGroup S.p.A.’s share capital, together with a majority of the members ofthe Board of Directors and the Board of Statutory Auditors, are present at themeeting.

 

To attend any shareholders’ meeting, a holder ofordinary shares must, at least two business days prior to the date fixed forthe meeting, deposit a certified statement of account which evidences itsownership of the ordinary shares at our offices or with such agent banks as maybe specified in the notice of meeting in exchange for an admission ticket andproxy form for the meeting. Such statements may be obtained by beneficialowners of the ordinary shares through the intermediaries associated with MonteTitoli (or such authorized centralized securities custody and administrationsystem with which their accounts are held). Alternatively, beneficial ownersmay instruct the relevant intermediary to procure the admission tickets andproxy forms.

 

Shareholders may appoint proxies by completing theform attached to the admission ticket. Directors, Statutory Auditors, externalauditors or our employees as well as employees of companies controlled by usmay not vote as proxies for shareholders and any one proxy cannot representmore than 200 shareholders of Luxottica Group S.p.A.

 

Pursuant to Decree n. 58/98, proxies maybe solicited by an intermediary (for example, banks or investment firms) onbehalf of a qualified soliciting stakeholder (generally, one or moreshareholders who own at least one percent or such lesser percentage determinedby CONSOB) of our voting capital and who has been registered in ourshareholders’ register as a holder of such shares for at least six months.

 

Proxies may be collected by a shareholders’association provided that such association has been formed by certified privateagreement, does not carry out business activities and is made up of at least50 individuals each of whom owns no more than 0.1 percent of our votingcapital. Members of the shareholders’ association may, but are not obliged togrant proxies to the legal representative of the association and proxies may begranted in respect of only certain of the matters to be discussed at therelevant shareholders’ meeting. The association may vote in different ways incompliance with the instructions expressed by each member who has granted aproxy to the association. CONSOB has established by implementing regulationsprovisions that govern the transparency and the proper performance of thesolicitation and collection of proxies.

 

Our By-Laws do not contain any limitations on thevoting rights in respect of ordinary shares held by any shareholder.Resolutions adopted at a shareholders’ meeting are binding on all shareholders.However, each absent, dissenting or abstaining shareholder (as well as anyDirector or Statutory Auditor) has the right, under Italian law, to ask a courtto annul resolutions taken in violation of applicable laws or the By-Laws. Inaddition, in a limited number of cases (including the merger of a listedcompany with, and its incorporation into, an unlisted company) applicable lawgrants dissenting and absent shareholders the right to obtain the redemption oftheir shares by the issuer at the average market price of the shares during theprevious six-month period. A redemption can be effected either by utilizing theavailable reserves of the issuer (in which case the shares may be held andregistered in the name of the issuer) or alternatively by a reduction of sharecapital of the issuer.

 

*Option Rights*

 

Pursuant to Italian law, holders of ordinary sharesare entitled to subscribe for issuances of shares, debentures convertible intoshares and rights to subscribe for shares in proportion to their holdings,unless such option rights are waived or limited by a shareholders’ resolutionadopted by the affirmative vote of holders of more than 50 percent of theordinary shares and such waiver or limitation is in the interest of LuxotticaGroup S.p.A. Particular Italian regulations set forth the procedures to befollowed by Italian listed companies in such circumstances.

 

It is likely that the option rights generallyavailable to holders of ordinary shares may not be fully available to holdersof ADRs. See “ —Description of American Depositary Receipts—Share Dividends andOther Distributions.”

 

Pursuant to Decree n. 58/98, in the event that: (i) thenewly issued shares are offered for subscription to our employees or employeesof our subsidiaries; and (ii) the new shares to be issued by us forsubscription by the aforementioned parties do not exceed one percent of ourshare capital, the resolution excluding option rights is to be approved byshareholders representing the majority required for extraordinary meetings.

 

Pursuant to Italian law, such option rights may beeliminated in certain other cases including contributions in kind.

 

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*Preferential Shares*

 

Under Italian law, a company such as ours may issueshares that have a preference over ordinary shares with respect to thedistribution of dividends or surplus assets. At present, we have no suchpreferential shares outstanding and any issuance of such shares would besubject to approval by a majority of shareholders.

 

*Rights on Liquidation*

 

On a liquidation or winding-up of the company,subject to the preferential rights of holders of any outstanding preferentialshares, holders of ordinary shares will be entitled to participate in anysurplus assets remaining after payment of the creditors. Shares rank *pari passu* among themselves in liquidation.

 

*Purchase of Shares by Luxottica Group S.p.A.*

 

We may purchase up to ten percent of our ordinaryshares, subject to certain conditions and limitations provided by Italian law,including that the purchase be approved by shareholders. Shares may only bepurchased out of profits available for dividends and distributable reserves asappearing in the latest shareholder-approved unconsolidated financialstatements. Further, we may only repurchase fully paid shares. As long as suchshares are owned by us, they would not be entitled to dividends nor tosubscribe for new ordinary shares in the case of capital increases, and theirvoting rights would be suspended. A corresponding reserve must be created inour balance sheet which is not available for distribution.

 

Decree n. 58/98 provides that the purchase by alisted company of its own shares and the purchase of shares of a listed companyby its subsidiary must take place by way of a public offer or on the market ina manner agreed with Borsa Italiana S.p.A. which must ensure the equalityof treatment among shareholders, subject to certain limitations. The foregoingdoes not apply to shares being purchased by a listed company from its employeesor employees of its parent company or subsidiaries under certain circumstances.

 

The ordinary meeting of shareholders on May 13,2008 approved a program authorizing the repurchase and disposal of up to amaximum of 18,500,000 Luxottica Group ordinary shares over the 18-month periodfollowing such date, for a maximum cost of up to Euro 370,000,000.

 

*Minority Shareholders’ Rights*

 

An absent or dissenting shareholder (representing1/1000 of the share capital of the Company) may, within three months, ask acourt to annul shareholders’ resolutions taken in violation of applicable lawsor our By-Laws. Any shareholders may bring to the attention of the Board ofStatutory Auditors facts or acts which are deemed wrongful. If suchshareholders represent more than 1/50 percent of our share capital, the Boardof Statutory Auditors must investigate without delay and report its findingsand recommendations at the shareholders’ meeting.

 

Shareholders representing more than 1/20 of ourshare capital have the right to report major irregularities to the relevantcourt. In addition, shareholders representing at least 1/40 of our sharecapital may initiate a liability suit against the directors, Statutory Auditorsand general managers of Luxottica Group S.p.A. We may waive or settle thesuit only if less than five percent of the shareholders vote against suchwaiver or settlement. We will reimburse the legal costs of such action in theevent that the claim of such shareholders is successful and (i) the courtdoes not award such costs against the relevant directors, Statutory Auditors orgeneral managers, or (ii) such costs cannot be recovered from suchdirectors, Statutory Auditors or general managers. In compliance withdecree n. 58/98, our By-Laws give minority shareholders the right toappoint directors and one Statutory Auditor as chairman and one AlternateAuditor to the Board of Statutory Auditors. See Item 6—“Directors, SeniorManagement and Employees—Directors and Senior Management.”

 

*Italian Tender Offer Rules*

 

Under Decree n. 58/98, a public tender offer isrequired to be made by any person that through share purchases holds more than30 percent of the voting stock of an Italian listed company. The publictender offer must cover the whole voting stock of the company. Similarly, underCONSOB rules, a public tender for the entire voting stock of a listed companymust be made by any person who currently owns more than a 30 percent interestin the voting securities of a company (but does not exercise majority votingrights at an ordinary shareholders’ meeting) and purchases or acquires,directly or indirectly, through the exercise of subscription or conversionrights during a 12-month period more than three percent of the ordinarycapital with voting rights. The offer must be launched within 20 days fromthe date on which the relevant threshold was exceeded, and must be made at aprice for each class of securities at least equal to the highest price paid bythe offeror and/or by its concert parties for the purchase of the relevantclass of the target company’s securities over a 12-month period preceding theannouncement of the compulsory bid. If no purchases for value of the relevantclass of securities have been

 

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madein the relevant period, the offer price will be equal to the weighted averagemarket price of the target securities over the previous 12 months (or, if amarket price for the relevant class of securities has not been available forthe whole of this period, over such shorter period for which a market price hasbeen available).

 

CONSOB regulates these provisions in greater detailthrough a number of exemptions from the duty to launch a tender offer. Suchexemptions include, among others: (i) when another person or personsjointly control the company; (ii) when a party exceeds the threshold as aresult of shares transferred to it by a related party; and (iii) when thethreshold is exceeded by a party following the exercise of pre-emption orconversion rights to which such party was entitled. Article 107 of theTesto Unico further provides 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 concerned hasexceeded 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 an exemption granted by CONSOB provided 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 grant to all other shareholders the rightto sell off their remaining shares, unless an adequate distribution of theshares is resumed so as to ensure proper trading within a period of threemonths. Moreover, any person who,following a tender offer for 100 percent of the voting stock, purchases morethan 95 percent of the voting stock: (i) must grant to all othershareholders the right to sell their voting shares or (ii) alternatively,and provided that it has stated its intention to do so in the offeringdocumentation, is entitled to acquire all remaining voting shares of thecompany (squeeze-out) within three months following the conclusion of thetender offer. Shares held in breach of these rules cannot bevoted and must be sold within 12 months.

 

*Derivative Suits*

 

Under Italian law, action against members of theBoard of Directors, members of the Board of Statutory Auditors and GeneralManagers of a company may be brought on behalf of the company if authorized bya resolution adopted at an ordinary meeting of shareholders. In respect oflisted companies, Italian law provides for a form of shareholders’ actionagainst members of a board of directors, which may be brought by holders of atleast 1/40 of the outstanding shares. We are allowed to not commence, or tosettle, the suit provided that shareholders representing at least five percentof the issued and outstanding shares do not vote against a resolution to thiseffect. We will reimburse the legal costs of such action in the event that theclaim of such shareholders is successful and (i) the court does not awardthese costs as part of the judgment against the relevant directors, StatutoryAuditors or general managers or (ii) these costs cannot be recovered fromsuch directors, Statutory Auditors or general managers. In addition, Italianlaw permits a shareholder acting alone to bring an action against members of aboard of directors in the event that such shareholder has suffered damagesdirectly related to negligence or willful misconduct.

 

*No Limitation of Ownership*

 

Neither Italian law nor any of our constituentdocuments impose any limitations on the right of non-resident or foreignshareholders to hold or exercise voting rights on our ordinary shares or theADSs.

 

**Description of American Depositary Receipts**

 

The following is a summary of certain provisions ofthe Amended and Restated Deposit Agreement (the “Deposit Agreement”), dated asof March 30, 2006, among Deutsche Bank Trust Company Americas, asdepositary, the owners and holders from time to time of ADRs issued thereunderand us. The Deposit Agreement supersedes our earlier deposit agreement with TheBank of New York. This summary does not purport to be complete and is qualifiedin its entirety by reference to the Deposit Agreement, a copy of which has beenfiled as an exhibit to this annual report. For more complete information, theentire agreement should be read. Copies of the Deposit Agreement are availablefor inspection at the principal Corporate Trust Office of Deutsche Bank TrustCompany Americas at 60 Wall Street, New York, New York 10005.

 

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ADRs are issued by Deutsche Bank Trust CompanyAmericas. Each ADR evidences an ownership interest in a number of AmericanDepositary Shares, each of which represents one ordinary share that we depositwith Deutsche Bank Milan, as custodian under the Deposit Agreement. Each ADRwill also represent securities, cash or other property deposited with DeutscheBank Trust Company Americas but not distributed to ADR holders. Deutsche BankTrust Company Americas’ Corporate Trust Office is located at 60 Wall Street,New York, New York 10005, and its principal executive office islocated at 60 Wall Street, New York, New York 10005.

 

***Share Dividends and Other Distributions***

 

Deutsche Bank Trust Company Americas has agreed topay to ADR holders the cash dividends or other distributions it or thecustodian receives on ordinary shares or other deposited securities, afterdeducting its fees and expenses.

 

*Cash*

 

Deutsche Bank Trust Company Americas converts anycash 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 Deutsche Bank TrustCompany Americas 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, Deutsche Bank Trust Company Americas may distribute the foreigncurrency to, or in its discretion may hold the foreign currency uninvested andwithout liability for interest for the accounts of, ADR holders entitled toreceive the same.

 

*Shares*

 

Deutsche Bank Trust Company Americas will, unlessotherwise requested by us, distribute new ADRs representing any shares we maydistribute as a dividend or free distribution. Deutsche Bank Trust CompanyAmericas will only distribute whole ADRs. It will sell shares which wouldrequire it to issue a fractional ADR and distribute the net proceeds in thesame way as it does with dividends or distributions of cash. If Deutsche BankTrust Company Americas does not distribute additional ADRs, each ADR will alsorepresent the additional deposited shares.

 

*Rights to Receive Additional Shares*

 

If we offer holders of our ordinary shares anyrights to subscribe for additional ordinary shares or any other rights,Deutsche Bank Trust Company Americas may make these rights available to ADRholders. We must first instruct Deutsche Bank Trust Company Americas to do soand furnish it with satisfactory evidence that it is legal to do so. If we donot furnish this evidence and/or give these instructions, or if Deutsche BankTrust Company Americas determines in its reasonable discretion that it is notlawful and feasible to make such rights available to all or certain owners,Deutsche Bank Trust Company Americas may sell the rights and allocate the netproceeds to holders’ accounts. Deutsche Bank Trust Company Americas may allowrights that are not distributed or sold to lapse. In that case, ADR holderswill receive no value for them.

 

If Deutsche Bank Trust Company Americas makes rightsavailable to ADR holders, upon instruction from such holders it will exercisethe rights and purchase the shares on behalf of the ADR holders.

 

*Deposit, Withdrawal and Cancellation*

 

ADRs may be turned in at the Corporate Trust Officeof Deutsche Bank Trust Company Americas. Upon payment of its fees and expensesand of any taxes or charges, such as stamp taxes or stock transfer taxes orfees, Deutsche Bank Trust Company Americas will deliver the depositedsecurities underlying the ADRs at the office of the custodian, except thatDeutsche Bank Trust Company Americas may deliver at its Corporate Trust Officeany dividends or distributions with respect to the deposited securitiesrepresented by the ADRs, or any proceeds from the sale of any dividends,distributions or rights, which may be held by Deutsche Bank Trust CompanyAmericas. Alternatively, at the request, risk and expense of the applicable ADRholder, Deutsche Bank Trust Company Americas will deliver the depositedsecurities at its Corporate Trust Office.

 

*Voting Rights*

 

ADR holders may instruct Deutsche Bank Trust CompanyAmericas to vote the shares underlying ADRs but only if we ask Deutsche BankTrust Company Americas to ask for such instructions. Otherwise, ADR holderswill not be able to

 

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exercisetheir right to vote unless such holders withdraw the ordinary shares underlyingthe ADRs. However, an ADR holder may not know about a meeting at which suchholder may be entitled to vote enough in advance to withdraw the shares.

 

If we ask for instructions of an ADR holder,Deutsche Bank Trust Company Americas will notify the ADR holder of the upcomingvote and arrange to deliver voting materials. The materials will (1) describethe matters to be voted on and (2) explain how ADR holders, on a certaindate, may instruct Deutsche Bank Trust Company Americas to vote the shares orother deposited securities underlying the ADRs as directed. For instructions tobe valid, Deutsche Bank Trust Company Americas must receive them on or beforethe date specified. Deutsche Bank Trust Company Americas will try, as far aspractical, subject to Italian law and the provisions of our articles ofassociation, to vote or to have its agents vote the shares or other depositedsecurities as instructed by the ADR holder. Deutsche Bank Trust CompanyAmericas will only vote or attempt to vote as instructed by the ADR holder andwill not vote any of such holder’s shares or other deposited securities exceptin accordance with such instructions.

 

Deutsche Bank Trust Company Americas shall fix arecord date whenever:

 

•                 any cash dividend or distribution shall becomepayable;

 

•                 any distribution other than cash shall be made;

 

•                 rights shall be issued with respect to the depositedsecurities;

 

•                 Deutsche Bank Trust Company Americas, for anyreason, causes a change in the number of ordinary shares that are representedby each ADS; or

 

•                 Deutsche Bank Trust Company Americas receives noticeof any meeting of 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 described below have been entered intoby Luxottica Group S.p.A. and/or its subsidiaries since June 30, 2006 and,as of the date of this annual report, contain provisions under which we or oneor more of our subsidiaries has an obligation or entitlement which is or may bematerial to us. This discussion is not complete and should be read inconjunction with the agreements described below, each of which has been filedwith the SEC as an exhibit to this annual report.

 

*The Euro 250 Million RevolvingCredit Facility*

 

On May 29, 2008,we entered into a Euro 250 million revolving credit facility agreement,guaranteed by our subsidiary U.S. Holdings, with Intesa Sanpaolo S.p.A. asagent and Intesa Sanpaolo S.p.A., Banca Popolare di Vicenza S.c.p.A. and BancaAntonveneta S.p.A. as lenders. Thefinal maturity of the credit facility is May 29, 2013. The credit facilityis a Euro 250 million revolving facility, which will require repayment of equalquarterly installments of principal of Euro 30 million starting August 29,2011 and a last repayment of Euro 40 million on the final maturity date.Interest accrues at Euribor (as defined in the agreement) plus a margin between0.40 percent and 0.60 percent based on the “Net Debt/EBITDA” ratio, as definedin the agreement.

 

*Luxottica Group S.p.A. 2008 Performance Shares Plan*

 

In May 2008, a performance shares plan for the top managers of the Company and othercompanies directly or indirectly controlled by the Company to be identified bythe Board (the “Plan”) was adopted. The Plan is intended to strengthen the loyalty of our key employees and to recognize their contributionsto our success on a medium- to long-term

 

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basis. The beneficiaries of the Plan will begranted the right to receive ordinary shares, without consideration, at the end of a three-year vesting periodand subject to achievement of certain Company performance targets to bedetermined by the our Board. The Plan will have aterm of five years, during which the Board may resolve to issue differentgrants to the Plan’s beneficiaries. The Plan covers a maximum of 6,500,000ordinary shares. Each annual grant will not exceed 2,000,000 ordinary shares. See Item 6—“Directors,Senior Management and Employees—Share Ownership” for more information.

 

*TheU.S.$1,500 Million Credit Facility and U.S.$500 Million Bridge Loan*

 

Tofinance the Oakley acquisition, on October 12, 2007, we and our subsidiaryU.S. Holdings entered into two credit facilities with a group of banksproviding for certain term loans and a short-term bridge loan for an aggregateprincipal amount of U.S.$2.0 billion. The term loan facility is afive-year term loan of U.S.$1.5 billion, with options to extend thematurity on two occasions for one year each time. The Mandated Lead Arrangersand Bookrunners for the term loan are Citigroup N.A. (acting also asDocumentation Agent), Intesa San Paolo S.p.A., The Royal Bank of Scotland plcand UniCredit Markets and Investment Banking (acting through BayerischeHypo—und Vereinsbank AG—Milan Branch) (acting also as Facility Agent). The termloan facility is divided into two facilities, Facility D and Facility E.Facility D consists of an amortizing term loan in an aggregate amount ofU.S.$1.0 billion, made available to U.S. Holdings, and Facility E consistsof a bullet term loan in an aggregate amount of U.S.$500 million, madeavailable to the Company. Each facility has a five-year term, with options toextend the maturity on two occasions for one year each time. The term loan hasa spread of between 20 and 40 basis points over LIBOR, depending on the Group’sratio of net debt to EBITDA. Interest accrues on the term loan at LIBOR (asdefined in the agreement) plus 0.40 percent (5.503 percent forFacility D and 5.458 percent for Facility E on December 31, 2007). Thefinal maturity of the credit facility is October 12, 2012. This creditfacility contains certain financial and operating covenants. We were incompliance with those covenants as of March 31, 2008. We had borrowedU.S.$1.5 billion under this credit facility as of December 31, 2007.

 

Theshort-term bridge loan facility is for an aggregate principal amount ofU.S.$500 million. This facility is underwritten by Bank of AmericaSecurities Limited and UniCredit Market and Investment Banking (acting throughBayerische Hypo—und Vereinsbank AG—Milan Branch). Interest accrues on the shortterm bridge loan at LIBOR (as defined in the agreement) plus 0.15 percent(5.208 percent on December 31, 2007). The final maturity of the creditfacility was eight months from the first utilization date.

 

*The Amendment Agreement to the Bridge Loan*

 

On April 29, 2008, we and our subsidiary U.S. Holdings enteredinto an amendment and transfer agreement to the U.S. $500 million short-termbridge loan facility discussed above. The terms of such amendment agreement,among other things, reduced the total facility amount from U.S. $500 million toU.S. $150 million and provide for a final maturity date that is eighteen (18)months from the effective date of the agreement.

 

*Merger Agreement with Oakley*

 

On June 20, 2007, we entered into an Agreementand Plan of Merger (the “Merger Agreement”) with Oakley, a developer,manufacturer and distributor of performance optics products including sunglasses,prescription eyewear, goggles and electronically-enabled eyewear, and NormaAcquisition Corp., an indirect wholly-owned subsidiary of Luxottica GroupS.p.A. formed for the purpose of effecting the transactions contemplated by theMerger Agreement, pursuant to which we acquired all of the outstanding equityinterests of Oakley. Pursuant to the Merger Agreement, Norma Acquisition Corp.was merged with and into Oakley with Oakley surviving as an indirectwholly-owned subsidiary of Luxottica. At the effective time of the merger, eachoutstanding share of Oakley’s common stock was converted into the right toreceive U.S.$29.30 per share in cash without interest, and each outstandingoption was converted into the right to receive U.S.$29.30 per share in cashless the applicable exercise price of such option for each share of commonstock underlying such option. The transaction closed on November 14, 2007.

 

*Non-Competition Agreement with Oakley and Jim Jannard*

 

Concurrently with theexecution of the Merger Agreement, we entered into a Non-Competition Agreement(the “Non-Competition Agreement”) with Oakley, Norma Acquisition Corp. and JimJannard, the founder and majority shareholder of Oakley, pursuant to which Mr. Jannardagreed to not participate, directly or indirectly, in specified activitiesconsidered to be in competition with Oakley or any of its subsidiaries for aperiod of five years, subject to certain exceptions.

 

Those exceptions allow Mr. Jannardto (i) own, directly or indirectly, solely as a passive investment, lessthan 5.0 percent of any class of securities of any entity in competitionwith the Business (as defined in the Non-Competition

 

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Agreement) where equitysecurities are traded on any national securities exchange, provided that he isnot a controlling person of, or a member of a group which controls, suchentity, and (ii) be an investor, partner, member, director or principal ofa private equity firm, venture capital firm or hedge fund that makesinvestments in a Competitor (as defined in the Non-Competition Agreement),provided that he completely recuses himself from selecting, advising ormanaging the investment in any such Competitor.

 

*Luxottica Group S.p.A. 2006 Stock Option Plan*

 

In July 2006, weadopted an employee stock option plan providing for the issuance of optionscovering up to 20,000,000 ordinary shares of nominal value of Euro 0.06 each.The purpose of the plan is to provide additional incentives to key employees ofthe Group. See Item 6—“Directors, Senior Management and Employees—ShareOwnership” for more information.

 

**Italian Exchange Controls**

 

The following is a summary of relevant Italian lawsin force as at the date of this annual report but does not purport to be acomprehensive description of all exchange control considerations that may berelevant.

 

There are no exchange controls in Italy. Residentsand non-residents of Italy may effect any investments, disinvestments and othertransactions that entail a transfer of assets to or from Italy, subject only tothe reporting, record-keeping and disclosure requirements described below. Inparticular, residents of Italy may hold foreign currency and foreign securitiesof any kind, within and outside Italy, while non-residents may invest inItalian securities without restriction and may export from Italy cash,instruments of credit or payment and securities, whether in foreign currency orEuro, representing interest, dividends, other asset distributions and theproceeds of dispositions.

 

Regulations concerning updated reporting,record-keeping, and restrictions on the use of cash and securities arecontained in Legislative Decree Nos. 231 dated November 21, 2007 (“Decree231/2007”), which implements the Anti-Money Laundering Directives Nos.2005/60/CE and 2006/70 CE.

 

Article 49 of the Decree 231/2007 provides thattransfers of cash, bearer bank or postal passbooks, in Euro or foreigncurrency, effected for any reason between different parties (resident ornon-resident), are forbidden when the total amount is equal to or greater thanEUR 5,000. The transfer may only be executed through banks, electronic moneyinstitutions and “Poste Italiane S.p.A.” (Italian Mail) (collectively, the “AuthorisedOperators”). Within 30 days of their knowledge, the Authorised Operators mustpromptly notify the Ministry of Finance of any breach of the provisions set outin Art. 49 of Decree 231/2007.

 

In addition, the Authorised Operators effecting suchtransactions, are required to: (i) duly identify the customer and theeffective current account holder on the basis of documents, data or informationderiving from an independent and reliable source; (ii) set up a “DataProcessing Archive” (Archivio Unico Informatico) which contains a copy of anydocument required for the customer’s identification; (iii) notify theFinancial Intelligence Unit (Unità di Informazione Finanziaria) of anysuspicious operation, where possible, before carrying out the transaction; and (iv) maintainrecords of similar transactions that occurred in the last ten years. The breachof dispositions of Decree 231/2007 involves criminal and administrativesanctions: criminal sanctions are imposed for, among other things, breach ofcustomer identification obligations and recording duties, and failure todisclose the fact that a suspicious transaction was reported; administrativesanctions are imposed for, among other things, failure to set up the DataProcessing Archive and to report the suspicious transactions to the FinancialIntelligence Unit.

 

The Financial Intelligence Unit must maintainreports for a period of ten years and may use them, directly or through othergovernment offices, to police money laundering, tax evasion and any other crimeor violation.

 

Individuals, non-profit entities and certainpartnerships that are resident in Italy must disclose on their annual taxdeclarations all investments held outside Italy and foreign financial assetsheld at the end of a taxable period through which foreign source income taxablein Italy may be derived as well as the total amount of transfers effectedduring a taxable period to, from, within and between countries other than Italyrelating to such foreign investments or financial assets, even if at the end ofthe taxable period such persons no longer owned such foreign investments orfinancial assets. No such disclosure is required if the total value of theforeign investments and financial assets held at the end of a taxable periodplus the total amount of the related transfers effected during the taxableperiod is not greater than Euro 12,500. In addition, no such disclosure isrequired in respect of securities deposited for management with qualifiedItalian financial intermediaries and in respect of contracts entered intothrough their intervention, provided that the items of income derived from suchforeign

 

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financialassets are collected through the intervention of the same intermediaries.Corporations and commercial partnerships resident in Italy are exempt from suchdisclosure requirements with respect to their annual tax declarations becausethis information is required to be disclosed in their financial statements.

 

There can be no assurance that the presentregulatory environment in or outside Italy will continue or that particularpolicies presently in effect will be maintained, although Italy is required tomaintain certain regulations and policies by virtue of its membership in theEuropean Union and other international organizations and its adherence tovarious bilateral and multilateral international agreements.

 

**Taxation**

 

The following summary contains a description of theprincipal United States federal and Italian income tax consequences of theownership and disposition of ADSs or ordinary shares by U.S. holders (asdefined below) resident in the United States for tax purposes. The followingdescription does not purport to be a complete analysis of all possible taxconsiderations that may be relevant to a U.S. tax resident holder of ADSs orordinary shares, and U.S. tax resident holders are advised to consult theiradvisors as to the overall consequences of their individual circumstances. Inparticular, this discussion does not address all material tax consequences ofowning ordinary shares or ADSs that may apply to special classes of holders,some of whom may be subject to different rules, including:

 

•                 partnerships and other pass-through entities;

 

•                 tax-exempt entities;

 

•                 certain banks, financial institutions and insurancecompanies;

 

•                 broker-dealers;

 

•                 traders in securities that elect to mark to market;

 

•                 investors liable for alternative minimum tax;

 

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

 

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

 

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

 

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

 

In addition, the following summary does not discussthe tax treatment of ordinary shares or ADSs that are held in connection with apermanent establishment or fixed base through which a U.S. holder carries onbusiness or performs personal services in Italy.

 

Furthermore, certain persons that may not be U.S.holders but who may otherwise be subject to United States federal income taxliability will also be subject to United States federal as well as Italian taxconsequences due to their ownership and disposition of ADSs or ordinary shares.Such investors should consult with their own advisors as to the particularconsequences associated with their investment.

 

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 Taxes on Income and the Preventionof Fraud or Fiscal Evasion (the “Treaty”) and the Convention Between the UnitedStates of America and the Italian Republic for the Avoidance of Double Taxationand the Prevention of Fiscal Evasion with respect to Taxes on Estates andInheritances (the “Estate Tax Convention”). These laws are subject to change,possibly on a retroactive basis and could affect the tax consequences describedbelow. A new tax treaty and protocol between Italy and the United States(collectively, the “New Treaty”) to replace the current Treaty was signed on August 25,1999, but is not yet in effect. The New Treaty would include an anti-abuseprovision and a provision limiting treaty benefits to individuals,

 

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qualified governmentalentities, companies that are publicly traded or that satisfy certain shareownership requirements, certain pension plans and other tax-exempt entities,and certain other persons meeting prescribed anti-treaty shopping requirements.

 

The New Treaty also wouldclarify the availability of treaty benefits to entities that are treated asfiscally transparent under United States or Italian law.

 

In addition, this section is based in part uponthe representations of the depositary and the assumption that each obligationin the Deposit Agreement and any related agreement will be performed inaccordance with its terms.

 

This discussion addresses only Italian incometaxation, gift and inheritance taxation and capital gains taxation and UnitedStates federal income and estate taxation.

 

For purposes of the current Treaty, the Estate TaxConvention and the Code, U.S. holders of ADSs will be treated as the owners ofthe underlying ordinary shares represented by such ADSs. Exchanges of ordinaryshares for ADSs and ADSs for ordinary shares generally will not be subject toItalian tax or United States federal income tax.

 

*Italian Tax Law*

 

*Withholding or Substitute Tax on Dividends.*In general,dividends paid by Italian corporations to non-Italian resident beneficialowners without a permanent establishment in Italy to which ordinary shares orADSs are effectively connected, are subject to final Italian withholding tax(or substitute tax, in the case of dividends on underlying shares listed on theMilan Stock Exchange) at the rate of 27 percent, unless reduced by anapplicable double taxation treaty. Reduced rates (normally 15 percent) ofwithholding tax (or substitute tax) on dividends apply to non-Italian 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 (orsubstitute tax) at a reduced rate of 15 percent will generally apply todividends paid by an Italian corporation to a U.S. resident entitled to Treatybenefits who timely complies with the procedures for claiming such benefits,provided the dividends are not effectively connected with a permanentestablishment in Italy through which the U.S. resident carries on a business orwith a fixed base in Italy through which the U.S. resident performs independentpersonal services. The foregoing treatment will not be changed by the dividendarticle of the New Treaty.

 

Under Italian law, in general, shares of Italiancompanies listed on the Milan Stock Exchange have to be registered in thecentralized deposit system managed by *Monte Titoli*.With respect to dividends paid by Italian corporations listed in Italy (such asLuxottica Group S.p.A.) to non-Italian resident beneficial owners, without apermanent establishment in Italy to which ADSs or ordinary shares areeffectively connected, on shares held in the *Monte Titoli*system (including our shares), instead of the 27 percent final withholdingtax mentioned above, a substitute tax will apply at the same rate (which ratemay, however, be reduced under an applicable double tax treaty) and conditionsas the above-mentioned withholding tax. This substitute tax will be levied bythe Italian authorized intermediary that participates in the *Monte Titoli* system and with which the securities aredeposited, as well as by non-Italian authorized intermediaries participating inthe *Monte Titoli* system (directly or througha non-Italian centralized deposit system participating in the *Monte Titoli* system), through a fiscal representative to beappointed in Italy.

 

The Italian budget bill for 2008, enacted on December 24,2007 under Law No. 244 (the “Budget Bill”), provided for the applicationof a reduced 1.35% withholding tax on dividends paid to non-residentbeneficiary entities (i) subject to corporate taxation and (ii) residentin an EU Member State or in other states which adhere to the “Accordo sullospazio economico europeo,” which are included in an *ad hoc*“white list” still to be released with a proper decree. Provisional disposalsprovide that, in the meantime, reference is to be made to the Decree dated September 4,1996, which reports the list of countries allowing an adequate exchange ofinformation with the Italian tax authority. Finally, the reduced withholdingtax mentioned above is to be applied to distributions of profits accrued from January 1,2008 (for entities ending their tax year on December 31).

 

Since the ordinary shares are registered in thecentralized deposit system managed by *Monte Titoli*,the substitute tax regime will apply to dividends paid by Luxottica GroupS.p.A., instead of the withholding tax regime.

 

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

 

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

 

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

 

The intermediary must keep the foregoing documentation for the entireperiod in which the Italian tax authorities are entitled to issue an assessmentwith respect to the tax year in which the dividends are paid and, if anassessment is issued, until the assessment is settled. If the intermediary withwhich the shares are deposited is not resident in Italy, the aforesaid dutiesand obligations must be carried out by (i) a bank or an investmentservices company that is a resident in Italy or (ii) a permanentestablishment in Italy of a non-resident bank or investment services company,appointed by the foreign intermediary as its fiscal representative in Italy.

 

As an alternative to the application of the more favorable treaty rateof substitute tax on dividends or where an income tax treaty does not apply,and except for entities that benefit from the above-mentioned 1.35 percentwithholding tax, under domestic Italian law non-resident shareholders can claima refund of an amount up to four-ninths of the 27 percent substitute taxon 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 shares to beneficial owners withrespect to their shares or ADSs that are made as part of a pro ratadistribution to all shareholders based on a gratuitous increase of the sharecapital through transfer of reserves or other provisions to share capitalgenerally will not be subject to Italian tax. However, distributions ofdividends in kind will be subject to withholding tax.

 

*Tax on Capital Gains.*Upondisposal of ordinary shares or ADSs of an Italian resident corporation, capitalgains realized by non-Italian resident individuals and foreign corporationswithout a permanent establishment in Italy to which the ordinary shares or ADSsare effectively connected may be subject to taxation in Italy. However, the taxregime depends on whether the interest (ordinary shares, ADSs and/or rights)disposed of is “qualified” or “non-qualified.” The disposal of a “qualified”shareholding in a corporation the stock of which is listed on a regulatedmarket (such as Luxottica Group S.p.A.) is defined to occur when a shareholder (i) ownsshares, ADSs and/or rights through which shares may be acquired representing inthe aggregate more than five percent of the share capital or two percent of theshares with voting rights at an ordinary shareholders’ meeting of thecorporation and (ii) in any twelve-month period following the date theownership test under (i) is met, such shareholder engages in the disposalof shares, ADSs and/or of rights through which shares may be acquired thatindividually or in the aggregate exceed the percentages indicated under (i) above.Capital gains realized by non-Italian resident shareholders upon disposal of a “non-qualified”shareholding, are in principle subject in Italy to a capital gain tax (“CGT”)at 12.5 percent. However, an exemption from CGT is provided for gains realizedby non-Italian resident shareholders without a permanent establishment in Italyto which the ordinary shares or ADSs are effectively connected on the disposalof “non-qualified” shareholdings in Italian resident corporations the stock ofwhich is listed on a regulated market (such as Luxottica Group S.p.A.) evenwhen such shareholdings are held in Italy. Non-Italian residents who dispose ofshares or ADSs may be required to timely provide a self-declaration not to beresident in Italy for tax purposes, in order to benefit from this exemption.Upon disposal of a “qualified” shareholding, non-Italian resident shareholdersare in principle subject to Italian ordinary taxation on 40 percent of thecapital gain realized.

 

The Ministerial Decree dated April 2, 2008 has increased theItalian capital gains tax from 40% to 49.72% on capital gains realized after January 1,2009.

 

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The above is subject to any provisions of an applicable income taxtreaty entered into by the Republic of Italy, if the income tax treatyprovisions are more favorable. The majority of double tax treaties entered intoby Italy, in accordance with the OECD Model tax convention, provide thatcapital gains realized from the disposition of Italian securities are subjectto taxation only in the country of residence of the seller. Therefore, thecapital gains realized by a non-Italian resident entitled to the benefits of atreaty entered into by Italy in accordance with the OECD Model in respect oftaxation of capital gains from the disposition of Italian securities will notbe subject to Italian taxation on such capital gains, regardless of whether theshareholding disposed of is qualified or non-qualified. Non-Italian residentswho dispose 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 (including acertificate of tax residence issued by the competent foreign tax authorities).

 

Under the Treaty, a person who is considered a U.S. resident forpurposes of the Treaty and is fully entitled to benefits under the Treaty willnot incur Italian capital gains tax on disposal of ordinary shares or ADSs,unless the ordinary shares or ADSs form part of a business property of apermanent establishment of the holder in Italy or pertain to a fixed baseavailable to a holder in Italy for the purpose of performing independentpersonal services. U.S. residents who sell ordinary shares or ADSs may be requiredto timely produce appropriate documentation establishing that theabove-mentioned conditions for non-taxability of capital gains under the Treatyhave been satisfied (including a certificate of tax residence issued by thecompetent U.S. tax authorities).

 

Such treatment will not be changed by the capital gains provisions ofthe New Treaty.

 

*Inheritance and Gift Tax.* Subject to certain exceptions, Italian inheritanceand gift tax is generally payable on transfers of ordinary shares and/or ADSsof an Italian resident corporation by reason of death or donation, regardlessof the residence of the deceased or donor and regardless of whether theordinary shares or ADSs are held outside Italy.

* *

In particular, transfers of assets and rights(including ordinary shares and/or ADSs) on death or by gift are generallysubject to Italian inheritance and gift tax:

 
| (i)   | at a rate of 4 percent in the case of transfers  made to the spouse or relatives in direct line, on the portion of the global  net value of the transferred assets (including ordinary shares and ADSs), if  any, exceeding, for each beneficiary, Euro 1,000,000;                                                                                                                                           |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (ii)  | at a rate of 6 percent, in the case of  transfers made to relatives within the fourth degree or relatives-in-law  within the third degree (in the case of transfers to brothers or sisters, the  6 percent rate is applicable only on the portion of the global net value  of the transferred assets (including ordinary shares and ADSs), if any,  exceeding, for each beneficiary, Euro 100,000); and |
| (iii) | at a rate of 8 percent, in any other case.                                                                                                                                                                                                                                                                                                                                                                   |

 

Inheritance or gift taxes paid in a jurisdictionoutside of Italy relating to the same estate on assets (including ordinaryshares and ADSs) existing in that jurisdiction are deductible, in whole or inpart, from the Italian inheritance and gift tax due with respect to the estate.

 

The above-described regime may be superseded by theprovisions of the double taxation treaties in respect of taxes on estates andinheritances by Italy, if more favorable and where applicable.

 

Subject to certain limitations, the Estate TaxConvention between the United States and Italy generally affords a credit forinheritance tax imposed by Italy on ordinary shares or ADSs of an Italianresident corporation that is applicable to any U.S. federal estate tax imposedon the same ordinary shares or ADSs. This credit is available only to theestate of a deceased person who, at the time of death, was a national of ordomiciled in the United States. There is currently no gift tax conventionbetween Italy and the United States.

 

*United States Federal Taxation*

 

For purposes of this section, a U.S. holder is an individual or entitywhich is a beneficial owner of shares or ADSs and is:

 

·      a citizen or resident of the United States;

 

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

 

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·      an estate whose income is subject to United States federal income taxregardless 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 for U.S. tax purposes as apartnership, holds ordinary shares or ADSs, the tax treatment of a partner willgenerally depend upon the status of the partner and the activities of thepartnership. Persons who are partners in partnerships holding ordinary sharesor ADSs should consult their tax advisors.

 

*Taxation of Dividends.*Underthe United States federal income tax laws, a U.S. holder must include as grossincome the gross amount of any dividend paid by Luxottica Group S.p.A. out ofits current or accumulated earnings and profits, as determined for UnitedStates federal income tax purposes. Such holder must also include any Italiantax withheld from the dividend payment in this gross amount even though theholder does not in fact receive such amounts withheld. The dividend is ordinaryincome that must be included in income when the U.S. holder, in the case ofordinary shares, or the depositary, in the case of ADSs, receives the dividend,actually or constructively. The dividend will not be eligible for the dividendsreceived deduction generally allowed to United States corporations in respectof dividends 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, regardless of whether the payment is in fact converted into U.S.dollars. Generally, any gain or loss resulting from currency exchangefluctuations during the period from the date the U.S. holder includes thedividend payment in income to the date he converts the payment into U.S.dollars will be treated as ordinary income or loss. The gain or loss generallywill be income from sources within the United States for foreign tax creditlimitation purposes. Distributions in excess of current and accumulatedearnings and profits, as determined for United States federal income taxpurposes, will be treated as a return of capital to the extent of the U.S.holder’s basis in the shares or ADSs and thereafter as capital gain.

 

Subject to certain generally applicable limitations, the Italianwithholding or substitute tax imposed on dividends in accordance with theTreaty and paid over to Italy will be creditable against a U.S. holder’s UnitedStates federal income tax liability. To the extent a refund of the tax withheldis available to the U.S. holder under Italian law or under the Treaty, theamount of tax withheld that is refundable will not be eligible for creditagainst such holder’s United States federal income tax liability. See “—ItalianTax Law—Withholding or Substitute Tax on Dividends” for the procedures for obtaininga tax refund.

 

Dividends paid by foreign corporations generally constitute income fromsources outside the United States, but generally will be “passive income” whichis treated separately from other types of income for purposes of computing the foreigntax credit allowable. The rules governing the foreign tax credit arecomplex. 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-corporate U.S. holders in taxableyears beginning before January 1, 2011 in respect of ordinary shares orADSs will be taxed at the rate applicable to long-term capital gains (generallyat a maximum income tax rate of 15 percent) if the dividends are “qualifieddividends.” This reduced income tax rate is only applicable to dividends paidby U.S. corporations and “qualified foreign corporations” and only with respectto shares held by a qualified U.S. holder (i.e., a non-corporate shareholdersuch as an individual) for a minimum holding period (generally, more than60 days during the 121-day period beginning 60 days before theex-dividend date). We believe that we are a “qualified foreign corporation” andthat dividends paid by us to individual U.S. holders of ordinary shares heldfor the minimum holding period should thus be eligible for the reduced incometax rate. See “—Passive Foreign Investment Company Considerations” for adiscussion of certain restrictions on “qualified foreign corporation” status. *Non-corporate U.S. holders are urged to consult their own tax advisorsto determine whether they are subject to any special rules that limittheir ability to be taxed at this favorable rate.*

 

*Taxation of Capital Gains.*Ifa U.S. holder sells or otherwise disposes of ordinary shares or ADSs and suchshares constitute a capital asset in the hands of the U.S. holder, such holderwill recognize capital gain or loss for United States federal income taxpurposes equal to the difference between the U.S. dollar value of the amountrealized and the tax basis, determined in U.S. dollars, in the ordinary sharesor ADSs. Capital gain of a non-corporate U.S. holder, recognized in taxableyears which begin before January 1, 2011, is generally taxed at a maximumrate of 15 percent for property held more than one year. Additionally,gain or loss will generally be from sources within the United States forforeign tax credit limitation purposes.

 

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*Passive Foreign Investment CompanyConsiderations.* A corporation organized outside theU.S. generally will be classified as a passive foreign investment company (a “PFIC”)for U.S. federal income tax purposes in any taxable year in which either: (a) atleast 75 percent of its gross income is “passive income,” or (b) theaverage percentage of the gross value of its assets that produce “passiveincome” or are held for the production of passive income is at least50 percent. Passive income for this purpose generally includes dividends,interest, royalties, rents and gains from commodities and securitiestransactions. Under a special “look-through” rule, in determining whether it isa PFIC, a foreign corporation is required to take into account a pro rataportion of the income and assets of each corporation in which it owns, directlyor indirectly, at least a 25 percent interest. Where the “look-through” rule applies,there is eliminated from the determination of the status of the foreigncorporation as a PFIC stock and debt instruments issued by such a25 percent-owned subsidiary as well as dividends and interest receivedfrom such a 25 percent-owned subsidiary. Based on our audited financialstatements, we strongly believe that we are not a PFIC for U.S. federal incometax purposes for 2007. 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 election. Inaddition, if we were classified as a PFIC, in a taxable year in which we pay adividend or the prior taxable year, we would not be a qualified foreigncorporation (as described in “—Taxation of Dividends”), and our dividends wouldnot be eligible for the reduced 15 percent 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 other taxabledistributions made within the United States to a U.S. holder will be subject toinformation reporting requirements and backup withholding tax (currently at therate of 28 percent) if such U.S. holder is a non-corporate United Statesperson 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 anyamounts withheld under the backup withholding rules that exceed his, heror its income tax liability by filing a refund claim with the IRS.

 

After December 31, 2010, the backup withholding rate will increaseto 31 percent under the sunset provisions of currently applicable U.S. taxlaw.

 

Persons who are not United States persons may be required to establishtheir exemption from information reporting and backup withholding by certifyingtheir status on Internal Revenue Service Form W-8BEN, W-8ECI or W-8IMY.

 

The payment of proceeds from the sale of ordinary shares or ADSs to orthrough a United States office of a broker is also subject to these UnitedStates backup withholding and information reporting rules unless theseller certifies, under penalties of perjury, that such seller is a non-U.S.person (or otherwise establishes an exemption). Special rules apply whereordinary shares or ADSs are sold through a non-U.S. office of a non-U.S. brokerand the sale proceeds are paid outside the United States.

 

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

 

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*Estate Tax Convention.*Underthe Estate Tax Convention between the United States and Italy, the ordinaryshares or ADSs will be deemed situated in Italy. Subject to certainlimitations, the Estate Tax Convention affords a credit for estate orinheritance tax imposed by Italy on ordinary shares or ADSs that is applicableagainst United States federal estate tax imposed on ordinary shares or ADSs.This credit is available only to the estate of a deceased person who, at thetime of death, was a national of or domiciled in the United States.

 

**Documents on Display**

 

We are subject to the informational requirements of the SecuritiesExchange Act of 1934, applicable to foreign private issuers, and in accordancetherewith we file reports and other information with the SEC. Reports and otherinformation filed by us are available for inspection and copying, upon paymentof fees prescribed by the SEC, at the Public Reference Room maintained bythe SEC at 100 F Street, N.E., Washington, DC 20549. Copies of such materialare also available for a fee by sending an electronic mail message to theinternet group mailbox publicinfo@sec.gov, by fax at (202) 777-1027 or by mailto 100 F Street, N.E., Washington, DC 20549. Please call the SEC at1-800-SEC-0330 for more information on the Public Reference Room. In addition,such material may also be inspected and copied at the offices of the New YorkStock Exchange, Inc., 20 Broad Street, New York, New York 10005. Thepublic may also view our annual reports and other documents filed with the SECon the Internet at www.sec.gov.

 

We furnish Deutsche Bank Trust Company Americas, as depositary withrespect to the ADSs, with annual reports in English (or a translation orsummary in English of the Italian reports), which include a review ofoperations and annual audited consolidated financial statements prepared inconformity with U.S. GAAP. We also furnish Deutsche Bank Trust Company Americaswith quarterly reports in English (or a translation or summary in English ofthe Italian reports) that include unaudited interim financial informationprepared in conformity with U.S. GAAP. If requested by us, Deutsche Bank TrustCompany Americas arranges for the mailing of such reports to registered holdersof ADSs. We also furnish to Deutsche Bank Trust Company Americas, in English,all notices of shareholders’ meetings and other reports and communications thatare made generally available to our shareholders. To the extent permitted bylaw, Deutsche Bank Trust Company Americas makes such notices, reports andcommunications available to holders of ADSs in such manner as we request andmails to holders of ADSs a notice containing the information (or a summarythereof in a form provided by us) contained in any notice of a shareholders’meeting received by Deutsche Bank Trust Company Americas. As a foreign privateissuer, we are exempt from the rules under the Securities Exchange Act of1934 prescribing the furnishing and content of proxy statements.

 

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

 

**Interest Rate Sensitivity**

 

At December 31, 2007 and2006, our interest rate sensitivity was limited to the amount of our unhedgedvariable rate outstanding debt under our credit facilities and bank overdraftfacilities.

 

Included in this amount are:

 

·      Tranche B and Tranche C borrowingson our subsequently amended credit facility with a group of banks, of Euro 1,130million and U.S.$325 million (of which Euro 567.4 million and Euro 244.0million was borrowed under Tranche C as of December 31, 2007 and 2006respectively, and U.S.$325 million was borrowed under Tranche B as of December 31,2007). However, in 2007, we entered into interest rate swaps to effectivelyhedge the floating rate to a fixed rate for Tranche B. As of December 31,2007, this credit facility bore interest at EURIBOR on Euro-denominated loansand LIBOR onU.S.$-denominated loans, plus a margin between 0.20 and 0.40 percent based onthe Net Debt/ EBITDA ratio as defined in the agreement (5.239 percent onTranche C as of December 31, 2007).

·      Our Euro 100 million creditfacility, of which Euro 100 million was borrowed as of December 31, 2007(unchanged from 2006). This credit facility accrues interest at EURIBOR plus0.25 percent (4.98 percent as of December 31, 2007).

·      Our Euro 50 million credit facility,of which Euro 25 million was borrowed as of December 31, 2007 (unchangedfrom 2006). This credit facility accrues interest at EURIBOR plus 0.55 percent(4.988 percent as of December 31, 2007).

·      Our US$ 1.0 billion credit facility,of which US$ 1.0 billion was borrowed as of December 31, 2007. This creditfacility accrues interest at LIBOR plus a margin between 0.20 and 0.40 percentbased on the Net Debt/EBITDA ratio as defined in the agreement (5.503 percentas of December 31, 2007).

 

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Additionally, in 2003 we issued U.S.$300 million of fixed ratesenior unsecured guaranteed notes in three series (Series A, B and C). Weimmediately entered into three interest rate swaps to hedge such series ofnotes, thereby effectively changing the fixed rate to a variable rate ofsix-month LIBOR plus a spread of 0.6575 percent or 0.73 percentdepending on the series. These swaps were terminated by a payment to the bankin December 2005, and we will amortize the final fair value adjustment tothe debt as an adjustment to the fixed-rate yield over the remaining life ofthe debt. This has effectively increased our fixed rate on such Series A,B and C notes to 5.64 percent, 5.99 percent, and 5.44 percent, respectively.

 

However, the effect of a ten percent change in interest rates (upwardor downward) at December 31, 2007 and 2006 would not have had a materialeffect on our future annual pretax earnings and cash flows. This was calculatedby us, based on our expected future pretax earning and cash flows with aninterest rate adjustment of ten percent above and below the rates in effect asof December 31, 2007 and 2006. We calculated this effect both on a singleyear basis and an accumulated basis using a present value calculation for allvariable-rate debt instruments. For U.S.$-denominated activities, we used anexchange rate of Euro 1.00 = U.S.$1.45 and Euro 1.00 = U.S.$1.35 as of December 31,2007 and 2006, respectively.

 

We monitor our exposure to interest rate fluctuations and may enterinto hedging arrangements to mitigate our exposure to increases in interestrates if we believe it is prudent to do so. We have 35 interest ratederivatives outstanding as of December 31, 2007:

 

·      In June 2005, the Company entered intonine interest rate swap transactions with various banks with an aggregateinitial notional amount of Euro 405 million, which began to decrease by Euro 45million every three months starting on June 3, 2007 (“Club Deal Swaps”).These swaps will expire on June 3, 2009. The Club Deal Swaps were enteredinto as a cash flow hedge on Tranche A of the credit facility discussed above. SeeItem 5—“Operating and Financial Review and Prospects—Liquidity and CapitalResources—Our Indebtedness—The Amended Euro 1,130 Million and U.S.$325 MillionCredit Facility and Related Interest Rate Swaps.” The Club Deal Swaps exchange the floating rate of Euribor for an averagefixed rate of 2.40 percent per annum.

 

·      In June 2005, the Company entered into fourinterest rate swap transactions with various banks with an aggregate initialnotional amount of Euro 120 million, which began to decrease by Euro 30 millionevery six months starting on March 30, 2007 (“Intesa OPSM Swaps”). Theseswaps will expire on September 30, 2008. The Intesa OPSM Swaps wereentered into as a cash flow hedge on a portion of the Banca Intesa Euro 200million unsecured credit facility discussed above. See Item 5—“Operating andFinancial Review and Prospects—Liquidity and Capital Resources—OurIndebtedness— The Euro 200 Million Credit Facility with Banca Intesa andRelated Interest Rate Swaps.”  The IntesaOPSM Swaps exchange the floating rate of Euribor for an average fixed rate of2.38 percent per annum.

 

·      During the third quarter of 2007, the Groupentered into thirteen interest rate swap transactions with an aggregate initialnotional amount of U.S.$325 million with various banks (“Tranche B Swaps”).These swaps will expire on March 10, 2012. The Tranche B Swaps wereentered into as a cash flow hedge on Tranche B of the credit facility discussedabove. See Item 5—“Operating and Financial Review and Prospects—Liquidity andCapital Resources—Our Indebtedness—Amended Euro 1,130 Million and U.S.$325Million Credit Facility and Related Interest Rate Swaps.” The Tranche B Swapsexchange the floating rate of LIBOR for an average fixed rate of 4.62 percentper annum.

 

·      During the fourth quarter of 2007, the Groupentered into ten interest rate swap transactions with an aggregate initialnotional amount of U.S.$500 million with various banks (“Tranche E Swaps”).These swaps will expire on October 12, 2012. The Tranche E Swaps wereentered into as a cash flow hedge on Tranche E of the credit facility discussedabove. See Item 5—“Operating and Financial Review and Prospects—Liquidity andCapital Resources—Our Indebtedness— The U.S.$1,500 Million Credit Facility,U.S.$500 Million Bridge Loan and Related Interest Rate Swaps.”  The Tranche E Swaps exchange the floatingrate of LIBOR for an average fixed rate of 4.26 percent per annum.

 

**Foreign Exchange Sensitivity**

 

Our manufacturing subsidiaries are mainly located in Italy and oursales and distribution facilities are maintained worldwide. With theacquisition of Oakley, we also now have manufacturing facilities in the U.S.that will be distributing their products worldwide.  As such, we are vulnerable to foreigncurrency exchange rate fluctuations in two principal areas:

 

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1.               We incur most of our manufacturing costsin Euro and receive a significant portion of our revenues in other currencies,and, starting in 2008, we expect that we will also incur significantmanufacturing costs in U.S. dollars and receive significant revenues incurrencies other than the U.S. dollar for the sales of Oakley products (whichwe refer to as Economic Risk); and

 

2.               Differences between the functionalcurrency of certain subsidiaries and the Euro as the reporting currency (whichwe refer to as Translation Risk).

 

*Economic Risk*.  A strengthening of the Euro relative to othercurrencies in which we receive revenues could negatively impact the demand forour products manufactured in Italy and/or reduce our gross margins. However, weexpect that our newly acquired Oakley manufacturing facilities in the U.S. willoffset these reduced margins as we expand Oakley’s sales in Euro-denominatedcountries.  We expect that the weakeningof the Euro will have the reverse effect. In addition, to the extent that our receivables and payables aredenominated in different currencies, exchange rate fluctuations could furtherimpact our reported results of operations. However, our production cycles arerelatively short and our receivables and payables are generally short-term innature. As a result, we do not believe that we currently have significantexposure in this area. We will, if we believe it is necessary, enter intoforeign exchange contracts to hedge certain of these transactions, which couldinclude sales, receivables and/or payables balances.

 

Effective January 1, 2001, we adopted SFAS 133, as amended andinterpreted, which establishes accounting and reporting standards forderivative instruments, including certain derivative instruments embedded inother contracts, and for hedging activities. SFAS 133 requires that allderivatives, whether designated as a hedging relationship or not, be recordedon the balance sheet at fair value regardless of the purpose or intent forholding them. If a derivative is designated as a fair-value hedge, changes inthe fair value of the derivative and the related change in the hedge item arerecognized in operations. If a derivative is designated as a cash-flow hedge,changes in the fair value of the derivative are recorded in other comprehensiveincome (“OCI”) in the consolidated statement of shareholders’ equity and arerecognized in the consolidated statements of income when the hedged itemaffects operations. For a derivative that does not qualify as a hedge, changesin fair value are recognized in operations.

 

From time to time, we use derivative financial instruments, principallycurrency forward agreements, as part of our risk management policy to reduceour exposure to market risks from changes in foreign exchange rates. As of December 31,2007, we had several currency forward derivatives and option structuresreplicating forward contracts (zero cost collar) with a maturity no longer than120 days. We may enter into other foreign exchange derivative financialinstruments when we assess that the risk can be hedged effectively.

 

*Translation Risk.*Asubstantial portion of revenues and costs are denominated in various currenciesother than Euro. The following table provides information about our revenuesand costs denominated in various currencies for the years ended December 31,2007 and 2006 and is not meant to be a tabular disclosure of market risk:

 
| **2007**           | ** ** | **U.S. Dollars** | ** ** | **Euro** | ** ** | **Other** | ** ** | **Total** | ** ** |
|--------------------|------------|-----------------------|------------|----------|------------|-----------|------------|-----------|------------|
| Revenues           |       | 61.2%                 |       | 20.6%    |       | 18.2%     |       | 100%      |       |
| Operating expenses |       | 59.2%                 |       | 24.0%    |       | 16.8%     |       | 100%      |       |

 
| **2006**           | ** ** | **U.S. Dollars** | ** ** | **Euro** | ** ** | **Other** | ** ** | **Total** | ** ** |
|--------------------|------------|-----------------------|------------|----------|------------|-----------|------------|-----------|------------|
| Revenues           |       | 65.1%                 |       | 18.7%    |       | 16.2%     |       | 100%      |       |
| Operating expenses |       | 63.8%                 |       | 21.5%    |       | 14.7%     |       | 100%      |       |

 

Because a large portion of our revenues and expenses are denominated inU.S. dollars, fluctuations in the exchange rate between the U.S. dollar and theEuro, our reporting currency, could have a material effect on our reportedfinancial position and results of operations. The effect of a ten percentweakening of the U.S.$ against the Euro as compared to the actual 2007 and 2006average exchange rate between the U.S.$ and Euro would have been a decrease inincome before taxes of Euro 66.7 million and of Euro 63.2 million,respectively. In addition, a significant change in the mix of revenues orexpenses between or among geographic or operating segments could increase ordecrease our exposure to other currency exchange rate fluctuations. We willcontinue to monitor our exposure to exchange rate fluctuations and enter intohedging arrangements if and to the extent we believe it to be appropriate.

 

The acquisitions of OPSM in 2003, Cole in 2004 and Oakley in 2007 havefurther increased our exposure to fluctuations in currency exchange rates. Themajority of the operations, assets and liabilities of Cole and Oakley are 

 

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denominated in U.S. dollars,while, for OPSM and a part of the Oakley business, the operations, assets andliabilities are mostly denominated in Australian dollars.

 

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

 

None.

 

**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**

 

*Disclosure Controls and Procedures*

 

Wemaintain disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in our reports under the SecuritiesExchange Act of 1934, as amended, is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms,and that such information is accumulated and communicated to our management,including our principal executive officer and our principal financial officer,as appropriate, to allow timely decisions regarding required disclosures. Anycontrols and procedures, no matter how well designed and operated, can provideonly reasonable assurance of achieving the desired control objectives. Ourmanagement, with the participation of our principal executive officer and ourprincipal financial officer, has evaluated the effectiveness of the design andoperation of our disclosure controls and procedures as of December 31,2007. Based upon that evaluation, our principal executive officer and ourprincipal financial officer have concluded that the design and operation of ourdisclosure controls and procedures provide reasonable assurance that, as of December 31,2007, the disclosure controls and procedures are effective.

 

*Management’s Report on Internal Control overFinancial Reporting*

 

Asrequired by the SEC rules and regulations for the implementation of Section 404of the Sarbanes-Oxley Act, our management is responsible for establishing andmaintaining adequate internal control over financial reporting, as such term isdefined in Exchange Act Rule 13a-15(f). Our internal control overfinancial reporting is designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of our consolidatedfinancial statements for external reporting purposes in accordance withaccounting principles generally accepted in the United States of America.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements in our consolidated financial statements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

During2007, we completed several acquisitions, including: D.O.C Optics Corporation, a100-store optical chain in the midwest United States, for approximately Euro 83.7million; the purchase of an additional 26 percent stake of our India-basedmanufacturer and distributor RayBan Sun Optics India, Ltd. for approximatelyEuro 13 million; and Oakley, Inc., a manufacturer, distributor, specialtyretailer and owner of the “Oakley” trade name for Euro 1,438.7 million.  As of year end, each of these acquiredbusinesses was a separate control environment. Thesebusinesses were excluded from management’s report on internal controls overfinancial reporting, as permitted by SEC guidance, for the year ended December 31,2007.  The excluded businesses were not material to the Company’sconsolidated results of operations for fiscal year 2007.  With theexception of Oakley, the excluded businesses were not material to the Company’sconsolidated balance sheets.  For additional information regardingOakley’s net assets, see Note 5 to our Consolidated Financial Statementsincluded in Item 18 of this annual report.

 

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Underthe supervision and with the participation of our management, including ourprincipal executive officer and principal financial officer, we have conductedan evaluation of the effectiveness of our internal control over financialreporting based on the framework in *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on our evaluation under theframework in *Internal Control—IntegratedFramework*, our management has concluded that our internal control overfinancial reporting was effective as of December 31, 2007.

 

Our independent registered public accounting firm hasaudited and issued its report on the effectiveness of our internal control overfinancial reporting as of December 31, 2007, which appears elsewhere inthis annual report on Form 20-F.

 

*Changes in Internal Control over FinancialReporting*

 

During the period covered by this annual report, therewere no changes in our internal control over financial reporting that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

**ITEM 16. [RESERVED]**

 

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

 

Our Board of Directors has determined that a member of our Board ofStatutory Auditors, Marco Reboa, qualifies as an “audit committee financialexpert,” as defined in the SEC rules, and is “independent,” as defined insuch rules. The Board of Statutory Auditors has been designated by our Board ofDirectors as the appropriate body to act as our “Audit Committee,” as definedin the Sarbanes-Oxley Act, SEC regulations and the NYSE listing standards. SeeItem 6—“Directors, Senior Management and Employees—Summary of the SignificantDifferences Between Our Corporate Governance Practices and the Corporate GovernanceStandards of the New York Stock Exchange—Board Committees.”

 

**ITEM 16B. Code of Ethics**

 

The Board of Directors adopted a Code of Ethics, as may be amended fromtime to time, that applies to our chief executive officer, chief financialofficer and all of our directors, members of management bodies, any otheremployees, and that is addressed to those who directly or indirectlypermanently or temporarily have relationships and dealings with the Company. Wewill provide a copy of our Code of Ethics without charge upon a written requestsent to our registered office at Via C. Cantù 2, 20123 Milan, Italy. You mayalso obtain a copy of our Code of Ethics on our website at www.luxottica.com.

 

In accordance with Italian law, we adopted a Procedure for Handling PrivilegedInformation, updated in March 2008, in order to ensure that materialnon-public information is promptly and adequately disclosed to the public andin compliance with the fundamental principles of transparency and truthfulness.We also adopted an Internal Dealing Procedure in order to comply with certainregulatory amendments. The procedure, updated in March 2008, governs thedisclosure obligations and the limitations concerning transactions carried outon shares and other financial instruments by a “significant” person (includingdirectors, the main shareholders of the company and the persons closely relatedto them).

 

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

 

Deloitte & Touche S.p.A., or Deloitte & Touche, wasengaged as our independent registered public accounting firm to audit ourconsolidated financial statements for the years ended December 31, 2007and 2006. Due to the nature of our operations, numerous Deloitte &Touche entities and affiliates perform numerous other accounting, tax andconsulting tasks for us around the world. The Board of Directors is thecorporate body competent to pre-approve, with the favorable opinion of theInternal Control Committee, all audit services for the annual audit ofLuxottica Group S.p.A.’s own financial statements and for the audit of theconsolidated financial statements of Luxottica Group S.p.A. and its subsidiaries,and to pre-approve all non-audit services permissible for all entities in thegroup, although pre-approval of such services may not always be possible basedon the nature of the service. Each pre-approval is typically given for aone-year period and is detailed by category and budgeted cost. Updates on auditand non-audit services to be provided by Deloitte & Touche areprovided to the Board quarterly.

 

The following table sets forth the aggregate fees paid by the Companyto Deloitte & Touche for 2007 and 2006:

 

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| **Thousands of Euro**                                                                        | ** ** | **2007  Fees** | ** ** | **2006  Fees** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------------|------------|----------------|------------|
| Audit fees (including annual financial  statement audit, semi-annual reviews and Sarbanes-Oxley audit) |       | 4,231          |       | 5,258          |       |
| Audit related fees (including benefit plan  audits and acquisition due diligence)                      |       | 355            |       | 427            |       |
| Tax fees (including compliance and  planning)                                                          |       | 605            |       | 1,854          |       |
| All other fees (including royalty audits)                                                              |       | 0              |       | 221            |       |
| Total fees                                                                                             |       | 5,191          |       | 7,760          |       |

 

Our Board of Directors has approved all of the audit and non-audit feesof Deloitte & Touche for the year 2007 in accordance with thepre-approval policy set forth above. The percentage of audit work performed bypersons other than full-time permanent employees of Deloitte & Toucheis less than 50 percent.

 

**ITEM 16D. Exemptions from the ListingStandards for Audit Committees**

 

We rely on the exemption from the listing standards for auditcommittees set forth in Exchange Act Rule 10A-3(c)(3). We believe thatsuch reliance will not materially adversely affect the ability of our Board ofStatutory Auditors to act independently and to satisfy the other requirementsof the SEC rules.

 

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

 

FromJanuary 1, 2007 to December 31, 2007, no purchases were made by or onbehalf of the Company or any affiliated purchaser of ordinary shares or ADSs.

 

The ordinary meeting of shareholders on May 13, 2008 approved aprogram authorizing the repurchase and disposal of up to a maximum of18,500,000 Luxottica Group ordinary shares over the 18-month period followingsuch date, for a maximum cost of up to Euro 370,000,000.

 

**ITEM 17. FINANCIAL STATEMENTS**

 

Not applicable.

 

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**ITEM 18. FINANCIAL STATEMENTS**

 
| **Index  to Consolidated Financial Statements**                                                                  | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------|
| Report of Independent  Registered Public Accounting Firm                                                         |       | F-1        |
| Consolidated  Balance Sheets, December 31, 2007 and 2006                                                    |       | F-4        |
| Consolidated  Statements of Income for the Years Ended December 31, 2007, 2006 and  2005                    |       | F-6        |
| Consolidated  Statements of Shareholders’ Equity for the Years Ended December 31,  2005, 2006 and 2007 |       | F-7        |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and  2005                |       | F-8        |
| Notes to  Consolidated Financial Statements                                                                      |       | F-10       |
|                                                                                                             |       |       |
| **Consolidated  Financial Statement Schedules**                                                                  | ** ** | ** ** |
| Valuation and  Qualifying Accounts                                                                               |       | F-52       |

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

**To theBoard of Directors and Stockholders of**

**LUXOTTICAGROUP S.p.A.**

 

Wehave audited the accompanying consolidated balance sheets of Luxottica GroupS.p.A. (an Italian corporation) and subsidiaries (the “Company") as ofDecember 31, 2007 and 2006, and the related consolidated statements of income,shareholders' equity, and cash flows for each of the three years in the periodended December 31, 2007.  Our audits alsoincluded the financial statement schedule listed in the Index at Item 18.  These financial statements and financialstatement schedule are the responsibility of the Company's management.  Our responsibility is to express an opinionon the financial statements and financial statement schedule based on ouraudits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion. 

 

Inour opinion, such consolidated financial statements present fairly, in allmaterial respects, the financial position of Luxottica Group S.p.A. andsubsidiaries as of December 31, 2007 and 2006, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2007, in conformity with accounting principles generally acceptedin the United States of America.  Also,in our opinion, such financial statement schedule, when considered in relationto the basic consolidated financial statements taken as a whole, presentsfairly, in all material respects, the information set forth therein.

 

Asdiscussed in Notes 2 and 8 to the consolidated financial statements, effectiveJanuary 1, 2007, the Company changed its method of accounting for uncertaintyin income taxes to conform to Financial Accounting Standards BoardInterpretation No. 48, “Accounting for Uncertainty in Income Taxes — aninterpretation of FASB Statement No. 109”. 

 

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the Company's internal control overfinancial reporting as of December 31, 2007, based on the criteria establishedin Internal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated June 24, 2008expressed an unqualified opinion on the Company's internal control overfinancial reporting.

 

 

 

 

Milan,Italy

June24, 2008

 
| Ancona Bari Bergamo Bologna Brescia Cagliari Firenze  Genova Milano Napoli Padova Parma             |   | A Member of                  |
|-----------------------------------------------------------------------------------------------------|--------|------------------------------|
| Roma Torino Treviso Verona Vicenza                                                                  |   | **Deloitte Touche Tohmatsu** |
|                                                                                                |   | ** **                   |
| Sede Legale: Via Tortona 25 - 20144 Milano - Capitale  Sociale: Euro 10.328.220,00 i.v.             |   |                         |
| Partita IVA/Codice Fiscale/Registro delle Imprese  Milano n. 03049560166 - R.E.A. Milano n. 1720239 |   |                         |

 

F-1

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|   | Deloitte  & Touche S.p.A. |
|--------|-------------------------------|
|   | Via  Tortona 25               |
|   | 20144  Milano                 |
|   | Italia                        |
|   |                          |
|   | Tel:                          | +39  02 833.22111 |
|   | Fax:                          | +39  02 833.22112 |
|   | www.deloitte.it               |

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

** **

**To theBoard of Directors and Stockholders of**

**LUXOTTICAGROUP S.p.A.**

 

Wehave audited the internal control over financial reporting of Luxottica GroupS.p.A and subsidiaries (the “Company”) as of December 31, 2007, based on thecriteria established in Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission. As describedin “Management’s Report on Internal Control over Financial Reporting”,management excluded from its assessment the internal control over financialreporting at Oakley Inc., D.O.C. Optics Corporation, and the 26 percent stakein RayBan Sun Optics India Ltd. (the “Acquired Entities”), which were acquiredin November, February, and June 2007, respectively, and whose financial statementsconstitute approximately 29% of total assets, 3% of net sales and 1% ofoperating income of the consolidated financial statement amounts, as of and forthe year ended December 31, 2007. Accordingly, our audit did not include theinternal control over financial reporting at the Acquired Entities. TheCompany’s management is responsible for maintaining effective internal controlover financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting, included in the accompanying “Management’sReport on Internal Control over Financial Reporting”. Our responsibility is toexpress an opinion on the Company’s internal control over financial reportingbased on our audit. 

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal controlover financial reporting, assessing the risk that a material weakness exists,testing and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion. 

 

Acompany’s internal control over financial reporting is a process designed by,or under the supervision of, the company’s principal executive and principalfinancial officers, or persons performing similar functions, and effected bythe company’s board of directors, management, and other personnel to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertain tothe maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2)provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized 

 

 
| Ancona Bari Bergamo Bologna Brescia Cagliari Firenze  Genova Milano Napoli Padova Parma             |   | A Member of                  |
|-----------------------------------------------------------------------------------------------------|--------|------------------------------|
| Roma Torino Treviso Verona Vicenza                                                                  |   | **Deloitte Touche Tohmatsu** |
|                                                                                                |   | ** **                   |
| Sede Legale: Via Tortona 25 - 20144 Milano - Capitale  Sociale: Euro 10.328.220,00 i.v.             |   |                         |
| Partita IVA/Codice Fiscale/Registro delle Imprese  Milano n. 03049560166 - R.E.A. Milano n. 1720239 |   |                         |

 

 

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----

 

acquisition,use, or disposition of the company’s assets that could have a material effecton the financial statements.

 

Becauseof the inherent limitations of internal control over financial reporting,including the possibility of collusion or improper management override ofcontrols, material misstatements due to error or fraud may not be prevented ordetected on a timely basis. Also, projections of any evaluation of theeffectiveness of the internal control over financial reporting to futureperiods are subject to the risk that the controls may become inadequate becauseof changes in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

 

Inour opinion, the Company maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2007, based on thecriteria established in Internal Control — Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission.

 

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated financialstatements and financial statement schedule as of and for the year endedDecember 31, 2007 of the Company and our report dated June 24, 2008 expressedan unqualified opinion on those financial statements and financial statementsschedule, and included an explanatory paragraph relating to the Company’sadoption of Financial Accounting Standards Board Interpretation No. 48,“Accounting for Uncertainty in Income Taxes — an Interpretation of FASBStatement No. 109” effective January 1, 2007.

 

 

 

 

Milan,Italy

June24, 2008

 

F-3

----

 

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

 

**CONSOLIDATEDBALANCE SHEETS DECEMBER 31, 2007 AND 2006 (*)**

 
| ** **                                                                                                                                               | ** ** | **2007**                         | ** ** | **2007**       | ** ** | **2006**  | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------|------------|-----------|------------|
| ** **                                                                                                                                               | ** ** | **(US $/000) ****(1)** | ** ** | **(Euro/000)** | ** ** |
|                                                                                                                                                     |       |                             |       |           |       |      |       |
| **ASSETS**                                                                                                                                               |       |                             |       |           |       |      |       |
|                                                                                                                                                     |       |                             |       |           |       |      |       |
| CURRENT ASSETS:                                                                                                                                          |       |                             |       |           |       |      |       |
| Cash and cash equivalents                                                                                                                                |       | $                                | 442,317    |           | 302,894    |      | 339,122    |   |
| Marketable securities                                                                                                                                    |       | 31,170                           |       | 21,345         |       |      |       |
| Accounts receivable - net  (Less allowance for doubtful accounts: € 25.5 million in 2007 (US $ 37.3  million) and € 22.7 million in 2006) |       | 971,368                          |       | 665,184        |       | 533,772   |       |
| Sales and income taxes receivable                                                                                                                        |       | 129,967                          |       | 89,000         |       | 24,924    |       |
| Inventories - net                                                                                                                                        |       | 839,696                          |       | 575,016        |       | 400,895   |       |
| Prepaid expenses and other                                                                                                                               |       | 203,426                          |       | 139,305        |       | 98,156    |       |
| Deferred tax assets - net                                                                                                                                |       | 172,101                          |       | 117,853        |       | 96,595    |       |
|                                                                                                                                                     |       |                             |       |           |       |      |       |
| Total current assets                                                                                                                                     |       | 2,790,045                        |       | 1,910,597      |       | 1,493,464 |       |
|                                                                                                                                                     |       |                             |       |           |       |      |       |
| PROPERTY, PLANT AND EQUIPMENT - net                                                                                                                      |       | 1,544,679                        |       | 1,057,782      |       | 787,201   |       |
|                                                                                                                                                     |       |                             |       |           |       |      |       |
| OTHER ASSETS:                                                                                                                                            |       |                             |       |           |       |      |       |
| Goodwill                                                                                                                                                 |       | 3,799,467                        |       | 2,601,840      |       | 1,694,614 |       |
| Intangible assets - net                                                                                                                                  |       | 1,907,323                        |       | 1,306,117      |       | 830,362   |       |
| Investments                                                                                                                                              |       | 25,801                           |       | 17,668         |       | 23,531    |       |
| Other assets                                                                                                                                             |       | 285,298                          |       | 195,370        |       | 94,501    |       |
| Deferred tax assets                                                                                                                                      |       | 99,142                           |       | 67,891         |       | 45,205    |       |
|                                                                                                                                                     |       |                             |       |           |       |      |       |
| Total other assets                                                                                                                                       |       | 6,117,031                        |       | 4,188,887      |       | 2,688,213 |       |
|                                                                                                                                                     |       |                             |       |           |       |      |       |
| TOTAL ASSETS                                                                                                                                             |       | $                                | 10,451,755 |           | 7,157,266  |      | 4,968,878  |   |

 

----

(1) Translated for convenience at the New York City Noon BuyingRate as determined in Note 1

(*) In accordance with US GAAP

 

See notes to the consolidated financial statements

 

F-4

----

 
| ** **                                                                                                                                                                                                                                               | ** ** | **2007**                         | ** ** | **2007**       | ** ** | **2006**  | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------|------------|-----------|------------|
| ** **                                                                                                                                                                                                                                               | ** ** | **(US $/000) ****(1)** | ** ** | **(Euro/000)** | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                                            |       |                             |       |           |       |      |       |
|                                                                                                                                                                                                                                                     |       |                             |       |           |       |      |       |
| CURRENT  LIABILITIES:                                                                                                                                                                                                                                    |       |                             |       |           |       |      |       |
| Bank  overdrafts                                                                                                                                                                                                                                         |       | $                                | 665,295    |           | 455,588    |      | 168,358    |   |
| Current  portion of long-term debt                                                                                                                                                                                                                       |       | 1,157,459                        |       | 792,617        |       | 359,527   |       |
| Accounts  payable                                                                                                                                                                                                                                        |       | 618,338                          |       | 423,432        |       | 349,598   |       |
| Accrued  expenses                                                                                                                                                                                                                                        |       |                             |       |           |       |      |       |
| Payroll  and related                                                                                                                                                                                                                                     |       | 194,194                          |       | 132,983        |       | 145,005   |       |
| Customers’  right of return                                                                                                                                                                                                                         |       | 38,781                           |       | 26,557         |       | 17,881    |       |
| Other                                                                                                                                                                                                                                                    |       | 450,850                          |       | 308,738        |       | 229,713   |       |
| Income  taxes payable                                                                                                                                                                                                                                    |       | 28,205                           |       | 19,314         |       | 155,195   |       |
|                                                                                                                                                                                                                                                     |       |                             |       |           |       |      |       |
| Total  current liabilities                                                                                                                                                                                                                               |       | 3,153,123                        |       | 2,159,229      |       | 1,425,277 |       |
|                                                                                                                                                                                                                                                     |       |                             |       |           |       |      |       |
| LONG-TERM  DEBT                                                                                                                                                                                                                                          |       | 2,813,301                        |       | 1,926,523      |       | 959,735   |       |
|                                                                                                                                                                                                                                                     |       |                             |       |           |       |      |       |
| LIABILITY  FOR TERMINATION INDEMNITIES                                                                                                                                                                                                                   |       | 83,107                           |       | 56,911         |       | 60,635    |       |
|                                                                                                                                                                                                                                                     |       |                             |       |           |       |      |       |
| DEFERRED  TAX LIABILITIES - NET                                                                                                                                                                                                                          |       | 362,704                          |       | 248,377        |       | 95,124    |       |
|                                                                                                                                                                                                                                                     |       |                             |       |           |       |      |       |
| OTHER  LONG-TERM LIABILITIES                                                                                                                                                                                                                             |       | 335,828                          |       | 229,972        |       | 181,888   |       |
|                                                                                                                                                                                                                                                     |       |                             |       |           |       |      |       |
| COMMITMENTS  AND CONTINGENCIES                                                                                                                                                                                                                           |       |                             |       |           |       |      |       |
|                                                                                                                                                                                                                                                     |       |                             |       |           |       |      |       |
| MINORITY  INTERESTS IN CONSOLIDATED SUBSIDIARIES                                                                                                                                                                                                         |       | 60,013                           |       | 41,097         |       | 30,371    |       |
|                                                                                                                                                                                                                                                     |       |                             |       |           |       |      |       |
| SHAREHOLDERS’  EQUITY:                                                                                                                                                                                                                              |       |                             |       |           |       |      |       |
| Capital  stock par value € 0.06 - 462,623,620 and 460,216,248 ordinary shares  authorized and issued at December 31, 2007 and 2006, respectively; 456,188,834  and 453,781,462 shares outstanding at December 31, 2007 and 2006,  respectively |       | 40,534                           |       | 27,757         |       | 27,613    |       |
| Additional  paid-in capital                                                                                                                                                                                                                              |       | 405,887                          |       | 277,947        |       | 203,016   |       |
| Retained  earnings                                                                                                                                                                                                                                       |       | 3,850,618                        |       | 2,636,868      |       | 2,343,800 |       |
| Accumulated  other comprehensive loss, net of tax                                                                                                                                                                                                        |       | (551,158                         | )          | (377,428       | )          | (288,593  | )          |
| Total                                                                                                                                                                                                                                                    |       | 3,745,881                        |       | 2,565,145      |       | 2,285,836 |       |
| Less  treasury shares at cost; 6,434,786 and 6,434,786 shares at December 31,  2007 and 2006, respectively                                                                                                                                          |       | 102,201                          |       | 69,987         |       | 69,987    |       |
| Total  shareholders’ equity                                                                                                                                                                                                                         |       | 3,643,680                        |       | 2,495,158      |       | 2,215,849 |       |
|                                                                                                                                                                                                                                                     |       |                             |       |           |       |      |       |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                                                                         |       | $                                | 10,451,755 |           | 7,157,266  |      | 4,968,878  |   |

 

----

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

(*) Inaccordance with US GAAP

 

Seenotes to the consolidated financial statements

 

F-5

----

 

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

 

**CONSOLIDATED STATEMENTS OF INCOME FORTHE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 (*)**

 
| ** **                                                    | ** ** | **2007**                         | ** ** | **2007**   | ** ** | **2006**       | ** ** | **2005**   | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                                                    | ** ** | **(US $/000)**** (1)** | ** ** | ** ** | ** ** | **(Euro/000)** | ** ** | ** ** | ** ** |
|                                                          |       |                             |       |       |       |           |       |       |       |
| NET SALES                                                     |       | $                                | 7,251,929  |       | 4,966,054  |           | 4,676,156  |       | 4,134,263  |   |
|                                                          |       |                             |       |       |       |           |       |       |       |
| COST OF SALES                                                 |       | (2,300,876                       | )          | (1,575,618 | )          | (1,487,700     | )          | (1,373,073 | )          |
|                                                          |       |                             |       |       |       |           |       |       |       |
| GROSS PROFIT                                                  |       | 4,951,053                        |       | 3,390,436  |       | 3,188,456      |       | 2,761,190  |       |
|                                                          |       |                             |       |       |       |           |       |       |       |
| OPERATING EXPENSES:                                           |       |                             |       |       |       |           |       |       |       |
| Selling and advertising                                       |       | (3,021,770                       | )          | (2,069,280 | )          | (1,948,466     | )          | (1,755,536 | )          |
| General and administrative                                    |       | (712,397                         | )          | (487,843   | )          | (484,002       | )          | (424,253   | )          |
|                                                          |       |                             |       |       |       |           |       |       |       |
| Total                                                         |       | (3,734,167                       | )          | (2,557,123 | )          | (2,432,468     | )          | (2,179,789 | )          |
|                                                          |       |                             |       |       |       |           |       |       |       |
| INCOME FROM OPERATIONS                                        |       | 1,216,886                        |       | 833,313    |       | 755,987        |       | 581,401    |       |
|                                                          |       |                             |       |       |       |           |       |       |       |
| OTHER INCOME (EXPENSE):                                       |       |                             |       |       |       |           |       |       |       |
| Interest income                                               |       | 24,952                           |       | 17,087     |       | 9,804          |       | 5,650      |       |
| Interest expense                                              |       | (130,694                         | )          | (89,498    | )          | (70,622        | )          | (66,171    | )          |
| Other - net                                                   |       | 28,885                           |       | 19,780     |       | (16,992        | )          | 18,429     |       |
|                                                          |       |                             |       |       |       |           |       |       |       |
| Other income (expense) - net                                  |       | (76,857                          | )          | (52,631    | )          | (77,810        | )          | (42,092    | )          |
|                                                          |       |                             |       |       |       |           |       |       |       |
| INCOME BEFORE PROVISION FOR INCOME TAXES                      |       | 1,140,029                        |       | 780,681    |       | 678,177        |       | 539,309    |       |
|                                                          |       |                             |       |       |       |           |       |       |       |
| PROVISION FOR INCOME TAXES                                    |       | (399,393                         | )          | (273,501   | )          | (238,757       | )          | (199,266   | )          |
|                                                          |       |                             |       |       |       |           |       |       |       |
| INCOME BEFORE MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES |       | 740,636                          |       | 507,180    |       | 439,420        |       | 340,043    |       |
|                                                          |       |                             |       |       |       |           |       |       |       |
| MINORITY INTERESTS IN INCOME OF CONSOLIDATED SUBSIDIARIES     |       | (21,870                          | )          | (14,976    | )          | (8,715         | )          | (9,253     | )          |
|                                                          |       |                             |       |       |       |           |       |       |       |
| NET INCOME FROM CONTINUING OPERATIONS                         |       | 718,766                          |       | 492,204    |       | 430,705        |       | 330,790    |       |
|                                                          |       |                             |       |       |       |           |       |       |       |
| DISCONTINUED OPERATIONS, NET OF TAXES                         |       |                             |       |       |       | (6,419         | )          | 11,504     |       |
|                                                          |       |                             |       |       |       |           |       |       |       |
| NET INCOME                                                    |       | $                                | 718,766    |       | 492,204    |           | 424,286    |       | 342,294    |   |
|                                                          |       |                             |       |       |       |           |       |       |       |
| EARNINGS PER SHARE: BASIC                                     |       |                             |       |       |       |           |       |       |       |
| Continuing Operations                                         |       | 1.58                             |       | 1.08       |       | 0.95           |       | 0.73       |       |
| Discontinued operations                                       |       |                             |       |       |       | (0.01          | )          | 0.03       |       |
| Net Income                                                    |       | 1.58                             |       | 1.08       |       | 0.94           |       | 0.76       |       |
|                                                          |       |                             |       |       |       |           |       |       |       |
| EARNINGS PER SHARE: DILUTED                                   |       |                             |       |       |       |           |       |       |       |
| Continuing Operations                                         |       | 1.57                             |       | 1.07       |       | 0.94           |       | 0.73       |       |
| Discontinued operations                                       |       |                             |       |       |       | (0.01          | )          | 0.03       |       |
| Net Income                                                    |       | 1.57                             |       | 1.07       |       | 0.93           |       | 0.76       |       |
|                                                          |       |                             |       |       |       |           |       |       |       |
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (thousands)     |       |                             |       |       |       |           |       |       |       |
| Basic                                                         |       | 455,185                          |       | 455,185    |       | 452,898        |       | 450,179    |       |
| Diluted                                                       |       | 458,531                          |       | 458,531    |       | 456,186        |       | 453,303    |       |

 

----

(1) Translated for convenience at the New York City Noon BuyingRate as determined in Note 1

(*) In accordance with US GAAP

 

See notes to the consolidatedfinancial statements

 

F-6

----

 

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

 

**CONSOLIDATED STATEMENTS OFSHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007 (*)**

 
|                                                                                |   |              |   |        |   |           |   |            |    |               |       |               |          | **Accumulated**     |    |              |   |        |   |
|-------------------------------------------------------------------------------------|--------|-------------------|--------|-------------|--------|----------------|--------|-----------------|---------|--------------------|------------|--------------------|---------------|---------------------|---------|-------------------|--------|-------------|--------|
|                                                                                |   |              |   |        |   |           |   |            |    |               |       | **Other**          |          | **Other**           |    |              |   |        |   |
|                                                                                |   | ** **        |   |        |   | **Additional** |   |            |    | **Unearned**       |       | **Comprehensive**  |          | **Comprehensive**   |    | **Treasury**      |   | **Total**   |   |
|                                                                                |   | **Common  Stock** |   | **Paid-in** |   | **Retained**   |   | **Stock-based** |    | **Income  (Loss)** | ** ** | **Income  (Loss)** |          | **Shares  Amount,** |    | **Shareholders'** |   |
|                                                                                |   | **Shares**        |   | **Amount**  |   | **Capital**    |   | **Earnings**    |    | **Compensation**   |       | **Net  of Tax**    |          | **Net  of Tax**     |    | **at  Cost**      |   | **Equity**  |   |
| BALANCES,  JANUARY 1, 2005                                                          |   | 455,205,473       |   | 27,312      |   | 47,167         |   | 1,812,073       |    |               |       |               |          | (320,958            | )       | (69,987           | )      | 1,495,607   |   |
|                                                                                |   |              |   |        |   |           |   |            |    |               |       |               |          |                |    |              |   |        |   |
| Exercise  of stock options                                                          |   | 2,770,250         |   | 167         |   | 28,062         |   |            |    |               |       |               |          |                |    |              |   | 28,229      |   |
| Translation  adjustment                                                             |   |              |   |        |   |           |   |            |    |               |       | 157,776            |          | 157,776             |    |              |   | 157,776     |   |
| Aggregate  stock based compensation                                                 |   |              |   |        |   | 70,273         |   |            |    | (70,273            | )          |               |          |                |    |              |   |        |   |
| Realized  stock based compensation                                                  |   |              |   |        |   |           |   |            |    | 21,706             |       |               |          |                |    |              |   | 21,706      |   |
| Minimum  pension, liability, net of taxes of Euro 1.6 million                       |   |              |   |        |   |           |   |            |    |               |       | 2,534              |          | 2,534               |    |              |   |  2,534 |   |
| Tax  benefit on stock options                                                       |   |              |   |        |   | 4,677          |   |            |    |               |       |               |          |                |    |              |   | 4,677       |   |
| Change  in fair value of derivative instruments, net of taxes of Euro 2.3 million   |   |              |   |        |   |           |   |            |    |               |       | 4,694              |          | 4,694               |    |              |   | 4,694       |   |
| Dividends  declared (Euro 0.23 per share)                                           |   |              |   |        |   |           |   | (103,484        | )       |               |       |               |          |                |    |              |   | (103,484    | )      |
| Net  Income (continuing operations)                                                 |   |              |   |        |   |           |   | 330,790         |    |               |       | 330,790            |          |                |    |              |   | 330,790     |   |
| Income  from discontinued operations                                                |   |              |   |        |   |           |   | 11,504          |    |               |       | 11,504             |          |                |    |              |   | 11,504      |   |
| Comprehensive  income                                                               |   |              |   |        |   |           |   |            |    |               |       | 507,298            |          |                |    |              |   |        |   |
|                                                                                |   |              |   |        |   |           |   |            |    |               |       |               |          |                |    |              |   |        |   |
| BALANCES,  DECEMBER 31, 2005                                                        |   | 457,975,723       |   | 27,479      |   | 150,179        |   | 2,050,883       |    | (48,567            | )          |               |          | (155,954            | )       | (69,987           | )      | 1,954,033   |   |
|                                                                                |   |              |   |        |   |           |   |            |    |               |       |               |          |                |    |              |   |        |   |
| Exercise  of stock options                                                          |   | 2,240,525         |   | 134         |   | 24,308         |   |            |    |               |       |               |          |                |    |              |   | 24,443      |   |
| Translation  adjustment                                                             |   |              |   |        |   |           |   |            |    |               |       | (126,853           | )             | (126,853            | )       |              |   | (126,853    | )      |
| Effect  of adoption of SFAS 123 R                                                   |   |              |   |        |   | (48,567        | )      |            |    | 48,567             |       |               |          |                |    |              |   | 0           |   |
| Realized  stock based compensation                                                  |   |              |   |        |   | 47,969         |   |            |    |               |       |               |          |                |    |              |   | 47,969      |   |
| Minimum  pension, liability, net of taxes of Euro 0.4 million                       |   |              |   |        |   |           |   |            |    |               |       | (624               | )             | (624                | )  |              |   | (624        | )      |
| Effect  of adoption SFAS 158, net of taxes of Euro 5.5 million                      |   |              |   |        |   |           |   |            |    |               |       | (8,409             | )             | (8,409              | )       |              |   | (8,409      | )      |
| Unrealized  gain on available-for-sale securities, net of taxes of Euro 0.5 million |   |              |   |        |   |           |   |            |    |               |       | 1,244              |          | 1,244               |    |              |   | 1,244       |   |
| Diluted  gain on business combinations, SAB 5-H gain                                |   |              |   |        |   | 21,847         |   |            |    |               |       |               |          |                |    |              |   | 21,847      |   |
| Excess  tax benefit on stock options                                                |   |              |   |        |   | 7,279          |   |            |    |               |       |               |          |                |    |              |   | 7,279       |   |
| Change  in fair value of derivative instruments, net of taxes of Euro 1.8 million   |   |              |   |        |   |           |   |            |    |               |       | 2,003              |          | 2,003               |    |              |   | 2,003       |   |
| Dividends  declared (Euro 0.29 per share)                                           |   |              |   |        |   |           |   | (131,369        | )       |               |       |               |          |                |    |              |   | (131,369    | )      |
| Net  Income (continuing operations)                                                 |   |              |   |        |   |           |   | 430,705         |    |               |       | 430,705            |          |                |    |              |   | 430,705     |   |
| Loss  from discontinued operations                                                  |   |              |   |        |   |           |   | (6,419          | )       |               |       | (6,419             | )             |                |    |              |   | (6,419      | )      |
| Comprehensive  income                                                               |   |              |   |        |   |           |   |            |    |               |       | 291,647            |          |                |    |              |   |        |   |
|                                                                                |   |              |   |        |   |           |   |            |    |               |       |               |          |                |    |              |   |        |   |
| BALANCES,  DECEMBER 31, 2006                                                        |   | 460,216,248       |   | 27,613      |   | 203,016        |   | 2,343,800       |    |               |       |               |          | (288,593            | )       | (69,987           | )      | 2,215,849   |   |
|                                                                                |   |              |   |        |   |           |   |            |    |               |       |               |          |                |    |              |   |        |   |
| Exercise  of stock options                                                          |   | 2,407,372         |   | 144         |   | 26,498         |   |            |    |               |       |               |          |                |    |              |   | 26,642      |   |
| Translation  adjustment                                                             |   |              |   |        |   |           |   |            |    |               |       | (90,881            | )             | (90,881             | )       |              |   | (90,881     | )      |
| Effect  of adoption of FIN 48                                                       |   |              |   |        |   |           |   | (8,060          | )  |               |       |               |          |                |    |              |   | (8,060      | )      |
| Realized  stock based compensation                                                  |   |              |   |        |   | 42,121         |   |            |    |               |       |               |          |                |    |              |   | 42,121      |   |
| Adjustement  to pension liability, net of taxes of Euro 3.9 million                 |   |              |   |        |   |           |   |            |    |               |       | 9,688              |          | 9,688               |    |              |   | 9,688       |   |
| Unrealized  gain on available-for-sale securities, net of taxes of Euro 0.9 million |   |              |   |        |   | 6,313          |   |            |    |               |       | (1,579             | )             | (1,579              | )       |              |   | (1,579      | )      |
| Excess  tax benefit on stock options                                                |   |              |   |        |   |           |   |            |    |               |       |               |          |                |    |              |   | 6,313       |   |
| Change  in fair value of derivative instruments, net of taxes of Euro 4.6 million   |   |              |   |        |   |           |   |            |    |               |       | (6,062             | )             | (6,062              | )       |              |   | (6,062      | )      |
| Dividends  declared (Euro 0.42 per share)                                           |   |              |   |        |   |           |   | (191,077        | )       |               |       |               |          |                |    |              |   | (191,077    | )      |
| Net  Income                                                                         |   |              |   |        |   |           |   | 492,204         |    |               |       | 492,204            |          |                |    |              |   | 492,204     |   |
| Comprehensive  income                                                               |   |              |   |        |   |           |   |            |    |               |       | 403,369            |          |                |    |              |   |        |   |
|                                                                                |   |              |   |        |   |           |   |            |    |               |       |               |          |                |    |              |   |        |   |
| BALANCES,  DECEMBER 31, 2007                                                        |   | 462,623,620       |   | 27,757      |   | 277,947        |   | 2,636,868       |    |               |       |               |          | (377,428            | )       | (69,987           | )      | 2,495,158   |   |
|                                                                                |   |              |   |        |   |           |   |            |    |               |       |               |          |                |    |              |   |        |   |
| Comprehensive  income (1)                                                           |   |              |   |        |   |           |   |            |    |               |       | $                  |  589,040 |                |    |              |   |        |   |   |
| BALANCES,  DECEMBER 31, 2007 (1)                                                    |   | 462,623,620       |   | $           | 40,534 |           | $      | 405,887         |    | $                  | 3,850,618  |               |          |                |    |              | $      | (551,158    | )      | $ | (102,201 | ) | $ | 3,643,680 |   |
| (US  $/000) (1)                                                                     |   |              |   |        |   |           |   |            |    |               |       |               |          |                |    |              |   |        |   |
|                                                                                     |        |                   |        |             |        |                |        |                 |         |                    |            |                    |               |                     |         |                   |        |             |        |  |  |  |  |  |  |  |

 

----

(1) Translated for convenience at the New YorkCity Noon Buying Rate as determined in Note 1

(*) In accordance with US GAAP

 

See notes to the consolidated financial statements

 

F-7

----

 

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

** **

**CONSOLIDATEDSTATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005(*)**

 
| ** **                                                                           | ** ** | **2007**                   | ** ** | **2007**   | ** ** | **2006**       | ** ** | **2005**   | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                                                                           | ** ** | **(US $/000)****(1)** | ** ** | ** ** | ** ** | **(Euro/000)** | ** ** | ** ** | ** ** |
|                                                                                 |       |                       |       |       |       |           |       |       |       |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                               |       |                       |       |       |       |           |       |       |       |
|                                                                                 |       |                       |       |       |       |           |       |       |       |
| Net  income from continuing operations                                               |       | $                          | 718,766    |       | 492,204    |           | 430,705    |       | 330,790    |   |
|                                                                                 |       |                       |       |       |       |           |       |       |       |
| Adjustments  to reconcile net income to net cash provided by operating activitities: |       |                       |       |       |       |           |       |       |       |
|                                                                                 |       |                       |       |       |       |           |       |       |       |
| Minority  interest in income of consolidated subsidiaries                            |       | 21,870                     |       | 14,976     |       | 8,715          |       | 9,253      |       |
| Non  cash stock-based compensation                                                   |       | 61,510                     |       | 42,121     |       | 47,969         |       | 21,706     |       |
| Excess  tax benefits from stock-based compensation                                   |       | (9,218                     | )          | (6,313     | )          | (7,279         | )          |       |       |
| Depreciation  and amortization                                                       |       | 339,977                    |       | 232,813    |       | 220,797        |       | 184,652    |       |
| Benefit  for deferred income taxes                                                   |       | (65,768                    | )          | (45,037    | )          | (72,509        | )          | (91,297    | )          |
| Loss  (Gain) on disposals of fixed assets - net                                      |       | (28,238                    | )          | (19,337    | )          | 4,930          |       | 6,559      |       |
| Termination  indemnities matured during the year - net                               |       | (5,249                     | )          | (3,595     | )          | 4,369          |       | 3,723      |       |
|                                                                                 |       |                       |       |       |       |           |       |       |       |
| Changes  in operating assets and liabilities, net of acquisition of businesses:      |       |                       |       |       |       |           |       |       |       |
| Accounts  receivable                                                                 |       | (81,349                    | )          | (55,707    | )          | (83,107        | )          | (33,634    | )          |
| Prepaid  expenses and other                                                          |       | (322,327                   | )          | (220,727   | )          | 8,568          |       | (56,767    | )          |
| Inventories                                                                          |       | (61,209                    | )          | (41,916    | )          | (27,658        | )          | 66,491     |       |
| Accounts  payable                                                                    |       | 65,695                     |       | 44,988     |       | 76,021         |       | 49,615     |       |
| Accrued  expenses and other                                                          |       | (13,776                    | )          | (9,433     | )          | (25,243        | )          | (17,544    | )          |
| Accrual  for customers’ right of return                                         |       | 14,391                     |       | 9,855      |       | 11,121         |       | 5,448      |       |
| Income  taxes payable                                                                |       | (134,556                   | )          | (92,142    | )          | 5,875          |       | 126,708    |       |
|                                                                                 |       |                       |       |       |       |           |       |       |       |
| Total  adjustments                                                                   |       | (218,247                   | )          | (149,454   | )          | 172,569        |       | 274,914    |       |
|                                                                                 |       |                       |       |       |       |           |       |       |       |
| Cash  provided by operating activities from continuing operations                    |       | $                          | 500,519    |       | 342,750    |           | 603,274    |       | 605,704    |   |

 

 

F-8

----

 
| ** **                                                                                  | ** ** | **2007**                     | ** **  | **2007**       | ** **  | **2006**       | ** **  | **2005**     | ** **  |
|---------------------------------------------------------------------------------------------|------------|------------------------------|-------------|----------------|-------------|----------------|-------------|--------------|-------------|
| ** **                                                                                  | ** ** | **(US $/000) (1)** | ** **  | ** **     | ** **  | **(Euro/000)** | ** **  | ** **   | ** **  |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                                      |       |                         |        |           |        |           |        |         |        |
| Property,  plant and equipment:                                                             |       |                         |        |           |        |           |        |         |        |
| Additions                                                                                   |       | (488,863                     | )           | (334,769       | )           | (272,180       | )           | (220,016     | )           |
| Disposals                                                                                   |       | 43,371                       |        | 29,700         |        | 21,563         |        | 1,022        |        |
| Increase  in investments                                                                    |       |                         |        |           |        | (5,872         | )           |         |        |
| Purchases  of businesses net of cash acquired                                               |       | (2,177,433                   | )           | (1,491,086     | )           | (134,114       | )           | (86,966      | )           |
| Sale  of investment in Pearle Europe                                                        |       |                         |        |           |        |           |        | 144,000      |        |
| Sale  of Things Remembered                                                                  |       |                         |        |           |        | 128,007        |        |         |        |
| Additions  of intangible assets                                                             |       | (5,671                       | )           | (3,883         | )           | (1,140         | )           | (4,479       | )           |
|                                                                                        |       |                         |        |           |        |           |        |         |        |
| **Cash used in investing activities of continuing operations**                              | ** ** | **(2,628,596**               | **)**       | **(1,800,038** | **)**       | **(263,737**   | **)**       | **(166,439** | **)**       |
|                                                                                        |       |                         |        |           |        |           |        |         |        |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                                      |       |                         |        |           |        |           |        |         |        |
| Long-term  debt:                                                                            |       |                         |        |           |        |           |        |         |        |
| Proceeds                                                                                    |       | 3,132,968                    |        | 2,145,428      |        | 84,100         |        | 373,462      |        |
| Repayments                                                                                  |       | (986,920                     | )           | (675,834       | )           | (233,378       | )           | (623,338     | )           |
| Swap  termination fees                                                                      |       |                         |        |           |        |           |        | (7,062       | )           |
| Repayment  of acquired lines of credit                                                      |       | (243,253                     | )           | (166,577       | )           |           |        |         |        |
| Increase  (decrease) in overdraft balances                                                  |       | 412,214                      |        | 282,280        |        | (101,008       | )           | (17,813      | )           |
| Exercise  of stock options                                                                  |       | 38,905                       |        | 26,642         |        | 24,443         |        | 28,229       |        |
| Excess  tax benefit from stock-based compensation                                           |       | 9,218                        |        | 6,313          |        | 7,279          |        |         |        |
| Dividends                                                                                   |       | (279,030                     | )           | (191,077       | )           | (131,369       | )           | (103,484     | )           |
|                                                                                        |       |                         |        |           |        |           |        |         |        |
| **Cash provided for (used in) financing activities of continuing  operations**              | ** ** | **2,084,102**                | ** **  | **1,427,174**  | ** **  | **(349,933**   | **)**       | **(350,006** | **)**       |
|                                                                                        |       |                         |        |           |        |           |        |         |        |
| **(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS**                                        | ** ** | **(43,975**                  | **)**       | **(30,114**    | **)**       | **(10,395**    | **)**       | **89,260**   | ** **  |
| ** **                                                                                  | ** ** | ** **                   | ** **  | ** **     | ** **  | ** **     | ** **  | ** **   | ** **  |
| **CASH AND EQUIVALENTS, BEGINNING OF YEAR**                                                 | ** ** | **495,220**                  | ** **  | **339,122**    | ** **  | **367,461**    | ** **  | **253,246**  | ** **  |
|                                                                                        |       |                         |        |           |        |           |        |         |        |
| Effect  of exchange rate changes on cash and cash equivalents                               |       | (8,928                       | )           | (6,114         | )           | (17,944        | )           | 24,955       |        |
|                                                                                        |       |                         |        |           |        |           |        |         |        |
| **CASH AND EQUIVALENTS, END OF YEAR**                                                       | ** ** | **$**                        | **442,317** | ** **     | **302,894** | ** **     | **339,122** | ** **   | **367,461** | ** ** |
|                                                                                        |       |                         |        |           |        |           |        |         |        |
| Cash  provided by (used in) operating activities of discontinued operations                 |       |                         |        |           |        | (5,688         | )           | 17,756       |        |
| Cash  provided by (used in) investing activities of discontinued operations                 |       |                         |        |           |        | (9,186         | )           | (9,340       | )           |
| Cash  provided by (used in) financing activities of discontinued operations                 |       |                         |        |           |        | 16,209         |        | (8,318       | )           |
|                                                                                        |       |                         |        |           |        |           |        |         |        |
| (DECREASE)INCREASE  IN CASH AND CASH EQUIVALENTS OF DISCONTINUED OPERATIONS                 |       |                         |        |           |        | 1,334          |        | 99           |        |
|                                                                                        |       |                         |        |           |        |           |        |         |        |
| CASH  RECLASSIFIED AS ASSETS OF DISCONTINUED OPERATION AT BEGINNING OF YEAR                 |       |                         |        |           |        | 4,795          |        | 4,103        |        |
|                                                                                        |       |                         |        |           |        |           |        |         |        |
| EFFECT  OF TRANSLATION ADJUSTMENTS ON CASH AND CASH EQUIVALENTS OF DISCONTINUED  OPERATIONS |       |                         |        |           |        | (557           | )           | 593          |        |
|                                                                                        |       |                         |        |           |        |           |        |         |        |
| CASH  RETAINED BY DISCONTINUED OPERATIONS UPON SALE                                         |       |                         |        |           |        | (5,572         | )           |         |        |
|                                                                                        |       |                         |        |           |        |           |        |         |        |
| **CASH INCLUDED IN ASSETS OF DISCONTINUEDOPERATIONS AT END OF PERIOD**                      | ** ** | ** **                   | ** **  | ** **     | ** **  | ** **     | ** **  | **4,795**    | ** **  |
| ** **                                                                                  | ** ** | ** **                   | ** **  | ** **     | ** **  | ** **     | ** **  | ** **   | ** **  |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOWS INFORMATION:                                         |       |                         |        |           |        |           |        |         |        |
| Cash  paid during the year for interest                                                     |       | 106,897                      |        | 73,202         |        | 67,496         |        | 61,770       |        |
| Cash  paid during the year for income taxes                                                 |       | 663,067                      |        | 454,062        |        | 242,628        |        | 153,287      |        |
| Acquisition  of businesses:                                                                 |       |                         |        |           |        |           |        |         |        |
| Fair  value of assets acquired                                                              |       | 796,052                      |        | 545,129        |        | 10,863         |        | 3,702        |        |
|                                                                                             |            |                              |             |                |             |                |             |              |             |  |

 

----

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

(*) Inaccordance with US GAAP

 

Seenotes to the consolidated financial statements

 

F-9

----

 

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

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.**         **ORGANIZATION ANDSIGNIFICANT ACCOUNTING POLICIES**

 

**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.

 

Throughits manufacturing and wholesale distribution operations, Luxottica Group isengaged in the design, manufacturing, wholesale distribution and marketing ofhouse brand and designer lines of mid to premium-priced prescription frames andsunglasses, and, with the acquisition of Oakley Inc. (“Oakley”) in November 2007,the Company, through various Oakley subsidiaries, is a designer, manufacturer,and worldwide distributor of performance optics products.

 

Throughits retail operations, as of December 31, 2007, the Company owned andoperated 5,885 retail locations worldwide (5,280 locations at December 31,2006) and franchised an additional 522 locations (439 locations at December 31,2006) principally through LensCrafters, Inc., Sunglass Hut InternationalInc., OPSM Group Limited, Cole National Corporation (“Cole”) and Oakley. Theretail division of Oakley (“O” retail) consists of owned retail locationsoperating under various names including “O” stores which sell apparel and otherOakley branded merchandise in addition to performance sunglasses. At December 31,2007, our retail operations by geographic region and significant trade nameswere as follows:

 
| ** **                  | ** ** | **North   America** | ** ** | **Europe/Middle   East** | ** ** | **Australia/New   Zealand/ South  Africa** | ** ** | **China/Hong   Kong** | ** ** | **Other**  | ** ** | **Total**  | ** ** |
|-----------------------------|------------|--------------------------|------------|-------------------------------|------------|------------------------------------------------------|------------|----------------------------|------------|------------|------------|------------|------------|
| LensCrafters                |       | 951                      |       |                          |       |                                                 |       | 165                        |       |       |       | 1,116      |       |
| Sunglass  Hut               |       | 1,738                    |       | 110                           |       | 287                                                  |       | 6                          |       |       |       | 2,141      |       |
| Pearle  and Licensed Brands |       | 1,815                    |       |                          |       |                                                 |       |                       |       |       |       | 1,815      |       |
| OPSM  Group                 |       |                     |       |                          |       | 551                                                  |       |                       |       |       |       | 551        |       |
| Oakley                      |       | 107                      |       |                          |       |                                                 |       |                       |       | 39         |       | 146        |       |
| Other                       |       |                     |       |                          |       | 32                                                   |       | 84                         |       |       |       | 116        |       |
| Franchisee  locations       |       | 414                      |       |                          |       | 108                                                  |       |                       |       |       |       | 522        |       |
| ** **                  | ** ** | ** **               | ** ** | ** **                    | ** ** | ** **                                           | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total**                   | ** ** | **5,025**                | ** ** | **110**                       | ** ** | **978**                                              | ** ** | **255**                    | ** ** | **39**     | ** ** | **6,407**  | ** ** |

 

Luxottica Group’snet sales consist of direct sales of finished products manufactured under itsown brand names or licensed brands to opticians and other independent retailersthrough its wholesale distribution channels and direct sales to consumersthrough its retail segment.

 

Demand for theCompany’s products, particularly the higher-end designer lines, is largelydependent on the discretionary spending power of the consumers in the marketsin which the Company operates.

 

TheNorth America retail division’s fiscal year is a 52- or 53-week period endingon the Saturday nearest December 31. The accompanying consolidatedfinancial statements include the operations of the North America retaildivision for the 52-week periods ended January 1, 2006, December 30,2006, and December 29, 2007.

 

F-10

----

 

**Principlesof consolidation and basis of presentation** -The consolidated financial statements of Luxottica Group include the financialstatements of the parent company and all wholly or majority-owned subsidiaries.During 2007 a subsidiary of the Company located in the United States acquiredan additional 26 percent interest in an affiliated manufacturing and wholesaledistributor, located and publicly traded in India, in which it previously heldan approximate 44 percent. Until the time that the Company became the majorityshareholder, this investment was accounted for under the equity method. TheCompany owns a 50 percent interest in an affiliated company located in GreatBritain which is accounted for under the equity method. Investments in othercompanies in which the Company has less than a 20 percent interest with noability to exercise significant influence are carried at cost. All intercompanyaccounts and transactions are eliminated in consolidation. Luxottica Groupprepares its consolidated financial statements in accordance with accountingprinciples generally accepted in the United States of America (“U.S. GAAP”).

 

Inaccordance with Financial Accounting Standard Board (“FASB”) Statement ofFinancial Accounting Standard (“SFAS”) No. 141, *Business Combinations*,we account for all business combinations under the purchase method.Furthermore, we recognize intangible assets apart from goodwill if they arisefrom contractual or legal rights or if they are separable from goodwill.

 

**Use of Estimates** - The preparation of financial statements inconformity with U.S. GAAP requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.Significant judgment and estimates are required in the determination of thevaluation allowances against receivables, inventory and deferred tax assets,calculation of pension and other long-term employee benefit accruals, legal andother accruals for contingent liabilities and the determination of impairmentconsiderations for long-lived assets, among other items. Actual results coulddiffer from those estimates.

 

**Foreign Currency Translation and Transactions** – Luxottica Group accounts for its foreign currency denominatedtransactions and foreign operations in accordance with SFAS No. 52, *Foreign Currency Translation*. The financial statements offoreign subsidiaries are translated into Euro, which is the functional currencyof the parent company and the reporting currency of the Company. Assets andliabilities of foreign subsidiaries, which use the local currency as theirfunctional currency, are translated at year-end exchange rates. Results ofoperations are translated using the average exchange rates prevailingthroughout the year. The resulting cumulative translation adjustments arerecorded as a separate component of “Accumulated other comprehensive income(loss).”

 

Transactionsin foreign currencies are recorded at the exchange rate in effect at thetransaction date. Gains or losses from foreign currency transactions, such asthose resulting from the settlement of foreign receivables or payables duringthe year, are recognized in the consolidated statement of income in such year.Aggregate foreign exchange transaction gain/(loss) for the fiscal years 2007,2006 and 2005 were Euro 15.2 million, Euro (19.9) million and Euro 9.5 million,respectively.

 

**Cash and Cash Equivalents** –Cash and cash equivalents includes cash on hand, demand deposits, and highlyliquid investments with an original maturity of three months or less, andamounts in-transit from banks for customer credit card and debit cardtransactions. Substantially all amounts in transit from the banks are convertedto cash within four business days from the time of sale. Credit card and debitcard transactions in transit were approximately Euro 25.5 million and Euro 23.4million at December 31, 2007 and 2006, respectively.

 

**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 of credit)that the Company has obtained through local financial institutions. Thesefacilities are usually short-term in nature or may contain provisions thatallow them to renew automatically with a cancellation notice period. Certainsubsidiaries’ agreements require a guarantee from Luxottica Group. Interestrates on these lines of credit vary and can be used to obtain various lettersof credit when needed.

 

**Inventories** – LuxotticaGroup’s manufactured inventories, approximately 66.2 percent and 66.7 percentof total frame inventory for 2007 and 2006, respectively, are stated at thelower of cost, as determined under the weighted-average method, or marketvalue. Retail inventories not manufactured by the Company or its subsidiariesare stated at the lower of cost as determined by the weighted-average cost, ormarket value. Inventories are recorded net of allowances for estimated losses.This reserve is calculated using various factors including sales volume,historical shrink results and current trends.

 

**Property, Plant and Equipment** - Property, plant and equipment are stated at historical cost.Depreciation is computed on the straight-line method over the estimated usefullives of the related assets as follows:

 

F-11

----

 
| ** **                          | ** ** | **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 15 years or the remaining life of the  lease |

 

Maintenanceand repair expenses are expensed as incurred. Upon the sale or disposition ofproperty and equipment, the cost of the asset and the related accumulateddepreciation and leasehold amortization are removed from the accounts and anyresulting gain or loss is included in the consolidated statement of income.

 

**Capitalized Leased**********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 annually for impairment as of December 31of each year in accordance with SFAS No. 142, *Goodwill and Other Intangible Assets*(“SFAS 142”).Additional impairment tests are performed if, for any reason, the Companybelieves that an event has occurred that may impair goodwill. Such tests areperformed at the reporting unit level which consists of four units, Wholesale,Retail North America, Retail Asia Pacific and Retail Other, as required by theprovisions of SFAS 142. For the fiscal years 2007, 2006 and 2005 the Companyhas not recorded a goodwill impairment charge.

 

**Trade Names and Other Intangibles** – In connection with various acquisitions, Luxottica Group hasrecorded as intangible assets certain trade names and other intangibles whichthe Company believes have a finite life. Trade names are amortized on astraight-line basis over periods ranging from 20 to 25 years (see Note 7).Other intangibles include, among other items, distributor networks, customerlists and contracts, franchise agreements and license agreements, and areamortized over the respective useful lives. All intangibles are subject to testfor impairment in accordance with SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*(“SFAS 144”). Aggregate amortizationexpense of trade names and other intangibles for the fiscal years 2007, 2006and 2005 was Euro 69.5 million, Euro 68.8 million and 61.9 million,respectively.

 

**Impairment of Long-Lived Assets** – Luxottica Group’s long-lived assets, other than goodwill, aretested for impairment whenever events or changes in circumstances indicate thatthe net carrying amount may not be recoverable. When such events occur, theCompany measures impairment by comparing the carrying value of the long-livedasset to the estimated undiscounted future cash flows expected to result fromthe use of the long-lived assets and their eventual disposition. If the sum ofthe expected undiscounted future cash flows is less than the carrying amount ofthe long-lived assets, the Company records an impairment loss, if determined tobe necessary. Such impairment loss is measured as the amount by which thecarrying amount of the long-lived asset exceeds the fair value in accordancewith SFAS 144. The aggregate impairment loss on certain non-performinglong-lived assets charged to the consolidated statements of income duringfiscal years 2007, 2006 and 2005 was not material.

 

**Store Opening and Closing Costs** - Store opening costs are charged to operations as incurred inaccordance with Statement of Position No. 98-5, *Accounting for the Cost of Start-up Activities*. The costsassociated with closing stores or facilities are recorded at fair value as suchcosts are incurred. Store closing costs charged to the consolidated statementsof income during fiscal years 2007, 2006 and 2005 were not material.

 

**SelfInsurance** - The Company is self insured forcertain losses relating to workers’ compensation, general liability, autoliability, and employee medical benefits for claims filed and for claimsincurred but not reported.  The Company’sliability is estimated on an undiscounted basis using historical claimsexperience and industry averages; however, the final cost of the claims may notbe known for over five years. As of December 31, 2007 and 2006, selfinsurance accruals were Euro 40.9 million and 37.4 million, respectively.

 

F-12

----

 

**Income Taxes** - Incometaxes are recorded in 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 the Company’sconsolidated financial statements or tax returns. Under this method, deferredtax liabilities and assets are determined based on the difference between theconsolidated financial statement and tax basis of assets and liabilities usingenacted tax rates in effect for the year in which the differences are expectedto reverse. A valuation allowance is recorded for deferred tax assets if it isdetermined that it is more likely than not that the asset will not be realized.Changes in valuation allowances from period to period are included in the taxprovisions in the relevant period of change.

 

As of January 1, 2007, the Company adoptedFinancial Accounting Interpretation (“FIN”) No. 48, *Accountingfor Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109*.FIN 48 provides that a tax benefit from an uncertain tax position may berecognized when it is more likely than not that the position will be sustainedupon examination, including resolutions of any related appeals or litigationprocesses, based on the technical merits. In addition, it provides additionalrequirements regarding measurement, de-recognition, disclosure, interest andpenalties and classification. FIN 48 must be applied to all existing taxpositions for all open tax periods as of the date of adoption (see Note 8 for atabular reconciliation of uncertain tax positions). The cumulative effect ofadoption of FIN 48 of Euro 8.1 million was recorded as a reduction to retainedearnings on the date of adoption.

 

The Companyrecognizes interest and penalties related to unrecognized tax benefits withinthe income tax expense line in the accompanying consolidated statements ofincome. Accrued interest and penalties are included within the related taxliability in the consolidated balance sheet.

 

**Liability for TerminationIndemnities** - The reserve for employeetermination indemnities of Italian companies was considered a defined benefitplan through December 31, 2006 and was accounted for accordingly.Effective January 1, 2007, the Italian employee termination indemnitysystem was reformed, and such indemnities are subsequently accounted for as adefined contribution plan. Termination indemnities in other countries areprovided through payroll tax and other social contributions in accordance withlocal statutory requirements (see Note 10).

 

**Revenue Recognition**- Revenues include sales ofmerchandise (both wholesale and retail), insurance and administrative feesassociated with the Company’s managed vision care business, eye exams andrelated professional services, and sales of merchandise to franchisees alongwith other revenues from franchisees such as royalties based on sales andinitial franchise fee revenues. Excluded from revenues and recorded net inexpenses when applicable are amounts collected from customers and remitted togovernmental authorities for taxes directly related to the revenue-producingtransaction.

 

Revenue is recognized when it is realized orrealizable and earned. Revenue is considered to be realized or realizable andearned when there is persuasive evidence of an arrangement, delivery hasoccurred, the sales price is fixed or determinable and collectibility isreasonably assured.

 

Wholesale Divisionrevenues are recognized from sales of products at the time of shipment, astitle and the risks and rewards of ownership of the goods are assumed by thecustomer at such time. The products are not subject to formal customeracceptance provisions. In some countries, the customer has the right to returnproducts for a limited period of time after the sale. However, such right ofreturn does not impact the timing of revenue recognition as all conditions ofSFAS No. 48, *Revenue Recognition When Right of ReturnExists*, are satisfied at the date of sale. Accordingly, the Companyhas recorded an accrual for the estimated amounts to be returned.  This estimate is based on the Company’s rightof return policies and practices along with historical data and salestrends.  There are no other post-shipmentobligations. Revenues received for the shipping and handling of goods areincluded in sales and the costs associated with shipments to customers areincluded in operating expenses. Total shipping costs in fiscal years 2007, 2006and 2005 associated with the sale of goods in the Wholesale Division were Euro8.3 million, Euro 7.3 million and Euro 6.0 million, respectively.

 

Retail Division revenues, including internet andcatalogue sales, are recognized 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 accrualfor the estimated amounts to be returned. 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-shipmentobligations. As such, the right of return does not impact the timing of revenuerecognition as all conditions of Statement of Financial Accounting Standards(“SFAS”) No. 48, Revenue Recognition When Right of Return Exists, are satisfiedat the date of sale. Additionally, the Retail Division enters into discountprograms and similar relationships with third parties that have terms of twelveor more months. Revenues under these arrangements are likewise recognized astransactions occur in the 

 

F-13

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Company’s retail locations and customers take receiptof products and services. Advance payments and deposits from customers are notrecorded as revenues until the product is delivered. At December 31, 2007 and2006 customer advances included in the consolidated balance sheet in “AccruedExpenses and Other” were Euro 22.9 million and Euro 21.8 million, respectively.Also included in Retail Division revenues are managed vision care revenuesconsisting of (i) insurance revenues, which are recognized when earned over theterms 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.

 

Oakleylicenses to third parties the rights to certain intellectual property and otherproprietary information and recognizes royalty revenues when earned.

 

The Retail Division previously sold separately pricedextended warranty contracts with terms of coverage of 12 months. Revenues fromthe sale of these warranty contracts are deferred and amortized over the livesof the contracts, while costs to service the warranty claims are expensed asincurred.

 

A reconciliation of the changes in deferred revenuefrom the sale of warranty contracts and other deferred items for the yearsended December 31, 2007 and 2006, is as follows:

 
| **(thousands of Euro)**           | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Beginning balance                 |       | 15,798   |       | 41,099   |       |
| Translation difference            |       | (586     | )          | (3,643   | )          |
| Warranty contracts sold           |       | —   |       | 30,151   |       |
| Other deferred revenues           |       | —   |       | 70       |       |
| Amortization of deferred revenues |       | (15,212  | )          | (51,879  | )          |
| Total                             |       | —   |       | 15,798   |       |
| Current                           |       | —   |       | 15,798   |       |
| Non-current                       |       | —   |       | —   |       |

 

The Company earns and accrues franchise revenues basedon sales by franchisees which are accrued as earned. 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 theCompany and when the related store begins operations. These initial franchisefees were immaterial for the fiscal years 2007, 2006 and 2005. Accruals are establishedfor amounts due under these relationships when they are determined to beuncollectible.

 

The Wholesale and Retail Divisions may offer certainpromotions during the year.  Free framesgiven to customers as part of a promotional offer are recorded in cost of salesat the time they are delivered to the customer. Discounts and coupons tendered by customers are recorded as a reductionof revenue at the date of sale.

 

**ManagedVision Care Underwriting and Expenses** - TheCompany sells vision insurance plans which generally have a duration of up tofive years. Based on its experience, the Company believes it can predictutilization and claims experience under these plans, including claims incurredbut not yet reported, with a high degree of confidence. Claims are recorded asthey are incurred and certain other membership costs are amortized over thecovered period.

 

**Advertisingand Direct Response Marketing** – Costs todevelop and create newspaper, radio and other media advertising are expensed asincurred. Costs to develop and create television advertising are expensed thefirst time the airtime is used. 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 are expected to result in future economic benefit and theprimary purpose of the advertising is to elicit sales to customers who could beshown to have responded specifically to the advertising.  Such costs related to the direct responseadvertising are amortized over the period during which the revenues arerecognized, not to exceed 90 days. Generally, other direct response programcosts that do not meet the capitalization criteria are expensed the first timethe advertising occurs. Advertising expenses incurred during fiscal years 2007,2006 and 2005 were Euro 348.2 million, Euro 318.1 million and Euro 267.8million, respectively, and no significant amounts have been reported as assets.

 

TheCompany receives a reimbursement from its acquired franchisees for certainmarketing costs.  Operating expenses inthe Consolidated Statements of Income are net of amounts reimbursed by thefranchisees calculated based on a percentage of their sales.  The amounts received in fiscal years 2007,2006 and 2005 for such reimbursement were Euro 16.8 million, Euro 19.2 millionand Euro 15.5 million, respectively.

 

F-14

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**Earnings Per Share** –Luxottica Group calculates basic and diluted earnings per share in accordancewith SFAS No. 128, *Earnings per Share*.Net income available to shareholders is the same for the basic and dilutedearnings per share calculations for the years ended December 31, 2007,2006 and 2005. Basic earnings per share are based on the weighted averagenumber of shares of common stock outstanding during the period. Dilutedearnings per share are based on the weighted average number of shares of commonstock and common stock equivalents (options) outstanding during the period,except when the common stock equivalents are anti-dilutive. The following is areconciliation from basic to diluted shares outstanding used in the calculationof earnings per share:

 
| ** **                                                                                                                                     | ** ** | **2007**    | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                                                                                                                     | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** |
| Weighted  average shares outstanding – basic                                                                                              |       | 455,184,797 |       | 452,897,854 |       | 450,179,073 |       |
|                                                                                                                                           |       |        |       |        |       |        |       |
| Effect  of dilutive stock options                                                                                                              |       | 3,345,812   |       | 3,287,796   |       | 3,124,353   |       |
|                                                                                                                                           |       |        |       |        |       |        |       |
| Weighted  average shares outstanding – dilutive                                                                                           |       | 458,530,609 |       | 456,185,650 |       | 453,303,426 |       |
|                                                                                                                                           |       |        |       |        |       |        |       |
| Options  not included in calculation of dilutive shares as the exercise price was  greater than the average price during the respective period |       | 4,947,775   |       | 6,885,893   |       | 569,124     |       |

 

**Stock-Based Compensation** - Stock-based compensation represents the cost related tostock-based awards granted to employees. Stock-based compensation cost ismeasured at grant date based on the estimated fair value of the award andrecognizes the cost on a straight-line basis (net of estimated forfeitures)over the employee requisite service period. The fair value of stock options isestimated using a binomial lattice valuation technique. Deferred tax assets arerecorded for awards that result in deductions on income tax returns, based onthe amount of compensation cost recognized and the statutory tax rate in thejurisdiction in which the deduction will be received. Differences between thedeferred tax assets recognized for financial reporting purposes and the actualtax deduction reported on the income tax return are recorded in AdditionalPaid-In Capital (if the tax deduction exceeds the deferred tax asset) or in theconsolidated statements of income (if the deferred tax asset exceeds the taxdeduction and no additional paid-in capital exists from previous awards).

 

**Fair Value of Financial Instruments** - Financial instruments consistprimarily of cash and cash equivalents, marketable securities, debtobligations, and derivative financial instruments which are either accountedfor as fair value or cash flow hedges, and starting in 2006, financialinstruments also include a note receivable from a third party for the sale ofThings Remembered Inc. (“TR Note”). Luxottica Group estimates the fair value ofcash and cash equivalents and marketable securities based on interest ratesavailable to the Company and by comparison to quoted market prices and its debtobligations, as there are no quoted market prices, based on interest ratesavailable to the Company. The fair value associated with financial guaranteeshas been accrued for when applicable and is disclosed in Note 15. The fairvalues of letters of credit are not disclosed as it is not practicable for theCompany to do so and substantially all of these instruments are in place foroperational purposes such as security on leases and health benefits. The fairvalue of the TR Note was based on discounted projected cash flows utilizing anexpected yield.

 

At December 31, 2007 and 2006, the fair value ofthe Company’s financial instruments approximated the carrying value except asotherwise disclosed.

 

**Derivative Financial Instruments** – Derivative financial instruments are accounted for in accordancewith SFAS No. 133, *Accounting for DerivativeInstruments and Hedging Activities*(“SFAS 133”), as amended andinterpreted.

 

SFAS133 requires that all derivatives, whether or not designed in hedgingrelationships, be recorded on the balance sheet at fair value regardless of thepurpose or intent for holding them. If a derivative is designated as afair-value hedge, changes in the fair value of the derivative and the relatedchange in the hedge item are recognized in operations. If a derivative isdesignated as a cash-flow hedge, changes in the fair value of the derivativeare recorded in other comprehensive income/(loss) (“OCI”) in the Statements ofConsolidated Shareholders’ Equity and are recognized in the consolidatedstatements of income when the hedged item

 

F-15

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affectsoperations. The effect of these derivatives in the consolidated statements ofincome depends on the item hedged (for example, interest rate hedges arerecorded in interest expense). For a derivative that does not qualify as ahedge, changes in fair value are recognized in the consolidated statements ofincome, under the caption “Other – net”.

 

Designatedhedging instruments and hedged items qualify for hedge accounting only if thereis a formal documentation of the hedging relationship at the inception of thehedge, hedging relationship is expected to be highly effective andeffectiveness is tested at the inception date and at least every three months.

 

Certaintransactions and other future events, such as (i) the derivative no longereffectively offsetting changes to the cash flow of the hedged instrument, (ii) theexpiration, termination or sale of the derivative, or (iii) any otherreason of which the Company becomes aware that the derivative no longerqualifies as a cash flow hedge, would cause the balance remaining in othercomprehensive income to be realized immediately as earnings. Based on currentinterest rates and market conditions, the estimated aggregate amount to berecognized as earnings from other comprehensive income relating to these cashflow hedges in fiscal 2008 is approximately Euro (1.2) million, net of taxes.

 

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

 

**Defined Benefit Pensions -** The funded status of the Company’s defined benefit pension plans isrecognized in the consolidated statement of income. The funded status ismeasured as the difference between the fair value of plan assets and thebenefit obligation at September 30, the measurement date. For definedbenefit pension plans, the benefit obligation is the projected benefitobligation (“PBO”), which represents the actuarial present value of benefitsexpected to be paid upon retirement based on estimated future compensationlevels. The fair value of plan assets represents the current market value ofcumulative company and participant contributions made to an irrevocable trustfund, held for the sole benefit of participants, which are invested by thetrust fund. Overfunded plans, with the fair value of plan assets exceeding thebenefit obligation, are aggregated and recorded as a prepaid pension assetequal to this excess. Underfunded plans, with the benefit obligation exceedingthe fair value of plan assets, are aggregated and recorded as a retirementbenefit obligation equal to this excess. The current portion of the retirementbenefit obligations represents the actuarial present value of benefits payablein the next 12 months exceeding the fair value of plan assets, measured on aplan-by-plan basis.

 

Net periodic pension benefit cost/(income) is recordedin the consolidated statements of income and includes service cost, interestcost, expected return on plan assets, amortization of prior servicecosts/(credits) and (gains)/losses previously recognized as a component ofgains and (losses) not affecting retained earnings and amortization of the nettransition asset remaining in accumulated gains and (losses) not affectingretained earnings. Service cost represents the actuarial present value ofparticipant benefits earned in the current year. Interest cost represents thetime value of money cost associated with the passage of time. Certain events,such as changes in employee base, plan amendments and changes in actuarialassumptions, result in a change in the benefit obligation and the correspondingchange in the gains and (losses) not affecting retained earnings. The result ofthese events is amortized as a component of net periodic cost/(income) over theservice lives of the participants.

 

**Information Expressed in US Dollars** - The Company’s consolidated financialstatements are stated in Euro, the currency of the country in which the parentcompany is incorporated and operates. The translation of Euro amounts into USDollar amounts is included solely for the convenience of international readersand has been made at the rate of Euro 1 to US Dollar 1.4603. Such rate wasdetermined by using the noon buying rate of the Euro to US Dollar as certifiedfor customs purposes by the Federal Reserve Bank of New York as of December 31,2007. Such translations should not be construed as representations that Euroamounts could be converted into US Dollars at that or any other rate.

 

**Reclassifications** - The presentation of certain prior yearinformation has been reclassified to conform to the current year presentation.

 

**RecentAccounting Pronouncements –**

 

In March 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 161, *Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133*  (“SFAS 161”). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and

 

F-16

 

its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The guidance in SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company is currently assessing the impact of SFAS 161.

 

In December 2007,the FASB issued SFAS No. 160, *Noncontrolling Interestsin Consolidated Financial Statements – an amendment to ARB No. 51*,establishing new accounting and reporting standards for noncontrollinginterests (formally known as “minority interests”) in a subsidiary and, whenapplicable, how to account for the deconsolidation of such subsidiary. The keydifferences include that non-controlling interests will be recorded as acomponent of equity, the consolidated income statements and statements ofcomprehensive income will be adjusted to include the non controlling interestand certain disclosures have been updated. The statement is effective for the fiscal years and interim periodswithin those years beginning on or after December 15, 2008.  Earlier adoption is prohibited.  The Company has minority interests in certainsubsidiaries and as such is currently evaluating the effect of adoption.

 

In December 2007,FASB issued SFAS No. 141(R), *Business CombinationsRevised* (“SFAS 141(R)”), which revises the current SFAS 141. Thesignificant changes include a change from the “cost allocation process” todetermine the value of assets and liabilities to a full fair value measurementapproach. In addition, acquisition related expenses will be expensed asincurred and not included in the purchase price allocation and contingentliabilities will be separated into two categories, contractual andnon-contractual, and accounted for based on which category the contingencyfalls into. This statement applies prospectively and is effective for businesscombinations for which the acquisition date is on or after the beginning of thefirst annual reporting period beginning after December 15, 2008.  Since it will be applied prospectively itwill not have an effect on the current financial statements, however, since theCompany participates in business combinations, in the future the Companybelieves this statement after the adoption date could have a significant effecton future operations.

 

In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities — Including an amendment of FASB No. 115,*which allows the Company to elect to record at fair value financialassets and liabilities, on an instrument by instrument basis, with the changebeing recorded in earnings.  Suchelection is irrevocable after elected for that instrument and must be appliedto the entire instrument. The adoption of such standard is for fiscal yearsbeginning after November 15, 2007. The adoption is not expected to have amaterial effect on the consolidated financial statements.

 

In September 2006,FASB issued SFAS No. 157, *Fair Value Measurements,*which establishes a definition of fair value, establishes a framework formeasuring fair value and expands disclosures about fair value measurements.SFAS No. 157 does not require new fair value measurements but clarifiesthe definition, method and disclosure requirements of previously issuedstandards that address fair value measurements. The adoption of such standardis for fiscal years beginning after November 15, 2007. The Company iscurrently evaluating the accounting and disclosure requirements and theireffect on the consolidated financial statements.

 

In September 2006,FASB issued SFAS No. 158, *Employer’s Accounting forDefined Benefit Pension Other Post Retirement Plans,*which requiresthe Company to recognize an asset or liability for the funded status(difference between fair value of plan assets and benefit obligation, which fordefined benefit pension plans is deemed to be the Projected Benefit Obligation)of its retirement plans and recognize changes in the funded status annuallythrough other comprehensive income (“O.C.I.”). Additionally, the statementchanges the date as of which the funded status can be measured (eliminates the90 day window) with limited exceptions. The effective date of the recognitionof the funded status is for years ending after December 15, 2006, and assuch, refer to Note 10 for the effect on adoption. The effective date for thechange in acceptable measurement date is for fiscal years ending after December 15,2008. The Company is currently evaluating the impact on the consolidatedfinancial statements of changing its measurement date.

 

F-17

----

 

**2.         RELATED PARTY TRANSACTIONS**

 

**Fixed Assets** - In 2002, asubsidiary of the Company entered into an agreement with the Company’s Chairmanto lease to him a portion of a building for Euro 0.5 million annually. Theexpiration date of this lease is 2010.

 

As of December 31, 2007 the receivable from theCompany’s Chairman amounts to Euro 0.3 million (Euro 0.2 million as of December 31,2006).

 

**License Agreement** – TheCompany has a worldwide exclusive license agreement to manufacture anddistribute ophthalmic products under the name of Brooks Brothers. The BrooksBrothers trade name is owned by Retail Brand Alliance, Inc. (“RBA”), whichis owned and controlled by a Director of the Company. The license agreementexpires in 2009. Royalties paid to RBA for such agreement were Euro 0.9million, Euro 1.3 million and Euro 0.5 million in fiscal years 2007, 2006 and2005 respectively.

 

In July 2004,the Company signed a worldwide exclusive license agreement to manufacture anddistribute ophthalmic products under the name of Adrienne Vittadini. TheAdrienne Vittadini trade name was owned by RBA until November 2006 whenthe license was sold by RBA to a party unrelated to the Company. For fiscalyears 2006 and 2005 royalties paid to RBA for such agreement were Euro 1.0million and Euro 0.9 million.

 

As of December 31,2007 the balance of accounts receivable and payable related to RBA (includingservice revenues described in the next paragraph) amount to Euro 0.0 millionand Euro 0.4 million, respectively (Euro 0.1 million and Euro 0.7 million, asof December 31, 2006).

 

**Service Revenues**- During fiscal years 2007, 2006 and 2005,subsidiaries of Luxottica U.S. Holdings Corp. (“US Holdings”) performed certainservices for RBA. Amounts received for the services provided were Euro 0.2million, Euro 0.7 million and Euro 0.6 million, in fiscal 2007, 2006 and 2005,respectively.

 

**Stock Incentive Plan -**On September 14, 2004, the Company announced that its majorityshareholder, Mr. Leonardo Del Vecchio, had allocated shares held throughLa Leonardo Finanziaria S.r.l. (subsequently merged into Delfin S.a.r.l.), aholding company of the Del Vecchio family, representing at that time 2.11percent (or 9.6 million shares) of the Company’s authorized and issued sharecapital, to a stock option plan for top management of the Company. The stockoptions to be issued under the stock option plan vested upon the meeting ofcertain economic objectives as of June 30, 2006 and, as such, the holdersof these options became entitled to exercise such options beginning on thatdate until their termination in 2014. In 2007, 400,000 options from this grantwere exercised.

 

**Transactionswith Former Chairman of Oakley**— Certain of the Company’s Oakley associates performservices for a company owned by the former chairman of Oakley.  Total billings for services rendered byOakley were Euro 0.4 million since the acquisition date. The agreementgoverning the provision of these services can be terminated at any time with a30 day written notice. In addition, Oakley may incur other costs on behalf ofthe former chairman and such company that are reimbursed after such amounts arepaid by Oakley or with a prepaid deposit. As of December 31, 2007, theaggregate amount due from the former chairman and such company wasapproximately Euro 0.1 million.

 

Oakley leases an aircraft from a differentcorporation owned by the former chairman of Oakley which expires January 31,2009, subject to automatic annual extensions unless Oakley, in its discretion,terminates the agreement as of such date or any subsequent expiration date. Theannual lease payment is approximately Euro 0.1 million and the Company bearsall costs and expenses of operating and maintaining the aircraft. Oakleyentered into time sharing agreements with the former chairman and various otherentities controlled by him whereby the Company is reimbursed for costs of theaircraft when utilized by the former chairman or such other entities.

 

As of December 31, 2007total receivables and payables from/to other related parties not considered inthe above reported paragraphs amount to Euro 0.9 million and Euro 0.7 million,respectively (Euro 1.3 million and Euro 0.2 million as of December 31,2006). These amounts mainly refer to commercial transactions with the companiesType 20 S.r.l. and Optica Limited.

 

F-18

----

 

**3.         INVENTORIES- NET**

 

Inventories – net consisted of the following(thousands of Euro):

 
| ** **                             | ** ** | **2007**    | ** ** | **2006**    | ** ** |
|----------------------------------------|------------|-------------|------------|-------------|------------|
| Raw  materials and packaging           |       | 117,191     |       | 76,352      |       |
| Work in  process                       |       | 52,132      |       | 49,650      |       |
| Finished  goods                        |       | 492,839     |       | 320,146     |       |
| Less:  Inventory obsolescence reserves |       | (87,146     | )          | (45,253     | )          |
| **Total**                              | ** ** | **575,016** | ** ** | **400,895** | ** ** |

 

**4.         SALEOF THINGS REMEMBERED**

 

 On September 29, 2006, the Company soldits Things Remembered (“TR”) specialty gifts retail business to a privateequity consortium for net cash consideration of Euro 128.0 million (US$162.1 including costs of US$ 5.3 million) and a promissory note with aprincipal amount of Euro 20.6 million (US$26.1 million). The TR business operated solely in the United States and was included inthe retail segment of the Company’s operations as of December 31, 2004 and2005. In the consolidated statements of income, for 2005 and 2006, the Companyhas reclassified sales, cost of sales and other expenses associated with thediscontinued operations as a single line item after income from continuingoperations but before net income. Revenues, income from operations, incomebefore provision for income taxes and income tax provision reclassified underdiscontinued operations for the twelve-month periods ended December 31,2005 and  2006, are as follows (thousandsof Euro):

** **
| ** **                                | ** ** | **2006 (1)** | ** ** | **2005** | ** ** |
|-------------------------------------------|------------|--------------|------------|----------|------------|
| Revenues                                  |       | 157,110      |       | 236,478  |       |
| Income from  operations                   |       | 3,250        |       | 21,153   |       |
| Income  before provision for income taxes |       | 761          |       | 18,260   |       |
| Income tax  provision                     |       | (45          | )          | (6,756   | )          |
|                                      |       |         |       |     |       |
| Gain/loss on  sale                        |       | 13,278       |       | N/A      |       |
| Income taxes  on sale                     |       | (20,413      | )          | N/A      |       |
| (Loss)/Gain  on discontinued operations   |       | (6,419       | )          | 11,504   |       |

 

----

(1)        From January 1, 2006 through September 29, 2006

 

The promissory note has a stated interest rate of15.0%. Interest is “paid-in-kind” annually in the form of an additionalprincipal amount added to the outstanding principal balance. All unpaidinterest and outstanding principal is due in March 2013. The promissorynote is subordinated to certain other outstanding senior debt of the acquireras defined in the promissory note. The promissory note has been classified asan “available-for-sale” security and as such changes in its fair value will beincluded in accumulated other comprehensive income and reclassified to earningswhen realized. For fiscal 2006 and 2007 there were no amounts reclassified fromother comprehensive income into earnings.

 

F-19

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**5.         ACQUISITIONSAND INVESTMENTS**

 

**a)     Oakley**

 

On June 20,2007, the Company and Oakley entered into a definitive merger agreement withthe unanimous approval of the Boards of Directors of both companies. On November 14,2007, the merger was consummated, the Company acquired all the outstandingcommon stock of Oakley which became a wholly owned subsidiary of the Company andits results of operations began to be included in the consolidated statementsof income of the Company. The aggregate consideration paid by the Company tothe former shareholders, option holders, and holders of other equity rights ofOakley was approximately Euro 1,425.6 million (US $2,091 million) in cash. Inconnection with the merger, the Company assumed approximately Euro 166.6million (US $244.4 million) of outstanding indebtedness. The purchase price of1,438.7 million (US $2,110.5 million) including approximately Euro 13.1 million(US $19.2 million) of 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 used various methods to calculate the fair value of the assetsacquired and the liabilities assumed. Although all valuations are not yetcompleted, the Company believes that the preliminary allocation of the purchaseprice is reasonable, but is subject to revisions upon completion of the finalvaluation of certain assets and liabilities, which is expected to occur during2008. As such, the final allocation of the purchase price among the assets andliabilities acquired may change in 2008 to reflect the final amounts. Theexcess of purchase price over net assets acquired (“goodwill”) has beenrecorded in the accompanying consolidated balance sheet. No portion of thisgoodwill is deductible for tax purposes. The acquisition of Oakley was made asa result of the Company’s strategy to strengthen its performance sunglasswholesale and retail businesses worldwide.

 

Thepurchase price (including acquisition-related expenses) has been allocatedbased upon the fair value of the assets acquired and liabilities assumed asfollows (thousands of Euro):

 
| *Assets acquired:*                             | * * | * *  | * * |
|------------------------------------------------|----------|-----------|----------|
| Cash and cash equivalents                      |     | 62,396    |     |
| Inventories                                    |     | 132,267   |     |
| Property, plant and equipment                  |     | 142,483   |     |
| Deferred tax assets                            |     | 29,714    |     |
| Prepaid expenses and other current assets      |     | 11,326    |     |
| Accounts receivable                            |     | 104,569   |     |
| Trade names and other intangible               |     | 544,578   |     |
| Other assets                                   |     | 3,978     |     |
|                                           |     |      |     |
| *Liabilities  assumed:*                        | * * | * *  | * * |
| Accounts payable                               |     | (36,285   | )        |
| Accrued expenses and other current liabilities |     | (82,434   | )        |
| Deferred tax liabilities                       |     | (183,046  | )        |
| Outstanding borrowings on credit facilities    |     | (166,577  | )        |
| Other long term liabilities                    |     | (22,891   | )        |
| Bank overdrafts                                |     | (5,575    | )        |
|                                           |     |      |     |
| Fair value of net assets                       |     | 534,502   |     |
|                                           |     |      |     |
| Goodwill                                       |     | 904,148   |     |
|                                           |     |      |     |
| Total purchase price                           |     | 1,438,650 |     |

 

The following table sets forth the Company’sunaudited pro forma consolidated results of operations assuming that theacquisition of Oakley was completed as of January 1 of each of the fiscalyears shown below (in thousands of Euro except for earnings per share data):

 

F-20

----

 
| ** **         | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|--------------------|------------|-----------|------------|-----------|------------|
|               |       |      |       |      |       |
| Net Sales          |       | 5,539,000 |       | 5,243,055 |       |
|               |       |      |       |      |       |
| Net Income         |       | 470,363   |       | 385,896   |       |
|               |       |      |       |      |       |
| Earnings per share |       |      |       |      |       |
| Basic              |       | 1.04      |       | 0.85      |       |
| Diluted            |       | 1.04      |       | 0.85      |       |

 

Pro forma data may not be indicative of theresults that would have been obtained had these events actually occurred at thebeginning of the periods presented, nor does it intend to be a projection offuture results.

 

**b)         Other acquisitions andinvestments:**

 

The following is a description of other acquisitionsand investments. No proforma financial information is presented, as these acquisitions were notmaterial, individually or in aggregate, to the Company’s consolidated financialstatements.

 

In February 2007,the Company completed the acquisition of certain assets and assumed certainliabilities of D.O.C Optics Corporation and its affiliates, an optical retailbusiness with approximately 100 stores located primarily in the Midwest UnitedStates of America for approximately Euro 83.7 million (U.S. $110.2 million) incash. The Company expects to convert the stores acquired to the currentoperating names, “LensCrafters” and “Pearle”. The purchase price, includingdirect acquisition-related expenses, was allocated to the assets acquired andliabilities assumed based on their fair value at the date of the acquisition.The goodwill recorded in the consolidated financial statements as of December 31,2007 totals Euro 70.4 million, of which Euro 64.9 million is deductible for taxpurposes. The Company used various methods to calculate the fair value of theassets acquired and liabilities assumed and all valuations are not yetcompleted. The final allocation of the purchase price among the assets andliabilities acquired and the amount of the goodwill has been completed in 2008resulting in no material differences from the purchase price allocation done in2007. The acquisition was made as a result of the Company’s strategy tocontinue expansion of its retail business in the United States of America.

 

During2007, in compliance with the 2006 decision of the Supreme Court of India, theCompany launched a public offering to acquire an additional 31 percent of theoutstanding equity share capital of RayBan Sun Optics India LTD (“RBSO”).Effective upon the entry of the shares tendered in the offer into the shareregister on June 26, 2007 the Company increased its ownership interest inRBSO to 70.5 percent. As of such date, RBSO was consolidated into the financialstatements. The operations of RBSO for the short period in 2007 and prior toour obtaining majority control were immaterial to the consolidated financialstatements presented. The total cost of the shares acquired was approximatelyEuro 13 million (US $17.2 million). The Company recorded the acquisition as a “step-acquisition”and allocated the purchase price paid over the newly acquired proportionalshare of the fair value of RBSO assets and liabilities acquired. There were nosubstantial unrecognized intangibles, and as such, goodwill was recorded forthe excess price paid over the net fair values of assets and liabilities ofapproximately Euro 9.1 million (US $ 12.3 million).

 

On July 1,2006, the Company acquired certain assets and assumed certain liabilities fromKing Optical Group Inc. consisting of its 74 Canadian optical store chain knownas Shoppers Optical (“SO”). The aggregate consideration paid by the Company tothe former owners of SO was approximately Canadian dollar (“CDN$”) 68.8 million(Euro 48.3 million) in cash. In connection with the acquisition, the Companyassumed no indebtedness. The purchase price of CDN$ 69.3 million (Euro 48.7million), including approximately CDN$ 0.1 million (Euro 0.4 million) of directacquisition-related expenses, was allocated to the assets acquired andliabilities assumed based on their fair value at the date of the acquisition.All valuations of net assets including but not limited to fixed assets andinventory have been completed during 2007 resulting in no material differencesfrom the purchase price allocation done in 2006. The acquisition was made as aresult of the Company’s strategy to continue expansion of its retail businessin Canada.

 

In July 2005,the Company announced that SPV Zeta S.r.l., a new wholly owned Italiansubsidiary, would acquire 100 percent of the equity interest in BeijingXueliang Optical Technology Co. Ltd. (“Xueliang Optical”) for a purchase priceof Chinese Renminbi (“RMB”) 169 million (approximately Euro 17 million), plusRMB 40 million (approximately Euro 4 million) in assumed liabilities. XueliangOptical has 79 stores in Beijing. The transaction was completed in April 2006after the customary approvals by the relevant Chinese governmental authorities.The acquisition was accounted for in accordance with SFAS 141 and, accordingly,the total consideration of Euro 22.6 million has been allocated to the fairmarket value of the assets and

 

F-21

----

 

liabilities of thecompany at the acquisition date. All valuations of net assets including but notlimited to fixed assets and inventory have been completed during 2007 with nomaterial differences from the purchase price allocation performed in 2006,which resulted in the recognition of goodwill of Euro 21.3 million as of thedate of acquisition. The acquisition was made as a result of the Company’s strategyto enter the retail business in The People’s Republic of China.

 

In October 2005,the Company announced that its new wholly owned Italian subsidiary, SPV EtaS.r.l., would acquire 100 percent of the equity interests in Ming Long Optical,the largest premium optical chain in the province of Guangdong, China, for apurchase price of RMB 290 million (approximately Euro 29 million). In July 2006the Company completed the transaction after receiving the customary approvalsby the relevant Chinese governmental authorities. Ming Long Optical operates atotal of 278 locations in two of the top premium optical markets in mainlandChina, as well as in Hong Kong. The acquisition was accounted for in accordancewith SFAS 141 and, accordingly, the total consideration of Euro 30.3 millionhas been allocated to the fair market value of the assets and liabilities ofthe company at the acquisition date. All valuations of net assets including butnot limited to fixed assets and inventory have been completed during 2007 withno material differences from the purchase price allocation performed in 2006,which resulted in the recognition of goodwill of Euro 15.8 million as of thedate of acquisition. The acquisition was made as a result of the Company’s strategy tocontinue expansion of its retail business in The People’s Republic of China.

 

In May 2006, the Company completed the purchase of the remaining 49%stake of the Turkish-based distributor Luxottica Gozluk Ticaret A.S. (“LuxotticaTurchia”) for an amount of Euro 15 million. Goodwill of Euro 7.0 million representing the excessof the net assets acquired has been recorded in the accompanying ConsolidatedBalance Sheets. In November 2006 Standard Gozluk Industri Ve Tircaret A.S.(“Standard”), a Turkish wholesaler fully owned by the former minorityshareholders of Luxottica Turchia, merged with Luxottica Turchia. As a resultof the merger the former shareholders of Standard received a minority stake ofLuxottica Turchia of 35.16% and a put option to sell the shares to the Company,while the Company was granted a call option on the minority stake. Theacquisition was accounted for in accordance with SFAS 141 and, accordingly, thetotal consideration of Euro 46.7 million has been allocated to the fair marketvalue of the assets and liabilities of the company at the acquisition date. Allvaluations of net assets including but not limited to fixed assets andinventory have been completed during 2007 resulting in the recognition ofintangible assets of approximately Euro 19.6 million and related deferred taxliabilities for approximately Euro 3.9 million and in the reduction of thegoodwill recognized in 2006 by approximately Euro 15.7 million. The acquisitionwas made as a result of the Company’s strategy to continue expansion of itswholesale business in Turkey, in particular in the prescription frames market.

 

In November 2006,the Company completed the acquisition, which was announced in June 2006, of Modern Sight Optics, a leadingpremium optical chain that operates a total of 28 stores in Shanghai, China.These stores are located in premium and high-end commercial centers andshopping malls situated primarily in Shanghai’s downtown area and affluentresidential areas. The Company acquired 100 percent of the equity interest inModern Sight Optics for total consideration of RMB 140 million (approximatelyEuro 14 million). Theacquisition was accounted for in accordance with SFAS 141 and, accordingly, thetotal consideration of Euro 16.3 million, including direct acquisition-relatedexpenses, has been allocated to the fair market value of the assets andliabilities of the company as of the acquisition date. All valuations of netassets including but not limited to fixed assets and inventory have beencompleted during 2007 with no material differences from the purchase priceallocation done in 2006 which resulted in the recognition of goodwill of Euro15.9 million as of the date of acquisition. The acquisition was made as a result of theCompany’s strategy to continue expansion of its retail business in The People’sRepublic of China.

 

In March 2007 the Company announced that it had acquiredtwo prominent specialty sun chains in South Africa, with a total of 65 stores.The two acquisitions represent an important step in the expansion of theCompany’s sun retail presence worldwide. Luxottica Group’s total investment inthe two transactions was approximately Euro 10 million. The Company used various methods to calculatethe fair value of the assets acquired and liabilities assumed and all valuationsare not yet completed. The excess of the purchase price over net assetsacquired (“goodwill”) has been recorded in the accompanying consolidatedbalance sheet. The estimated preliminary goodwill totals Euro 8.3 million.

 

F-22

----

 

**6.         PROPERTY,PLANT AND EQUIPMENT – NET**

 

Property, plant and equipment-net consisted of thefollowing (thousands of Euro):

 
| ** **                                           | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|------------------------------------------------------|------------|-----------|------------|-----------|------------|
|                                                 |       |      |       |      |       |
| Land and buildings, including leasehold improvements |       | 687,428   |       | 568,584   |       |
| Machinery and equipment                              |       | 697,776   |       | 629,362   |       |
| Aircraft                                             |       | 40,222    |       | 40,385    |       |
| Other equipment                                      |       | 439,696   |       | 363,417   |       |
|                                                 |       | 1,865,122 |       | 1,601,748 |       |
|                                                 |       |      |       |      |       |
| Less: accumulated depreciation and amortization      |       | 807,340   |       | 814,547   |       |
| Total                                                |       | 1,057,782 |       | 787,201   |       |

 

Depreciationand amortization expense relating to property, plant and equipment for theyears ended December 31, 2007, 2006 and 2005 was Euro 163.3 million, Euro151.9 million and 122.8 million, respectively. Included in other equipment isapproximately Euro 71.6 million and Euro 32.3 million of construction inprogress as of December 31, 2007 and 2006, respectively. Constructionin-progress consists mainly of the opening, remodeling andrelocation of stores and the expansion of manufacturing facilities in Italy.

 

Certaintangible assets are maintained in currencies other than Euro (the reportingcurrency) and, as such, balances may fluctuate due to changes in exchangerates.

 

**7.**         **GOODWILLAND INTANGIBLE****ASSETS** - **NET**

 

Thechanges in the carrying amount of goodwill for the years ended December 31,2006 and 2007, are as follows (thousands of Euro):

 
| ** **                                | ** ** | **Retail  Segment** | ** ** | **Wholesale  Segment** | ** ** | **Oakley**  | ** ** | **Total**     | ** ** |
|-------------------------------------------|------------|---------------------|------------|------------------------|------------|-------------|------------|---------------|------------|
|                                      |       |                |       |                   |       |        |       |          |       |
| Balance as  of January 1, 2006       | ** ** | **1,350,776**       | ** ** | **295,897**            | ** ** | **—**  | ** ** | **1,646,673** | ** ** |
|                                      |       |                |       |                   |       |        |       |          |       |
| Acquisitions  (a)                         |       | 111,186             |       | 44,738                 |       |        |       | 155,924       |       |
|                                      |       |                |       |                   |       |        |       |          |       |
| Adjustments  on previous acquisitions (a) |       | (3,249              | )          | —                 |       |        |       | (3,249        | )          |
|                                      |       |                |       |                   |       |        |       |          |       |
| Change in  exchange rates (b)             |       | (104,714            | )          | (20                    | )          |        |       | (104,734      | )          |
|                                      |       |                |       |                   |       |        |       |          |       |
| Balance as  of December 31, 2006     | ** ** | **1,353,999**       | ** ** | **340,615**            | ** ** | **—**  | ** ** | **1,694,614** | ** ** |
|                                      |       |                |       |                   |       |        |       |          |       |
| Acquisitions  (a)                         |       | 86,021              |       | 9,611                  |       | 904,148     |       | 999,780       |       |
|                                      |       | ** **          |       |                   |       |        |       | —        |       |
| Adjustments  on previous acquisitions (a) |       |                |       | (15,678                | )          |        |       | (15,678       | )          |
|                                      |       | ** **          |       |                   |       |        |       | —        |       |
| Change in  exchange rates (b)             |       | (84,323             | )          | 4,393                  |       | 3,054       |       | (76,876       | )          |
|                                      |       |                |       |                   |       |        |       |          |       |
| Balance as  of December 31, 2007     | ** ** | **1,355,697**       | ** ** | **338,941**            | ** ** | **907,202** | ** ** | **2,601,840** | ** ** |

 

----

(a)     Goodwillacquired in 2006 consisted primarily of the acquisition in Turkey in theWholesale segment, and of minor acquisitions in Retail segment. Goodwillacquired in 2007 mainly consists of the acquisition of Oakley, of the acquisitionof the additional 26% of the net equity of the Indian subsidiary and of minoracquisitions in the Retail segment.

 

F-23

----

 

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

 

Intangibleassets-net consist of the following (thousands of Euro),

 
| ** **                                                                                                                                                                        | ** ** | **2007**      | ** ** | **2006**    | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|-------------|------------|
|                                                                                                                                                                              |       |          |       |        |       |
| LensCrafters trade name, net of accumulated amortization of Euro  76,080 thousand and Euro 77,518 thousand as of December 31, 2007 and  2006, respectively (a)               |       | 74,574        |       | 89,187      |       |
|                                                                                                                                                                              |       |          |       |        |       |
| Ray-Ban acquired trade names, net of accumulated amortization of Euro  118,749 thousand and Euro 104,776 thousand as of December 31, 2007 and  2006, respectively (a)        |       | 160,747       |       | 174,424     |       |
|                                                                                                                                                                              |       |          |       |        |       |
| Sunglass Hut International trade name, net of accumulated  amortization of Euro 55,838 thousand and Euro 52,633 thousand as of  December 31, 2007 and 2006, respectively (a) |       | 150,969       |       | 176,207     |       |
|                                                                                                                                                                              |       |          |       |        |       |
| OPSM acquired trade names, net of accumulated amortization of Euro  34,576 thousand and Euro 24,466 thousand as of December 31, 2007 and  2006, respectively (a)             |       | 112,467       |       | 123,158     |       |
|                                                                                                                                                                              |       |          |       |        |       |
| Various trade names of Cole, net of accumulated amortization of Euro  5,313 thousand and Euro 8,617 thousand as of December 31, 2007 and 2006,  respectively (a)             |       | 35,550        |       | 41,151      |       |
|                                                                                                                                                                              |       |          |       |        |       |
| Cole distributor network, net of accumulated amortization of Euro  12,120 thousand and Euro 5,500 thousand as of December 31, 2007 and  2006, respectively (b)               |       | 66,716        |       | 79,054      |       |
|                                                                                                                                                                              |       |          |       |        |       |
| Cole customer list and contracts, net of accumulated amortization of  Euro 7,011 thousand and Euro 4,163 thousand as of December 31, 2007 and  2006, respectively (b)        |       | 39,066        |       | 45,969      |       |
|                                                                                                                                                                              |       |          |       |        |       |
| Cole franchise agreements, net of accumulated amortization of Euro  2,515 thousand and Euro 1,927 thousand of December 31, 2007 and 2006,  respectively (b)                  |       | 12,961        |       | 15,199      |       |
|                                                                                                                                                                              |       |          |       |        |       |
| Oakley acquired trade names, net of accumulated amortization of Euro  1,972 thousand at December 31, 2007 (see Note 5) (a)                                                   |       | 376,937       |       |        |       |
|                                                                                                                                                                              |       |          |       |        |       |
| Oakley Customer list, net of accumulated amortization of Euro 1,016  thousand at December 31, 2007 (see Note 5) (b)                                                          |       | 143,548       |       |        |       |
|                                                                                                                                                                              |       |          |       |        |       |
| Oakley other intangibles, net of accumulated amortization of Euro  1,099 thousand at December 31, 2007 (See note 5) (c)                                                      |       | 22,475        |       |        |       |
|                                                                                                                                                                              |       |          |       |        |       |
| Other intangibles, net of accumulated amortization of Euro 54,428  thousand and Euro 52,635 thousand as of December 31, 2007 and 2006,  respectively (c)                     |       | 110,107       |       | 86,013      |       |
|                                                                                                                                                                              |       |          |       |        |       |
| **Total**                                                                                                                                                                         | ** ** | **1,306,117** | ** ** | **830,362** | ** ** |

 

F-24

----

 

----

(a)     The LensCrafters, Sunglass Hut International, OPSM, Cole andOakley trade names are amortized on a straight-line basis over a period of 25years and the Ray-Ban trade names over a period of 20 years, as the Companybelieves these trade names to be finite-lived assets.

 

(b)    Distributor network, customer contracts and lists, and franchiseagreements were identifiable intangibles recorded in connection with theacquisition of Cole in 2004 and of Oakley in 2007.  These assets have finite lives and areamortized on a straight-line basis over periods ranging between 20 and 25years. The weighted average amortization period is 22.2 years.

 

(c)     Other identifiable intangibles have finite lives ranging between3 and 17 years and are amortized on a straight line basis. The weighted averageamortization period is 11.3 years. Most of these useful lives were determinedbased on the terms of the license agreements and non-compete agreements. During2006, approximately Euro 11.4 million of intangibles related to a non competeagreement of Sunglass Hut International became fully amortized and were writtenoff. During 2007, approximately Euro 5.8 million of intangibles became fullyamortized and were written off.

 

Certainintangible assets are maintained in currencies other than Euro (the reportingcurrency) and, as such, balances may fluctuate due to changes in exchangerates.

 

Estimatedannual amortization expense relating to identifiable assets, including theidentifiable intangibles attributable to recent acquisitions for which thepurchase price allocation is not final, is shown below (thousands of Euro):

 
| **Years ending December 31,** | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------|------------|
| 2008                               |       | 81,618     |       |
| 2009                               |       | 78,526     |       |
| 2010                               |       | 78,253     |       |
| 2011                               |       | 78,823     |       |
| 2012                               |       | 76,826     |       |

 

**8.**         **INCOME TAXES**

 

Incomebefore provision for income taxes and the provision for income taxes consistedof the following (thousands of Euro):

 
| ** **                                          | ** ** | **2007**    | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|-----------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| Income  before provision for income taxes           |       |        |       |        |       |        |       |
|                                                |       |        |       |        |       |        |       |
| Italian  Companies                                  |       | 317,637     |       | 251,343     |       | 216,438     |       |
| USA Companies                                       |       | 319,154     |       | 331,035     |       | 244,050     |       |
| Other  foreign Companies                            |       | 143,890     |       | 95,799      |       | 78,821      |       |
|                                                |       |        |       |        |       |        |       |
| **Total income before provision for income  taxes** | ** ** | **780,681** | ** ** | **678,177** | ** ** | **539,309** | ** ** |
|                                                |       |        |       |        |       |        |       |
| Provision  for income taxes                         |       |        |       |        |       |        |       |
|                                                |       |        |       |        |       |        |       |
| Current                                             |       |        |       |        |       |        |       |
| Italian  Companies                                  |       | 156,198     |       | 157,342     |       | 127,730     |       |
| USA  Companies                                      |       | 116,785     |       | 120,681     |       | 120,784     |       |
| Other  foreign Companies                            |       | 61,742      |       | 33,206      |       | 40,855      |       |
|                                                |       |        |       |        |       |        |       |
| **Total  provision for current income taxes**       | ** ** | **334,725** | ** ** | **311,229** | ** ** | **289,369** | ** ** |
|                                                |       |        |       |        |       |        |       |
| Deferred                                            |       |        |       |        |       |        |       |
| Italian  Companies                                  |       | (47,736     | )          | (23,016     | )          | (74,874     | )          |
| USA  Companies                                      |       | (10,592     | )          | (3,392      | )          | (14,295     | )          |
| Other  foreign Companies                            |       | (2,896      | )          | (46,065     | )          | (934        | )          |
|                                                |       |        |       |        |       |        |       |
| **Total  provision for deferred income taxes**      | ** ** | **(61,224** | **)**      | **(72,473** | **)**      | **(90,103** | **)**      |
|                                                |       |        |       |        |       |        |       |
| **Total  taxes**                                    | ** ** | **273,501** | ** ** | **238,757** | ** ** | **199,266** | ** ** |

 

TheItalian statutory tax rate is the result of two components: national (“IRES”)and regional (“IRAP”) tax. IRAP could have a substantially different base forits computation than IRES.

 

F-25

----

 

Reconciliationbetween the Italian statutory tax rate and the effective tax rate is asfollows,

 
| ** **                                                    | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                    | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                          |       |                             |       |   |   |   |   |
| Italian  statutory tax rate                                   |       | 37.3                             | %          | 37.3 | % | 37.3 | % |
| Aggregate  effect of different rates in foreign jurisdictions |       | (1.7                             | )%         | (1.5 | )% | 1.7 | % |
| Aggregate  Italian tax benefit - net                          |       |                             |       |   |   | (4.1 | )% |
| Aggregate effect of asset revaluation in Australia            |       |                             |       | (6.8 | )% |   |   |
| Aggregate  effect of Italian restructuring                    |       | (5.3                             | )%         |   |   |   |   |
| Aggregate effect of change in tax law in Italy                |       | 2.1                              | %          |   |   |   |   |
| Effect of non-deductible stock-based compensation             |       | 1.1                              | %          | 5.5 | % | 3.0 | % |
| Aggregate  other effects                                      |       | 1.5                              | %          | 0.7 | % | (0.9 | )% |
|                                                          |       |                             |       |   |   |   |   |
| Effective  rate                                               |       | 35.0                             | %          | 35.2 | % | 37.0 | % |

 

In2005, the Company elected, under newly established tax regulations in Italy, tostep-up the tax basis of certain assets, net of certain tax amounts the Companypaid in that period.

 

In2006, the Australian subsidiaries of the Company elected to apply a new taxconsolidation regime, which was introduced by the Australian government. Byelecting such new consolidation regime for tax purposes, certain intangible andfixed assets were revaluated for tax purposes increasing their tax basis. Theincrease in the tax basis became effective in 2006 upon filing the final 2005tax return in December 2006.

 

The2007 tax benefit of 5.3%, relates to the business reorganization of certainItalian companies which results in the release of deferred tax liabilities andis partially offset by the increase by 2.1% in the 2007 tax charge due to thechange in the Italian statutory tax rates which results in the reduction ofdeferred tax assets.

 

Thedeferred tax assets and liabilities as of December 31, 2007 and 2006,respectively, were comprised of (thousands of Euro):

 

F-26

----

 

*Amounts in thousands of Euro*

 
| ** **                                               | ** **   | **2007**       | ** **   | **2006**       | ** **   |
|----------------------------------------------------------|--------------|----------------|--------------|----------------|--------------|
| **Deferred  Income Tax Assets**                          | ** **   | ** **     | ** **   | ** **     | ** **   |
| Inventory                                                |         | 73,062         |         | 65,192         |         |
| Insurance  and other reserves                            |         | 10,238         |         | 14,947         |         |
| Loss on  investments                                     |         | —         |         | 1,094          |         |
| Right of  return reserve                                 |         | 13,464         |         | 8,934          |         |
| Deferred  revenue extended warranty contracts            |         | 824            |         | 7,192          |         |
| Net  operating loss carryforwards                        |         | 45,224         |         | 44,449         |         |
| Recorded  reserves                                       |         | 1,381          |         | 4,318          |         |
| Occupancy  reserves                                      |         | 14,681         |         | 11,616         |         |
| Employee-related  reserves (including pension liability) |         | 48,977         |         | 39,374         |         |
| Trade name                                               |         | 72,686         |         | 84,013         |         |
| Other                                                    |         | 26,693         |         | 1,900          |         |
| Fixed assets                                             |         | 24,472         |         | 28,211         |         |
| ***Total  Deferred Tax assets***                         | *** *** | ***331,702***  | *** *** | ***311,240***  | *** *** |
| *** ***                                             | *** *** | *** ***   | *** *** | *** ***   | *** *** |
| Valuation  Allowance                                     |         | (27,088        | )            | (29,781        | )            |
|                                                     |         |           |         |           |         |
| ***Net  Deferred tax assets***                           | *** *** | ***304,614***  | *** *** | ***281,458***  | *** *** |
|                                                     |         |           |         |           |         |
| **Deferred  Income Tax Liabilities**                     | ** **   | ** **     | ** **   | ** **     | ** **   |
| Trade name                                               |         | (216,997       | )            | (113,448       | )            |
| Equity  revaluation step-up                              |         |           |         | (40,950        | )            |
| Other  intangibles                                       |         | (117,975       | )            | (65,412        | )            |
| Dividends                                                |         | (11,933        | )            | (13,308        | )            |
| Other                                                    |         | (20,342        | )            | (1,663         | )            |
| ***Total  Deferred Income Tax Liabilites***              | *** *** | ***(367,247*** | ***)***      | ***(234,782*** | ***)***      |
|                                                     |         |           |         |           |         |
| **Net  Deferred Income Tax Assets/(Liabilities)**        | ** **   | **(62,633**    | **)**        | **46,676**     | ** **   |
|                                                     |         |           |         |           |         |

 

Deferred income tax assets have beenclassified in the consolidated financial statements as follows:

 
| Deferred  Income Tax Assets - current          |       | 117,853     |   | 96,595     |       |
|------------------------------------------------|------------|-------------|--------|------------|------------|
| Deferred  Income Tax Assets - non current      |       | 67,891      |   | 45,205     |       |
| Deferred  Income Tax Liabilities - non current |       | (248,377    | )      | (95,124    | )          |
|                                           | ** ** | **(62,633** | **)**  | **46,676** | ** ** |

 

On December 24,2007,the Italian Government issued the Italian Finance bill of 2008 (the “2008Bill”). The 2008 Bill decreases the national tax rate (referred to as “IRES”)from 33% to 27.5%, and the regional tax rate (referred to as “IRAP”) from 4.25%to 3.9%. The effect of this change created an additional Euro 8 million ofdeferred tax expense in 2007.

 

TheCompany does not provide for an accrual for income taxes on undistributedearnings of its non Italian operations to the related Italian parent companythat are intended to be permanently invested. It is not practicable todetermine the amount of income tax liability that would result had such earningsactually been distributed. In connection with the 2007 earnings of certainsubsidiaries, the Company has provided for an accrual for income taxes relatedto declared dividends of earnings.

 

At December 31,2007, a US subsidiary of the Company had Federal net operating losscarry-forwards (NOLs) of approximately Euro 93.5 million which may be usedagainst income generated by restricted subgroups.  Substantially all of the NOLs begin expiringin 2019. Approximately Euro 231.1 thousands of these NOLs were used in 2007 and2006, respectively.  The use of the NOLis limited due to restrictions imposed by U.S. tax rules governingutilization of loss carry-forwards following changes in ownership.  None of the net operating losses expired in2007 or 2006. As of December 31, 2007, a US subsidiary of the Company hadvarious state net operating loss carry-forwards, associated with individualstates within the United States of America (SNOLs) totalling approximately Euro3.4 million. These SNOLs begin expiring in 2008. Due to the Company’s USsubsidiaries foreign operations, as of December 31, 2007, a US subsidiaryof the Company has approximately Euro 3.9 million and Euro 5.1 million of nonUS net operating losses and foreign tax credit carry-forwards, respectively.These foreign NOLs and foreign tax credits will begin to expire in 2012 and2013, respectively.

 

F-27

----

 

As of December 31,2007 and 2006, the Company has recorded an aggregate valuation allowance ofEuro 27.1 million and Euro 29.8 million, respectively, against deferred taxassets as it is more likely than not that the above deferred income tax assetswill not be fully utilized in future periods.

 

Areconciliation of the amount of unrecognized tax benefits is as follows(amounts in thousands of Euro):

 
| Balance — January 1, 2007                   |   | 54,089 |   |
|-------------------------------------------------------|--------|--------|--------|
| Gross increase — acquisition of Oakley           |   | 14,176 |   |
| Gross increase — tax positions in prior period   |   | 5,018  |   |
| Gross decrease — tax positions in prior period   |   | (7,473 | )      |
| Gross increase — tax positions in current period |   | 5,796  |   |
| Settlements                                           |   | (2,799 | )      |
| Lapse of statute of limitations                       |   | (8,851 | )      |
| Change in exchange rates                              |   | (3,365 | )      |
|                                                  |   |   |   |
| Balance — December 31, 2007                 |   | 56,591 |   |

 

Includedin the balance of unrecognized tax benefits at December 31, 2007, are Euro39.9 million of tax benefits that, if recognized, would affect the effectivetax rate.

 

TheGroup does not anticipate the unrecognized tax benefits to change significantlyduring 2008.

 

TheGroup recognizes interest accrued related to unrecognized tax benefits andpenalties as income tax expense. Related to the uncertain tax benefits notedabove, the Company’s accrual for penalties and interest during 2007 isimmaterial and in total, as of December 31, 2007, the Company hasrecognized a liability for penalties of approximately Euro 5.9 million andinterest of approximately Euro 9.6 million.

 

TheGroup is subject to taxation in Italy and foreign jurisdictions of which onlythe U.S. federal is significant.

 

Italiancompanies’ taxes are subject to review pursuant to Italian law. As of December 31,2007, tax years from 2002 through the most recent year were open for suchreview. Certain Luxottica Group subsidiaries are subject to tax reviews forprevious years and, during 2005 a wholly owned Italian subsidiary was subjectedto a tax inspection. As a result of this, some insignificant recorded losseswere reversed and an immaterial amount was accrued for as a liability.Management believes no significant unaccrued liabilities will arise from therelated tax reviews.

 

TheGroup’s U.S. federal tax years for 2004, 2005 and 2006 are subject toexamination by the tax authorities.

 

F-28

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**9.         LONG-TERM DEBT**

 

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

 
| ** **                                                                                                                                                                                                    | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
|                                                                                                                                                                                                          |       |      |       |      |       |
| Credit agreement with various Italian financial institutions (a)                                                                                                                                              |       | 185,000   |       | 245,000   |       |
| Senior unsecured guaranteed notes (b)                                                                                                                                                                         |       | 97,880    |       | 165,022   |       |
| Credit agreement with various financial institutions (c)                                                                                                                                                      |       | 1,059,918 |       | 895,240   |       |
| Credit agreement with various financial institutions for Oakley  Acquisition (e)                                                                                                                              |       | 1,369,582 |       |      |       |
| Capital lease obligations, payable in installments through 2007                                                                                                                                               |       | 1,866     |       | 3,626     |       |
| Other loans with banks and other third parties, interest at various  rates  payable in installments through  2014. Certain subsidiaries’ fixed assets are pledged as collateral for such  loans (d) |       | 4,894     |       | 10,374    |       |
|                                                                                                                                                                                                          |       |      |       |      |       |
| Total                                                                                                                                                                                                         |       | 2,719,140 |       | 1,319,262 |       |
|                                                                                                                                                                                                          |       |      |       |      |       |
| Current maturities                                                                                                                                                                                            |       | 792,617   |       | 359,527   |       |

 

----

(a) In September 2003, theCompany acquired its ownership interest of OPSM and more than 90 percent of theperformance rights and options of OPSM for an aggregate of AUD 442.7 million(Euro 253.7 million), including acquisition expenses. The purchase price waspaid for with the proceeds of a credit facility with Banca Intesa S.p.A. ofEuro 200 million, in addition to other short-term lines available. The credit facilityincludes a Euro 150 million term loan, which requires repayment of equalsemi-annual instalments of principal of Euro 30 million starting on September 30,2006 until the final maturity date. Interest accrues on the term loan atEuribor (as defined in the agreement) plus 0.55 percent (5.315 percent on December 31,2007). The revolving loan provides borrowing availability of up to Euro 50million; amounts borrowed under the revolving portion can be borrowed andrepaid until final maturity. At December 31, 2007, 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 (4.988 percent on December 31,2007). The final maturity of the credit facility is September 30, 2008.The Company 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, 2007. Under this creditfacility Euro 85 million and Euro 145 million were borrowed as of December 31,2007 and 2006, respectively.

 

In June 2005, the Company entered intofour interest rate swap transactions with various banks with an aggregateinitial notional amount of Euro 120 million which will decrease by Euro 30million every six months starting on March 30, 2007 (“Intesa OPSM Swaps”).These swaps will expire on September 30, 2008. The Intesa OPSM Swaps wereentered into as a cash flow hedge on a portion of the Banca Intesa Euro 200million unsecured credit facility discussed above. The Intesa OPSM Swapsexchange the floating rate of Euribor for an average fixed rate of 2.45 percentper annum. The ineffectiveness of cash flow hedges was tested at the inceptiondate and throughout the year. The results of the tests indicated that the cashflow hedges are highly effective. As a consequence approximately Euro 0.44million, net of taxes, is included in other comprehensive income as of December 31,2007. Based on current interest rates and market conditions, the estimatedaggregate amount to be recognized as earnings from other comprehensive incomefor these cash flow hedges in fiscal 2008 is approximately Euro 0.41 million,net of taxes.

 

In December 2005, the Company enteredinto an unsecured credit facility with Banco Popolare di Verona e Novara. The18-month credit facility consists of a revolving loan that provides borrowingavailability of up to Euro 100 million; amounts borrowed under the revolvingportion can be borrowed and repaid until final maturity. At December 31,2007, Euro 100 million had been drawn from the revolving portion. Interestaccrues on the revolving loan at Euribor (as defined in the agreement) plus0.25 percent (4.98 percent on December 31, 2007). In 2007 the creditfacility was renewed and therefore its final maturity is December 3, 2008.The Company can select interest periods of one, three or six months.

 

F-29

----

 

(b) On September 3, 2003, USHoldings closed a private placement of US $300 million (Euro 205.4 million atthe exchange rate of December 31, 2007) of senior unsecured guaranteednotes (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 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 dates of maturity. The Notes are guaranteed on asenior unsecured basis by the Company and Luxottica S.r.l., a wholly ownedsubsidiary. The notes contain certain financial and operating covenants. USHoldings was in compliance with those covenants as of December 31, 2007.In December 2005, US Holdings terminated the fair value interest rate swapagreement described below, and as such, US Holdings will amortize the finaladjustment to the carrying amount of the hedged interest-bearing financialinstruments as an adjustment to the fixed-rate debt yield over the remaininglife of the debt. The effective interest rates on the Series A, B, and CNotes for their remaining lives are 5.64 percent, 5.99 percent, and 5.44percent, respectively. Under this credit facility Euro 97.9 million and Euro165.0 million were borrowed as of December 31, 2007 and 2006,respectively.

 

In connection with the issuance of the Notes, USHoldings entered into three interest rate swap agreements with Deutsche Bank AG(the “DB Swaps”). The three separate agreements’ notional amounts and interestpayment dates coincided with the Notes. The DB Swaps exchanged the fixed rateof the Notes for a floating rate of the six-month LIBOR rate plus 0.6575percent for the Series A Notes and the six-month LIBOR rate plus 0.73percent for the Series B and Series C Notes. These swaps were treatedas fair value hedges of the related debt and qualified for the shortcut methodof hedge accounting (assuming no ineffectiveness in a hedge in an interest rateswap). Thus the interest income/expense on the swaps was recorded as anadjustment to the interest expense on the debt, effectively changing the debtfrom a fixed rate of interest to the swap rate. In December 2005, theCompany terminated the DB Swaps. The Company paid the bank an aggregate of Euro7.0 million (US $8.4 million), excluding accrued interest, for the finalsettlement of the DB Swaps.

 

(c) On June 3, 2004, as amended on March 10, 2006, the Companyand US Holdings entered into a credit facility with a group of banks providingfor loans in the aggregate principal amount of Euro 1,130 million and US $325million. The five-year facility consists of three Tranches (Tranche A, TrancheB, Tranche C). The March 2006 amendment increased the availableborrowings, decreased the interest margin and defined a new maturity date offive years from the date of the amendment for Tranche B and Tranche C. On February 2007,the Company exercised an option included in the amendment to the term andrevolving facility to extend the maturity date of Tranches B and C to March 2012.Tranche A is a Euro 405 millionamortizing term loan requiring repayment of nine equal quarterly instalments ofprincipal of Euro 45 million beginning in June 2007, which is to be usedfor general corporate purposes, including the refinancing of existing LuxotticaGroup S.p.A. debt as it matures. TrancheB is a term loan of US $325 million which was drawn upon on October 1,2004 by US Holdings to finance the purchase price of the acquisition ofCole.  Amounts borrowed under Tranche Bwill mature in March 2012. TrancheC is a Revolving Credit Facility of Euro 725 million-equivalentmulti-currency (Euro/US Dollar). Amounts borrowed under Tranche C may be repaidand reborrowed with all outstanding balances maturing in March 2012. TheCompany can select interest periods of one, two, three or six months withinterest accruing on Euro-denominated loans based on the corresponding Euriborrate and US Dollar denominated loans based on the corresponding LIBOR rate,both plus a margin between 0.20 percent and 0.40 percent based on the “NetDebt/EBITDA” ratio, as defined in the agreement. The interest rate on December 31,2007 was 4.976 percent for Tranche A, 5.449 percent for Tranche B, 5.239percent on Tranche C amounts borrowed in US Dollars. The credit facilitycontains certain financial and operating covenants. The Company was incompliance with those covenants as of December 31, 2006 and 2007. Underthis credit facility, Euro 1,059.9 million and Euro 895.2 million was borrowedas of December 31, 2007 and 2006, respectively.

 

In June 2005,the Company entered into nine interest rate swap transactions with an aggregateinitial notional amount of Euro 405 million with various banks which willdecrease by Euro 45 million every three months starting on June 3, 2007(the “Club Deal Swaps”). These swaps will expire on June 3, 2009. The ClubDeal Swaps were entered into as a cash flow hedge on Tranche A of the creditfacility discussed above. The Club Deal Swaps exchange the floating rate ofEuribor for an average fixed rate of 2.48 percent per annum. Theineffectiveness of cash flow hedges was tested at the inception date andthroughout the year. The results of the tests indicated that the cash flowhedges are highly effective. As a consequence approximately Euro 2.9 million,net of taxes, is included in other comprehensive income as of December 31,2007. Based oncurrent interest rates and market conditions, the estimated aggregate amount tobe recognized as earnings from other comprehensive income for these cash flowhedges in fiscal 2008 is approximately Euro 2.2 million, net of taxes.

 

F-30

----

 

During the thirdquarter of 2007 the Group entered into 13 interest rate swap transactions withan aggregate initial notional amount of US $325.0 million with various banks (“TrancheB Swaps”). These swaps will expire on March 10, 2012. The Tranche B Swapswere entered into as a cash flow hedge on Tranche B of the credit facilitydiscussed above. The Tranche B Swaps exchange the floating rate of Libor for anaverage fixed rate of 4.67 percent per annum. The ineffectiveness of cash flowhedges was tested at the inception date and throughout the year. The results ofthe tests indicated that the cash flow hedges are highly effective. As aconsequence approximately US $ (4.5) million, net of taxes, is included inother comprehensive income as of December 31, 2007. Based on current interest rates andmarket conditions, the estimated aggregate amount to be recognized as earningsfrom other comprehensive income for these cash flow hedges in fiscal 2008 isapproximately US $ (3.0) million, net of taxes.

 

(d) Otherloans consist of several small credit agreements.

 

(e) On November 14, 2007, the Groupcompleted the merger with Oakley for a total purchase price of approximatelyU.S. $2.1 billion. In order to finance the acquisition of Oakley, on October 12,2007 the Company and its subsidiary U.S. Holdings entered into two creditfacilities with a group of banks providing for certain term loans and a bridgeloan for an aggregate principal amount of U.S. $2.0 billion. The term loanfacility is a term loan of U.S. $1.5 billion, with a five-year term, withoptions to extend the maturity on two occasions for one year each time. Theterm loan facility is divided into two facilities, Facility D and Facility E.Facility D consists of an amortizing term loan in an aggregate amount of U.S.$1.0 billion, made available to U.S. Holdings, and Facility E consists of abullet term loan in an aggregate amount of U.S. $500 million, made available tothe Company. Each facility has a five-year term, with options to extend thematurity on two occasions for one year each time. Interest accrues on the termloan at LIBOR plus 20 to 40 basis points based on “Net Debt to EBITDA” ratio,as defined in the agreement (5.503 percent for Facility D and 5.458 percent forFacility E on December 31, 2007). The final maturity of the creditfacility is October 12, 2012. These credit facilities contain certainfinancial and operating covenants. The Company was in compliance with thosecovenants as of December 31, 2007. US $1,500.0 million was borrowed underthis credit facility as of December 31, 2007.

 

During the thirdquarter of 2007 the Group entered into ten interest rate swap transactions withan aggregate initial notional amount of US $500.0 million with various banks (“TrancheE Swaps”). These swaps will expire on October 12, 2012. The Tranche ESwaps were entered into as a cash flow hedge on Facility E of the creditfacility discussed above. The Tranche E Swaps exchange the floating rate ofLibor for an average fixed rate of 4.26 percent per annum. The ineffectivenessof cash flow hedges was tested at the inception date and throughout the year.The results of the tests indicated that the cash flow hedges are highlyeffective. As a consequence approximately US $ (1.4) million, net of taxes, isincluded in other comprehensive income as of December 31, 2007. Based on current interest rates andmarket conditions, the estimated aggregate amount to be recognized in earningsfrom other comprehensive income for these cash flow hedges in fiscal 2008 isapproximately US $ (3.6) million, net of taxes.

 

The short term bridge loan facility is for anaggregate principal amount of U.S. $500 million. Interest accrues on the shortterm bridge loan at LIBOR (as defined in the agreement) plus 0.15 percent(5.208 percent on December 31, 2007). The final maturity of the creditfacility is eight months from the first utilization date.

 

Long-termdebt, including capital lease obligations, matures in the years subsequent to December 31,2007 as follows (thousands of Euro):

 
| **Year ended December 31,** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------|------------|
| 2008                                       |       | 792,617    |       |
| 2009                                       |       | 133,876    |       |
| 2010                                       |       | 145,265    |       |
| 2011                                       |       | 185,170    |       |
| 2012                                       |       | 1,461,700  |       |
| Following years                            |       | 512        |       |
| Total                                      |       | 2,719,140  |       |

 

F-31

----

 

**10.       EMPLOYEE BENEFITS**

 

# **Liability for TerminationIndemnities -**

# ** **

Withregards to staff leaving indemnities (“TFR”), Italian law provides forseverance payments to employees upon dismissal, resignation, retirement ofother termination of employment.  TFR,through December 31, 2006, was considered an unfunded defined benefitplan.  Therefore, through December 31,2006, the Company accounted for the defined benefit plan in accordance with

EITF88-1, “Determination of Vested Benefit Obligation for a Defined Benefit PensionPlan,” using the option to record the vested benefit obligation, which is theactuarial present value of the vested benefits to which the employee would beentitled if the employee retired, resigned or were terminated as of the date ofthe financial statements..

 

EffectiveJanuary 1, 2007, the TFR system was reformed, and under the new law,employees are given the ability to choose where the TFR compensation isinvested, whereas such compensation otherwise would be directed to the NationalSocial Security Institute or Pension Funds. As a result, contributions underthe reformed TFR system are accounted for as a defined contribution plan. Theliability accrued until December 31, 2006 continues to be considered adefined benefit plan, therefore each year, the Company adjusts its accrualbased upon headcount and inflation and excluding the changes in compensationlevel.

 

Thereare also some termination indemnities in other countries which are providedthrough payroll tax and other social contributions in accordance with localstatutory requirements. The related charge to earnings for the years endedDecember 31, 2007, 2006 and 2005 aggregated, Euro 15.4 million, Euro 12.9million and Euro 12.0 million respectively.

 

***Qualified Pension Plans*** – During fiscal years 2007 and 2006, the Company continued tosponsor a qualified noncontributory defined benefit pension plan, whichprovides for the payment of benefits to eligible past and present employees ofcertain U.S. subsidiaries of the Company (“U.S. Associates”) uponretirement.  Pension benefits are accruedbased on length of service and annual compensation under a cash balanceformula.

 

This pensionplan was amended effective January 1, 2006 granting eligibility to U.S.Associates who work in the Cole Vision stores, field management, and therelated labs and distribution centers. Additionally, the Company amended the pension accrual formula for theCole associates, as well as all new hires for the Company.  The new formula has a more gradual benefitaccrual pattern.  However, the PensionProtection Act of 2006 will require a change to the Plan’s vesting scheduleeffective January 1, 2008.

 

As of theeffective date of the Cole acquisition, the Company assumed sponsorship of theCole National Group, Inc. Retirement Plan (“Cole Plan”).  This is a qualified noncontributory definedbenefit pension plan that covers Cole employees who have met eligibilityservice requirements and are not members of certain collective bargainingunits. The pension plan provides for benefits to be paid to eligible past andpresent employees at retirement based primarily upon years of service and theemployees’ compensation levels near retirement. In January 2002, the ColePlan was frozen for all participants. The average pay for all participants wasfrozen as of March 31, 2002, except for those who were aged 50 with 10years of benefit service as of that same date, whose service will continue toincrease as long as they remain employed by the Company.

 

As of December 31,2007, the Cole Plan was merged into the existing U.S. Associates Pension Plan.The projected benefit obligation and the fair value of net assets transferredon such date were Euro 34.2 million (US $49.9 million) and Euro 37.6 million(US $54.9 million), respectively. Upon the merger, there were no changes to theprovisions or benefit formulas of the plan.

 

***Nonqualified Pension Plans and Agreements*** – The Company also maintains a nonqualified, unfunded supplementalexecutive retirement plan (“SERP”) for participants of its U.S. Associatesqualified pension plan to provide benefits in excess of amounts permitted underthe provisions of prevailing U.S. tax law. The pension liability and expense associated with this plan are accruedusing the same actuarial methods and assumptions as those used for thequalified pension plan.

 

Starting January 1,2006, this plan’s benefit provisions were amended to mirror the changes made tothe Company’s qualified pension plan.

 

A subsidiaryof the Company sponsors the Cole National Group, Inc. Supplemental PensionPlan.  This plan is a nonqualified unfundedsupplemental executive retirement plan for certain participants of the Colepension plan who were designated by the Board of Directors of Cole on therecommendation of Cole’s Chief Executive Officer at such time.  This plan provides benefits in excess ofamounts permitted under the provisions of the prevailing tax law.  The pension liability and expense associatedwith this plan are accrued using the same actuarial methods and assumptions asthose used for the qualified pension plan.

 

F-32

----

 

The followingtables provide key information pertaining to the Company’s U.S. pension plansand SERP.  The Company uses a September 30measurement date for these plans.

### ** **

### **Obligations and Funded Status(thousands of Euro):**

 
| ** **                                    | ** ** | **Pension Plans** | ** ** | **SERP**    | ** ** |
|-----------------------------------------------|------------|------------------------|------------|-------------|------------|
| ** **                                    | ** ** | **2007**               | ** ** | **2006**    | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                          |       |                   |       |        |       |   |   |   |   |
| Change in benefit obligations:                |       |                   |       |        |       |   |   |   |   |
| Benefit obligation — beginning of period |       | 272,248                |       | 278,947     |       | 8,320 |   | 6,530 |   |
| Service cost                                  |       | 16,449                 |       | 13,326      |       | 504 |   | 335 |   |
| Interest cost                                 |       | 15,606                 |       | 15,090      |       | 589 |   | 442 |   |
| Actuarial (gain)/loss                         |       | (1,690                 | )          | 3,195       |       | 1,871 |   | 1,832 |   |
| Plan amendments                               |       |                   |       | 297         |       |   |   |   |   |
| Benefits paid                                 |       | (8,573                 | )          | (9,373      | )          | (219 | ) | (23 | ) |
| Translation difference                        |       | (27,254                | )          | (29,234     | )          | (970 | ) | (796 | ) |
| **Benefit obligation — end of period**   | ** ** | **266,786**            | ** ** | **272,248** | ** ** | **10,095** | ** ** | **8,320** | ** ** |

 
| ** **                                           | ** ** | **Pension Plans** | ** ** | **SERP**    | ** ** |
|------------------------------------------------------|------------|-------------------|------------|-------------|------------|
| ** **                                           | ** ** | **2007**          | ** ** | **2006**    | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                 |       |              |       |        |       |   |   |   |   |
| Change in plan assets:                               |       |              |       |        |       |   |   |   |   |
| Fair value of plan assets — beginning of period |       | 216,792           |       | 206,316     |       |   |   |   |   |
| Actual return on plan assets                         |       | 24,203            |       | 14,514      |       |   |   |   |   |
| Employer contribution                                |       | 16,717            |       | 27,610      |       | 219 |   | 23 |   |
| Benefits paid                                        |       | (8,573            | )          | (9,373      | )          | (219 | ) | (23 | ) |
| Translation difference                               |       | (22,564           | )          | (22,275     | )          |   |   |   |   |
| **Fair value of plan assets — end of period**   | ** ** | **226,575**       | ** ** | **216,792** | ** ** | **0** | ** ** | **0** | ** ** |
|                                                 |       |              |       |        |       |   |   |   |   |
| Funded status                                        |       | (40,211           | )          | (55,456     | )          | (10,095 | ) | (8,320 | ) |

 

Amountsrecognized in the consolidated balance sheets as of December 31, 2007 and2006, consist of the following (thousandsof Euro):

 
| ** **                                 | ** ** | **Pension Plans** | ** ** | **SERP**   | ** ** |
|--------------------------------------------|------------|------------------------|------------|------------|------------|
| ** **                                 | ** ** | **2007**               | ** ** | **2006**   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Liabilities:                               |       |                   |       |       |       |   |   |   |   |
| Current liabilities                        |       | —                 |       | —     |       | 770 |   | 232 |   |
| Noncurrent liabilities                     |       | 40,211                 |       | 55,456     |       | 9,325 |   | 8,088 |   |
| **Total accrued pension liabilities**      | ** ** | **40,211**             | ** ** | **55,456** | ** ** | **10,095** | ** ** | **8,320** | ** ** |
|                                       |       |                   |       |       |       |   |   |   |   |
| Other comprehensive income:                |       |                   |       |       |       |   |   |   |   |
| Net loss                                   |       | 28,380                 |       | 43,690     |       | 3,898 |   | 2,799 |   |
| Prior service cost                         |       | 283                    |       | 881        |       | 17 |   | 29 |   |
| Contributions after measurement date       |       | —                 |       | —     |       | 5 |   | 3 |   |
| **Accumulated other comprehensive income** | ** ** | **28,663**             | ** ** | **44,571** | ** ** | **3,920** | ** ** | **2,831** | ** ** |

 

# **The accumulated benefit obligations for the pensionplans and SERP as of September 30, 2007 and 2006, were as follows (**thousands of Euro):

 

F-33

----

 
| ** **                                                                                              | ** ** | **Pension Plans** | ** ** | **SERP**   | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------|------------|
| ** **                                                                                              | ** ** | **2007**               | ** ** | **2006**   | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                              |       |                   |       |       |       |   |   |   |   |
| Accumulated benefit obligations                                                                         |       | 245,829                |       | 255,239    |       | 7,989 |   | 6,542 |   |
| ** **                                                                                              |       |                   |       |       |       |   |   |   |   |
| **Components of Net Periodic Benefit Cost and  Other Amounts Recognized in Other Comprehensive Income** |       |                   |       |       |       |   |   |   |   |
|                                                                                                    |       |                   |       |       |       |   |   |   |   |
| Net Periodic Benefit Cost:                                                                              |       |                   |       |       |       |   |   |   |   |
| Service cost                                                                                            |       | 16,449                 |       | 13,326     |       | 504 |   | 335 |   |
| Interest cost                                                                                           |       | 15,606                 |       | 15,090     |       | 589 |   | 442 |   |
| Expected return on plan assets                                                                          |       | (16,703                | )          | (15,837    | )          | — |   | — |   |
| Amortization of actuarial loss                                                                          |       | 2,640                  |       | 3,277      |       | 413 |   | 299 |   |
| Amortization of prior service cost                                                                      |       | 547                    |       | 561        |       | 9 |   | 10 |   |
|                                                                                                    |       |                   |       |       |       |   |   |   |   |
| **Net periodic benefit cost**                                                                           | ** ** | **18,539**             | ** ** | **16,417** | ** ** | **1,515** | ** ** | **1,086** | ** ** |
|                                                                                                    |       |                   |       |       |       |   |   |   |   |
| Other Changes in Plan Assets and Benefit Obligations Recognized in  Other Comprehensive Income:         |       |                   |       |       |       |   |   |   |   |
| Net loss (gain)                                                                                         |       | (9,191                 | )          | 4,518      |       | 1,871 |   | 1,831 |   |
| Prior service cost                                                                                      |       | —                 |       | 297        |       | — |   | — |   |
| Amortization of actuarial loss                                                                          |       | (2,640                 | )          | (3,277     | )          | (413 | ) | (299 | ) |
| Amortization of prior service cost                                                                      |       | (547                   | )          | (561       | )          | (9 | ) | (10 | ) |
|                                                                                                    |       |                   |       |       |       |   |   |   |   |
| **Total recognized in other comprehensive  income**                                                     | ** ** | **(12,378**            | **)**      | **977**    | ** ** | **1,449** | ** ** | **1,522** | ** ** |
|                                                                                                    |       |                   |       |       |       |   |   |   |   |
| **TOTAL**                                                                                               | ** ** | **6,161**              | ** ** | **17,394** | ** ** | **2,964** | ** ** | **2,608** | ** ** |

 

The estimatednet loss and prior service cost for the U.S. defined benefit pension plans thatwill be amortized from accumulated other comprehensive income into net periodicbenefit cost over the next fiscal year are Euro 0.7 million and Euro 0.1million, respectively. The estimated net loss and prior service cost for theSERP plans that will be amortized from accumulated other comprehensive incomeinto net periodic benefit cost over the next fiscal year are Euro 0.3 millionand 0.0, respectively.

 

#### **Assumptions**

 
| ** **                                                                                                                | ** ** | **Pension Plans** | ** ** | **SERP** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------|------------|
| ** **                                                                                                                | ** ** | **2007**          | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                                                                      |       |              |       |     |       |   |   |   |   |
| Weighted-average  assumption used to determine benefit obligations:                                                       |       |              |       |     |       |   |   |   |   |
| Discount  Rate                                                                                                            |       | 6.50%             |       | 6.00%    |       | 6.50% |   | 6.00% |   |
| Rate of  compensation increase                                                                                            |       | 6%/5%/4%          |       | 4.50%    |       | 6%/5%/4% |   | 4.50% |   |
|                                                                                                                      |       |              |       |     |       |   |   |   |   |
| Weighted-average assumption used to determine net periodic benefit  cost for years ended December 31, 2007 and 2006: |       |              |       |     |       |   |   |   |   |
| Discount  rate                                                                                                            |       | 6.00%             |       | 5.75%    |       | 6.00% |   | 5.75% |   |
| Expected  long-term return on plan assets                                                                                 |       | 8.25%             |       | 8.25%    |       | N/A |   | N/A |   |
| Rate of  compensation increase                                                                                            |       | 4.50%             |       | 4.25%    |       | 4.50% |   | 4.25% |   |
| Mortality  table                                                                                                          |       | RP-2000           |       | RP-2000  |       | RP-2000 |   | RP-2000 |   |

 

F-34

----

 

In the past,the Company has used a flat rate assumption for its rate of compensationincreases. Based on a study of historical experience performed by the Company’sactuary, the Company has moved to an assumption for salary increases based on agraduated approach as opposed to the flat rate assumption used in the past.  This study reviewed plan experience for thethree years preceding the January 1, 2006 actuarial valuation. The Company’sexperience shows salary increases that typically vary by age. Therefore, the2007 assumption related to salary increases was changed to better matchhistorical experience and reflects an increase of 4%, 5% or 6% depending on theage of the participant.

 

For 2007, theCompany’s long-term rate of return assumption on the pension plans’ assets was8.25%.  In developing this assumption, theCompany considered input from its third-party pension asset managers,investment consultants and plan actuaries, including their review of assetclass return expectations and long-term inflation assumptions. The Company alsoconsidered the pension plans’ historical average return over various periods oftime (through December 31, 2006). The resulting assumption was alsobenchmarked against the assumptions used by other U.S. corporations asreflected in several surveys to determine consensus thinking at that time onthis assumption.

 

***Plan Assets*****–**The Pension Plan’s target and actualasset allocations at September 30, 2007 and 2006, by asset category are asfollows:

 
| ** **              | ** ** | ** **                    | ** ** | **Plan Assets at  September 30, 2007** | ** ** | **Plan Assets at  September 30, 2006** | ** ** |
|-------------------------|------------|-------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| **Asset Category** | ** ** | **Asset  Allocation  Target** | ** ** | **U.S.  Associates  Plan**                                 | ** ** | **Cole  Plan**                                             | ** ** | **U.S.  Associates  Plan** | ** ** | **Cole Plan** | ** ** |
| Equity securities       |       | 65                            | %          | 63                                                         | %          | 72                                                         | %          | 64 | % | 67 | % |
| Debt securities         |       | 35                            | %          | 35                                                         | %          | 27                                                         | %          | 34 | % | 29 | % |
| Other                   |       | —                        | %          | 2                                                          | %          | 1                                                          | %          | 2 | % | 4 | % |
|                    |       |                          |       |                                                       |       |                                                       |       |   |   |   |   |
| Total                   |       | 100                           | %          | 100                                                        | %          | 100                                                        | %          | 100 | % | 100 | % |

 

The actualallocation percentages at any given time may vary from the targeted amounts dueto changes in stock and bond valuations as well as timing of contributions toand benefit payments from the pension plan trusts.

 

With themerger of the Cole Plan into the U.S. Associates Plan as of December 31,2007, the assets of the Cole Plan were liquidated and transferred to theLuxottica Plan portfolio. This cash was then re-invested to achieve thetargeted asset allocation percentages. Plan assets are invested in diversified portfolios consisting of anarray of asset classes within the above target allocations and using acombination of active and, in the case of the Cole plan, passive investmentstrategies. Active strategies employ multiple investment management firms. Riskis controlled through diversification among asset classes, managers, styles,market capitalization (equity investments) and individual securities. Certaintransactions and securities are not authorized to be conducted or held in thepension trusts, such as ownership of real estate other than real estateinvestment trusts, commodity contracts, and American Depositary Receipts (“ADRs”)or common stock of the Company. Risk is further controlled both at the assetclass and manager level by assigning benchmarks and excess return targets. Theinvestment managers are monitored on an ongoing basis to evaluate performanceagainst the established market benchmarks and return targets.

 

Each of thedefined benefit pension plans has an investment policy that was developed toserve as a management tool to provide the framework within which the fiduciary’sinvestment decisions are made; establish standards to measure investmentmanager’s performance; outline the roles and responsibilities of the variousparties involved; and describe the ongoing review process.

 

***Benefit Payments*––** The following estimated future benefit payments, which reflectexpected future service, are expected to be paid in the years indicated forboth the U.S. Associates Pension Plan reflecting the Cole Plan merger and theHoldings and Cole Supplemental Plans (thousands of Euro):

 

F-35

----

 

| ** **  | ** ** | **Pension Plans** | ** ** | **Serp  Plans** | ** ** |
|-------------|------------|------------------------|------------|-----------------|------------|
| 2008        |       | 9,500                  |       | 770             |       |
| 2009        |       | 9,850                  |       | 528             |       |
| 2010        |       | 10,574                 |       | 529             |       |
| 2011        |       | 11,777                 |       | 531             |       |
| 2012        |       | 12,901                 |       | 1,176           |       |
| 2013 - 2017 |       | 83,792                 |       | 5,213           |       |

 

***Contributions*** — TheCompany expects to contribute Euro 13.7 million to its pension plan and Euro0.8 million to the SERP in 2008.

 

***Other Benefits*** —The Company provides certain postemployment medical, disability, and lifeinsurance benefits to its U.S. Associates. The Company’s accrued liabilityrelated to this obligation as of December 31, 2007 and 2006 was Euro 1.4million and Euro 1.3 million, respectively, and is included in other long termliabilities on the consolidated balance sheets.

 

The Companysponsors a tax incentive savings plan covering all full-time employees.  The Company makes quarterly contributions incash to the plan based on a percentage of employees’ contributions.  Additionally, the Company may make an annualdiscretionary contribution to the plan, which may be made in the Parent’s ADR’sor cash.  Aggregate contributions made tothe tax incentive savings plan by the Company were Euro 8.1 million and Euro9.2 million for fiscal years 2007 and 2006, respectively.  For fiscal years 2007 and 2006 thesecontributions do not include an accrual for a discretionary match.

 

Effective uponthe acquisition of Oakley on November 14, 2007, the Company also sponsorsa tax incentive savings plan for all United States Oakley associates with atleast six months of service.  This planis funded by employee contributions with the Company matching a portion of theemployee contribution.  Companycontributions to the plan for the period November 14, 2007 through December 31,2007 were Euro 0.1 million.

 

The Companysponsors the following additional other benefit plans, which cover certain presentand past employees of the Cole companies acquired:

 

·                  Cole provides, under individual agreements, postemployment benefitsfor continuation of health care benefits and life insurance coverage to formeremployees after employment.  As of December 31,2007 and 2006, the accrued liability related to these benefits was Euro 1.0million and Euro 1.2 million, respectively, and is included in the other longterm liabilities on the consolidated balance sheet.

 

·                  Cole also maintains a defined contribution plan covering allfull-time employees in Puerto Rico. The employees in Puerto Rico who have inthe past participated in the Company’s tax incentive savings plan weretransferred into the Cole plan effective January 1, 2006. Additionally,effective January 1, 2006, the plan was amended to provide for a match of100 percent of the first three percent of employee contributions. In 2007 and2006, the Company made quarterly contributions in cash to the plan based on apercentage of employees’ contributions. The matching contributions to such planfor the fiscal years 2007 and 2006 were immaterial.

 

·                  Cole established and maintains the Cole National Group, Inc.Supplemental Retirement Benefit Plan, which provides supplemental retirementbenefits for certain highly compensated and management employees who werepreviously designated by the former Board of Directors of Cole as participants.This is an unfunded non-contributory defined contribution plan.  Each participant’s account is credited withinterest earned on the average balance during the year.  This plan was frozen as to future salarycredits on the effective date of the Cole acquisition in 2004.  The plan liability of Euro 1.0 million andEuro 1.3 million at December 31, 2007 and 2006, respectively, is includedin other long term liabilities on the consolidated balance sheets.

 

***Other Defined Contribution Plan —***The Company continues to participate in superannuation plans inAustralia and Hong Kong.  The plansprovide benefits on a defined contribution basis for employees on retirement,resignation, disablement or death.  Contributionsto defined contribution superannuation plans are recognized as an expense asthe contributions are paid or become payable to the fund.  Contributions are accrued based on legislatedrates and annual compensation.

 

F-36

----

 

Certainemployees of the Company located outside the United States are covered by statesponsored post-employment benefit plans. These plans are generally funded inconformity with the applicable local government regulations and amounts areexpensed as contributions accrue. The aggregate liability to the Company forthese foreign post-employment benefit plans as of December 31, 2007 and2006, was immaterial.

 

***Health Benefit Plans*-**The Company partially subsidizeshealth care benefits for eligible retirees. Employees generally become eligible for retiree health care benefitswhen they retire from active service between the ages of 55 and 65.  Benefits are discontinued at age 65.

 

As of the Coleacquisition, the Company has a liability for a postretirement benefit planmaintained by Cole in connection with its acquisition of Pearle in 1996. Thisplan was closed to new participants at the time of Cole’s acquisition ofPearle. Under this plan, the eligible former employees are provided lifeinsurance and certain health care benefits which are partially subsidized byCole.  Medical benefits under this plancan be maintained past the age of 65.

 

Amountsrecognized in the consolidated balance sheets as of December 31, 2007 and2006, consist of the following (thousands of Euro):

 
| ** **                                   | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|----------------------------------------------|------------|-----------|------------|-----------|------------|
| Liabilities:                                 |       |      |       |      |       |
| Current liabilities                          |       | 173       |       | 185       |       |
| Noncurrent liabilities                       |       | 3,260     |       | 3,650     |       |
| **Total accrued postretirement liabilities** | ** ** | **3,433** | ** ** | **3,835** | ** ** |

 

Amountsrecognized in accumulated other comprehensive income are not material.

 

**Benefit Payments** – The following estimatedfuture benefit payments for the health benefit plans, which reflect expectedfuture service, are estimated to be paid in the years indicated for both theHoldings and Cole plans (thousands of Euro),

 
| 2008      |   | 173   |
|-----------|--------|-------|
| 2009      |   | 200   |
| 2010      |   | 214   |
| 2011      |   | 234   |
| 2012      |   | 258   |
| 2013-2017 |   | 1,637 |

 

***Contributions —***Theexpected contributions for 2008 are Euro 0.2 million for the Company and Euro0.1 million for the employee participants.

 

For 2007, a 11.5%(12% for 2006) increase in the cost of covered health care benefits wasassumed.  This rate was assumed todecrease gradually to 5% for 2020 and remain at that level thereafter. Thehealth care cost trend rate assumption could have a significant effect on theamounts reported. A 1% increase or decrease in the health care trend rate wouldnot have a material impact on the consolidated financial statements.  The weighted-average discount rate used indetermining the accumulated postretirement benefit obligation was 6.5% at September 30,2007 and 6.0% at September 30, 2006.

 

The weightedaverage discount rate used in determining the net periodic benefit cost was6.0% for 2007 and 5.75% for 2006.

 

F-37

----

 

#### **Implementation of SFAS No. 158**

#### ** **

In the fourthquarter of 2006, the Company adopted Statement of Financial AccountingStandards No. 158, *Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans, anamendment of FASB Statements No. 87, 88, 106, and 132(R) *(“SFASNo. 158”) which requires employers to recognize on the balance sheet theprojected benefit obligation of pension plans and the accumulatedpostretirement benefit obligation for any other postretirement plan.  This requirement replaces the requirement ofSFAS No. 87 to report a minimum pension liability measured as the excessof the accumulated benefit obligation over the fair value of plan assets andany recorded pension accrual.  SFAS No. 158also requires employers to recognize in other comprehensive income gains orlosses and prior service costs or credits that occur during the period butwould not be recognized as net periodic benefit cost as required by SFAS No. 87,88, and 106.  There is no change in therequirements related to the income statement recognition of net periodicbenefit costs.  The incremental effect ofapplying SFAS No. 158 on the consolidated balance sheet at December 31,2006 is as follows (thousands of Euro):

 
| ** **                                | ** ** | **Before Application of SFAS  No.158** | ** ** | **Adjustments** | ** ** | **After Application of  SFAS No.158** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------------|------------|-----------------|------------|------------------------------------------------------|------------|
|                                      |       |                                                  |       |            |       |                                                 |       |
| Prepaid pension (intangible asset)        |       | (304                                                  | )          | 2,254           |       | 1,950                                                |       |
| **Total assets**                          | ** ** | **4,966,624**                                         | ** ** | **2,254**       | ** ** | **4,968,878**                                        | ** ** |
| Current liability – SFAS No.106      |       |                                                  |       | 185             |       | 185                                                  |       |
| Current liability – pension benefits |       |                                                  |       | 232             |       | 232                                                  |       |
| **Total current liabilities**             | ** ** | **1,424,860**                                         | ** ** | **417**         | ** ** | **1,425,277**                                        | ** ** |
| Long-term SFAS No.106                     |       | 4,055                                                 |       | (405            | )          | 3,650                                                |       |
| Long-term pension benefits                |       | 45,961                                                |       | 17,583          |       | 63,544                                               |       |
| Non-current deferred income taxes         |       | 48,202                                                |       | (6,932          | )          | 41,270                                               |       |
| **Total long-term liabilities**           | ** ** | **1,317,507**                                         | ** ** | **10,246**      | ** ** | **1,327,753**                                        | ** ** |
| Accumulated other comprehensive loss      |       | (280,184                                              | )          | (8,409          | )          | (288,593                                             | )          |
| **Total stockholders’ equity**       | ** ** | **2,224,258**                                         | ** ** | **(8,409**      | **)**      | **2,215,849**                                        | ** ** |

 

F-38

----

 

**11.          STOCK OPTION AND INCENTIVE PLANS**

 

**Stock Option Plan**

 

Beginningin April 1998, certain officers and other key employees of the Company andits subsidiaries were granted stock options of Luxottica Group S.p.A. under theCompany’s stock option plans (the “plans”). The aggregate number of sharespermitted to be granted under these plans to the employees is 23,044,300. TheCompany believes that the granting of options to these key employees betteraligns the interest of such employees with those of the shareholders. Prior to2006, under the older plans the stock options were granted at a price that wasequal to or greater then market value of the shares at the date of grant. Underthe 2005 and 2006 plans, options were granted at the greater of (i) either the previous 30 day average stock price immediately beforethe date of grant or (ii) the price on the grant date depending on certainregulatory requirements of the country where the employee receiving the optionis located. These options become exercisable in either three equal annual installments, two equalannual installments in the second and third years of the three-year vesting period or100 percent vesting on the third anniversary of the date of grant. Certainoptions may contain accelerated vesting terms if there is a change in ownership(as defined in the plans).

 

Priorto the adoption of SFAS 123 (R) on January 1, 2006, the Companyapplied APB 25, and as such no compensation expense was recognized because theexercise price of the options was equal to the fair market value on the date ofgrant. However, as some of those individuals were U.S. citizens/taxpayers andas the exercise of such options created taxable income, the Company wasafforded a tax benefit in its US Federal tax return equal to the incomedeclared by the individuals. U.S. GAAP does not permit the aforementioned taxbenefit to be recorded in the statement of income. Therefore, such amount isrecorded as a reduction of taxes payable and an increase to additional paid-incapital. For the year ended December 31, 2005, the benefit recordedapproximated Euro 4.7 million.

 

TheCompany adopted SFAS 123(R) as of January 1, 2006, and at such pointbegan expensing stock options over their requisite service period based ontheir fair value as of the date of grant. For the years ended December 31,2007 and 2006, Euro 7.8 million and Euro 7.0 million, respectively, ofcompensation expense has been recorded for these plans.

 

A summary ofoption activity under the Plans as of December 31, 2007, and changesduring the year then ended is as follows:

 
| ** **                               | ** ** | ** **          | ** ** | **Weighted Average** | ** ** | **Weighted Average** | ** ** | ** **               | ** ** |
|------------------------------------------|------------|---------------------|------------|---------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                               | ** ** | **Number**          | ** ** | **Exercise Price**   | ** ** | **Remaining**             | ** ** | **Aggregate**            | ** ** |
| ** **                               | ** ** | **of Options** | ** ** | **(Denominated**          | ** ** | **Contractual**           | ** ** | **Intrinsic Value** | ** ** |
| ** **                               | ** ** | **Outstanding**     | ** ** | **in Euro)**         | ** ** | **Terms**                 | ** ** | **(Euro 000s)**     | ** ** |
| Outstanding as of December 31, 2006 |       | 9,300,685           |       | 14.15                     |       |                      |       |                     |       |
| Granted                                  |       | 1,745,000           |       | 24.03                     |       |                      |       |                     |       |
| Forfeitures                              |       | (54,400             | )          | 14.45                     |       |                      |       |                     |       |
| Exercised                                |       | (1,877,372          | )          | 10.09                     |       |                      |       |                     |       |
| Outstanding as of December 31, 2007 |       | 9,113,913           |       | 16.61                     |       | 5.39                      |       | 50,952                   |       |
| Exercisable at December 31, 2007    |       | 4,996,413           |       | 12.11                     |       | 3.78                      |       | 47,638                   |       |

 

Theweighted-average fair value of grant-date fair value options granted during theyears 2007, 2006, and 2005 was Euro 6.03, Euro 5.72 and Euro 4.27,respectively.

 

The fair value ofthe stock options granted was estimated at the date of grant using a binomiallattice model. The following table presents the weighted – average assumptionsused in the valuation and the resulting weighted average fair value per optiongranted:

 

F-39

----

 
| ** **                         | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |     |       |
| Dividend yield                     |       | 1.43     | %          | 1.33     | %          | 1.54     | %          |
|                               |       |     |       |     |       |     |       |
| Risk-free interest rate            |       | 3.91     | %          | 3.11     | %          | 3.17     | %          |
|                               |       |     |       |     |       |     |       |
| Expected option life (years)       |       | 5.7      |       | 5.8      |       | 5.84     |       |
|                               |       |     |       |     |       |     |       |
| Expected volatility                |       | 23.70    | %          | 25.91    | %          | 25.92    | %          |
|                               |       |     |       |     |       |     |       |
| Weighted average fair value (Euro) |       | 6.03     |       | 5.72     |       | 4.27     |       |

 

Expected volatilities are based on impliedvolatilities from traded share options on the Company’s stock, historicalvolatility of the Company’s share price, and other factors. The expected optionlife is based on the historical exercise experience for the Company based uponthe date of grant and represents the period of time that options granted areexpected to be outstanding. The risk-free rate for periods within thecontractual life of the option is based on the U.S. Federal Treasury orEuropean government bond yield curve, as appropriate, in effect at the time ofgrant.

 

As of December 31, 2007 there was Euro 8.6 million of totalunrecognized compensation cost related to non-vested share-based compensationarrangements; that cost is expected to be recognized over a period of 1.9years.

 

**Stock Performance Plans**

 

In October 2004,under a Company performance plan, the Company granted options to acquire anaggregate of 1,000,000 shares of the Company to certain employees of NorthAmerican Luxottica Retail Division which vested and became exercisable on January 31,2007 as certain financial performance measures were met over the period ending December 2006.At December 31, 2005, there were options to acquire 1,000,000 shares (theclosing ADR price at December 31, 2005 on the New York Stock Exchange wasUS Dollar 25.31 per share) at an exercise price of US Dollar 18.59 per share.Prior to the adoption of SFAS 123-R compensation expense was recorded inaccordance with variable accounting under APB 25 for the options issued underthe incentive plan based on the market value of the underlying ordinary shareswhen the number of shares to be issued is known (“intrinsic value method”).During fiscal 2005, it became probable that the incentive targets would be metand as such the Company has recorded approximately Euro 1.8 million (or USDollar 2.2 million) of compensation expense net of taxes during fiscal 2005 andrecorded future unearned compensation expense in equity of approximately Euro2.7 million (US Dollar 3.2 million) with an offsetting increase in additionalpaid-in capital for such amounts. For the years ended December 31, 2007and 2006 Euro 0.2 million and Euro 1.9 million, respectively, of compensationexpense has been recorded for this plan.

 

In September 2004,the Company’s Chairman and majority shareholder, Mr. Leonardo Del Vecchio,allocated shares held through La Leonardo Finanziaria S.r.l., an Italianholding company of the Del Vecchio family, representing, at that time, 2.11percent (or 9.6 million shares) of the Company’s currently authorized andissued share capital, to a stock option plan for top management of the Companyat an exercise price of Euro 13.67 per share (the closing stock price at December 31,2005 on the Milan Stock Exchange was Euro 21.43 per share). The stock optionsto be issued under the stock option plan vested upon meeting certain economicobjectives in June 2006. As such, compensation expense is recorded inaccordance with variable accounting under APB 25 for the options issued tomanagement under the incentive plan based on the market value of the underlyingordinary shares only when the number of shares to be vested and issued isknown. During 2005, it became probable that the incentive targets would be metand, as such, the Company has recorded compensation expense of approximatelyEuro 19.9 million, net of taxes and recorded future unearned compensationexpense in equity of approximately Euro 45.8 million, net of taxes, with anoffsetting increase in additional paid-in capital for such amounts. For theyears ended December 31, 2007 and 2006 Euro 0.0 million and Euro 21.4million, respectively, of compensation expense has been recorded for this plan.

 

In July 2006,under a Company performance plan, the Company granted options to acquire anaggregate of 13,000,000 shares of the Company to certain top managementpositions throughout the Company which vest and become exercisable as certainfinancial performance measures will be met. Upon vesting the associate will beable to exercise such options until they expire in 2016. Currently it isexpected that these performance conditions will be met. If these performancemeasures are not expected to be met no additional compensation costs will berecognized and previous compensation costs recognized will be reversed. For theyears ended December 31, 2007 and 2006, Euro 34.1 million and Euro 17.6million, respectively, of compensation expense has been recorded for theseplans.

 

F-40

----

 

Asummary of option activity under the performance plans as of December 31,2007, and changes during the year then ended are as follows:

 
| ** **                               | ** ** | ** **          | ** ** | **Weighted Average** | ** ** | **Weighted Average** | ** ** | ** **               | ** ** |
|------------------------------------------|------------|---------------------|------------|---------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                               | ** ** | **Number**          | ** ** | **Exercise Price**   | ** ** | **Remaining**             | ** ** | **Aggregate**            | ** ** |
| ** **                               | ** ** | **of Options** | ** ** | **(Denominated**          | ** ** | **Contractual**           | ** ** | **Intrinsic Value** | ** ** |
| **Performance Plans**               | ** ** | **Outstanding**     | ** ** | **in Euro)**         | ** ** | **Terms**                 | ** ** | **(Euro 000s)**     | ** ** |
| Outstanding as of December 31, 2006 |       | 23,600,000          |       | 17.91                     |       |                      |       |                     |       |
| Granted                                  |       |                |       |                      |       |                      |       |                     |       |
| Forfeitures                              |       |                |       |                      |       |                      |       |                     |       |
| Exercised                                |       | (930,000            | )          | 16.47                     |       |                      |       |                     |       |
| Outstanding as of December 31, 2007 |       | 22,670,000          |       | 18.01                     |       | 7.71                      |       | 83,877                   |       |
| Exercisable at December 31, 2007    |       | 9,670,000           |       | 13.62                     |       | 6.54                      |       | 77,512                   |       |

 

Theweighted-average fair value of grant-date fair value options granted during theyear 2006 was Euro 5.13. There were no performance grants issued in 2005 or2007.

 

The fair value ofthe stock options granted was estimated at the date of grant using a binomiallattice model. The following table presents the weighted – average assumptionsused in the valuation and the resulting weighted average fair value per optiongranted,

 
| ** **                         | ** ** | **2007**   | ** ** | **2006**             | ** ** | **2005**              | ** ** |
|------------------------------------|------------|------------|------------|----------------------|------------|-----------------------|------------|
| ** **                         | ** ** | ** ** | ** ** | **Plan I  (a)** | ** ** | **Plan II  (b)** | ** ** | ** ** | ** ** |
| Dividend yield                     |       | —     |       | 1.33                 | %          |                  | 1.33       | % |   | — |   |
|                               |       |       |       |                 |       |                  |       |   |   |   |   |
| Risk-free interest rate            |       | —     |       | 3.88                 | %          |                  | 3.89       | % |   | — |   |
|                               |       |       |       |                 |       |                  |       |   |   |   |   |
| Expected option life (years)       |       | —     |       | 5.36                 |       |                  | 5.53       |   |   | — |   |
|                               |       |       |       |                 |       |                  |       |   |   |   |   |
| Expected volatility                |       | —     |       | 26.63                | %          |                  | 26.63      | % |   | — |   |
|                               |       |       |       |                 |       |                  |       |   |   |   |   |
| Weighted average fair value (Euro) |       | —     |       | 6.15                 |       |                  | 5.8        |   |   | — |   |

 

----

(a)  Stock Performance Plan issued in July 2006for a total of 9,500,000 options granted

 

(b)  Stock Performance Plan issued in July 2006 for atotal of 3,500,000 options granted

 

As of December 31, 2007 there was Euro 27.1 million of totalunrecognized compensation cost related to non-vested share-based compensationarrangements; that cost is expected to be recognized over a period of 0.7years.

 

Cash received from option exercises under all share-based arrangementsand actual tax benefits realized for the tax deductions from option exercisesare disclosed in the consolidated statements of shareholders’ Equity.

 

F-41

----

 

**Adoptionof SFAS 123 (R)**

 

Effective January 1,2006 the Company adopted the provisions of SFAS No. 123(R), *Share-Based Payment* (“SFAS 123(R)”) which requires the Companyto measure and record compensation expense for stock options and othershare-based payments based on the fair value of the instruments. The adoptionwas made utilizing the modified prospective application method as defined inSFAS 123(R) and as such applies to awards modified, repurchased orcancelled after such date and to any portion of awards for which the requisiteservice has not been rendered and to every new granted award issued after December 31,2005. The following table illustrates the effect on net income and earnings pershare had the compensation costs of the plans been determined under afair-value based method as stated in SFAS 123 for 2005. The estimated fairvalue for each option was calculated using a binomial model:

 
| ** **                                                                                                      | ** ** | **Year ended  December 31, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| (In thousands of Euro, except share data):                                                                      |       |                                        |       |
| Net income as reported                                                                                          |       | 342,294                                     |       |
|                                                                                                            |       |                                        |       |
| Add: Stock-Based compensation cost included in the reported net  income, net of taxes                           |       | 21,706                                      |       |
|                                                                                                            |       |                                        |       |
| Deduct: Stock-based compensation expense determined under fair-value  based method for all awards, net of taxes |       | (23,203                                     | )          |
|                                                                                                            |       |                                        |       |
| Pro forma                                                                                                       |       | 340,797                                     |       |
|                                                                                                            |       |                                        |       |
| Basic earnings per share:                                                                                       |       |                                        |       |
| As reported                                                                                                     |       | 0.76                                        |       |
| Pro forma                                                                                                       |       | 0.76                                        |       |
| * *                                                                                                        |       |                                        |       |
| Diluted earnings per share:                                                                                     |       |                                        |       |
| As reported                                                                                                     |       | 0.76                                        |       |
| Pro forma                                                                                                       |       | 0.75                                        |       |

 

F-42

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**12.       SHAREHOLDERS’ EQUITY**

 

In June 2007and May 2006, the Company’s Annual Shareholders Meetings approved cashdividends of Euro 191.1 million and Euro 131.4 million, respectively. Theseamounts became payable in June 2007 and May 2006, respectively.Italian law requires that five percent of net income be retained as a legalreserve until this reserve is equal to one-fifth of the issued share capital.As such, this legal reserve is not available for dividends to the shareholders.Legal reserves of the Italian entities included in retained earnings were Euro5.5 million at December 31, 2007 and 2006, respectively.

 

LuxotticaGroup’s legal reserve roll-forward for fiscal period 2005-2007 is detailed as follows(thousands of Euro):

 
| January 1, 2005         |   | 5,454 |   |
|------------------------------|--------|-------|--------|
| Increase in fiscal year 2005 |   | 23    |   |
| December 31, 2005       |   | 5,477 |   |
| Increase in fiscal year 2006 |   | 36    |   |
| December 31, 2006       |   | 5,513 |   |
| Increase in fiscal year 2007 |   | 23    |   |
| December 31, 2007       |   | 5,536 |   |

 

Previously theBoard of Directors authorized US Holdings to repurchase through the open marketup to 21,500,000 ADRs of Luxottica Group S.p.A., representing at that timeapproximately 4.7 percent of the authorized and issued share capital. As of December 31,2004, both repurchase programs expired and US Holdings purchased 6,434,786(1,911,700 in 2002 and 4,523,786 in 2003) ADRs at an aggregate purchase priceof Euro 70.0 million (U.S. $73.8 million translated at the exchange rate at thetime of the transactions). In connection with the repurchase, an amount of Euro70.0 million is classified as treasury shares in the Company’s consolidatedfinancial statements. The market value of the stock based on the share price aslisted on the Milan Stock Exchange at December 31, 2007, is approximatelyEuro 139.9 million (US $203.9 million).

 

F-43

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**13**.       **SEGMENTS ANDRELATED INFORMATION**

 

Inaccordance with SFAS No. 131, *DisclosuresAbout Segments of an Enterprise and Related Information*, the Companyoperates in two industry segments: (1) manufacturing and wholesaledistribution and (2) retail distribution. Through its manufacturing andwholesale distribution operations, the Company is engaged in the design,manufacture, 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, Sunglass Hut International, OPSM Group Limited and Cole NationalCorporation. For 2007 Oakley is viewed as a stand alone segment since it hasnot yet been integrated into the wholesale and retail segments.

 

Thefollowing tables summarize the segment and geographic information deemedessential by the Company’s management for the purpose of evaluating the Company’sperformance and for making decisions about future allocations of resources.

 

The “Inter-segmenttransactions and corporate adjustments” column includes the elimination ofinter-segment activities which consist primarily of sales of product from themanufacturing and wholesale segment to the retail segment and corporate relatedexpenses not allocated to reportable segments. This has the effect ofincreasing reportable operating profit for the manufacturing and wholesale andretail segments. Identifiable assets are those tangible and intangible assets usedin operations in each segment. Corporate identifiable assets are principallycash, goodwill and trade names.

 
| **(thousands of Euro)** | ** ** | **Manufacturing  and  Wholesale** | ** ** | **Retail** | ** ** | **Oakley** | ** ** | **Inter-Segments  Transactions and  Corporate  Adjustments** | ** ** | **Consolidated** | ** ** |
|-----------------------------------|------------|-----------------------------------|------------|------------|------------|------------|------------|-------------------------------------------------------------------|------------|------------------|------------|
|                              |       |                              |       |       |       |       |       |                                                              |       |             |       |
| *Year ended December 31, 2005*    |       |                              |       |       |       |       |       |                                                              |       |             |       |
|                              |       |                              |       |       |       |       |       |                                                              |       |             |       |
| Net Sales                         |       | 1,310,273                         |       | 3,061,690  |       |       |       | (237,700                                                          | )(1)       | 4,134,263        |       |
| Income from operations            |       | 304,333                           |       | 355,238    |       |       |       | (78,170                                                           | )(2)       | 581,401          |       |
| Capital Expenditure               |       | 81,070                            |       | 138,946    |       |       |       |                                                              |       | 220,016          |       |
| Depreciation & Amortization   |       | 48,720                            |       | 103,596    |       |       |       | 32,336                                                            | (3)        | 184,652          |       |
| Total Assets                      |       | 1,590,091                         |       | 1,308,174  |       |       |       | 2,075,257                                                         | (4)        | 4,973,522        |       |
|                              |       |                              |       |       |       |       |       |                                                              |       |             |       |
| *Year ended December 31, 2006*    |       |                              |       |       |       |       |       |                                                              |       |             |       |
|                              |       |                              |       |       |       |       |       |                                                              |       |             |       |
| Net Sales                         |       | 1,715,369                         |       | 3,294,161  |       |       |       | (333,374                                                          | )(1)       | 4,676,156        |       |
| Income from operations            |       | 445,843                           |       | 431,547    |       |       |       | (121,403                                                          | )(2)       | 755,987          |       |
| Capital Expenditure               |       | 108,117                           |       | 164,063    |       |       |       |                                                              |       | 272,180          |       |
| Depreciation & Amortization   |       | 57,331                            |       | 122,403    |       |       |       | 41,063                                                            | (3)        | 220,797          |       |
| Total Assets                      |       | 1,853,144                         |       | 1,343,482  |       |       |       | 1,772,252                                                         | (4)        | 4,968,878        |       |
|                              |       |                              |       |       |       |       |       |                                                              |       |             |       |
| *Year ended December 31, 2007*    |       |                              |       |       |       |       |       |                                                              |       |             |       |
|                              |       |                              |       |       |       |       |       |                                                              |       |             |       |
| Net Sales                         |       | 1,992,740                         |       | 3,233,802  |       | 86,964     |       | (347,452                                                          | )(1)       | 4,966,054        |       |
| Income from operations            |       | 527,991                           |       | 361,809    |       | 3,717      |       | (60,204                                                           | )(2)       | 833,313          |       |
| Capital Expenditure               |       | 112,973                           |       | 213,293    |       | 8,503      |       |                                                              |       | 334,769          |       |
| Depreciation & Amortization   |       | 68,981                            |       | 118,100    |       | 7,682      |       | 38,050                                                            | (3)        | 232,813          |       |
| Total Assets                      |       | 2,321,204                         |       | 1,405,299  |       | 1,937,292  |       | 1,493,471                                                         | (4)        | 7,157,266        |       |

 

----

(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)   Corporateadjustments of depreciation and amortization relate to depreciation andamortization of corporate assets.

 

F-44

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(4)   Corporateadjustments of total assets include mainly the net value of goodwill and tradenames of acquired retail businesses.

 

The geographic segmentsinclude Italy, the main manufacturing and distribution base, United States andCanada (which includes the United States of America, Canada and Caribbeanislands), Asia Pacific (which includes Australia, New Zealand, China, HongKong, Japan) and Other (which includes all other geographic locations includingEurope (excluding Italy), South and Central America and the Middle East). Salesare attributed to geographic segments based on the legal entity domicile wherethe sale is originated. Intercompany sales included in inter-segmentelimination are accounted for on a cost plus mark-up basis.

 
| **(Thousands of Euro)  Year Ended December 31,** | ** ** | **Italy  (6)** | ** ** | **United  States and  Canada (6)** | ** ** | **Asia  Pacific  (6)** | ** ** | **Other********(6)** | ** ** | **Adjustments  and  Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------------|------------|----------------|------------|----------------------------------------------|------------|------------------------|------------|----------------------|------------|------------------------------------|------------|------------------|------------|
| 2005                                                                      |       |           |       |                                         |       |                   |       |                 |       |                               |       |             |       |
| Net sales (5)                                                             |       | 998,420        |       | 2,811,860                                    |       | 516,793                |       | 575,196              |       | (768,006                           | )          | 4,134,263        |       |
| Income from operations                                                    |       | 258,391        |       | 291,438                                      |       | 46,993                 |       | 51,200               |       | (66,621                            | )          | 581,401          |       |
| Long lived assets, net                                                    |       | 228,841        |       | 375,776                                      |       | 92,335                 |       | 8,214                |       | —                             |       | 705,166          |       |
| Total assets                                                              |       | 1,294,955      |       | 2,932,483                                    |       | 662,926                |       | 270,169              |       | (187,011                           | )          | 4,973,522        |       |
|                                                                      |       |           |       |                                         |       |                   |       |                 |       |                               |       |             |       |
| 2006                                                                      |       |           |       |                                         |       |                   |       |                 |       |                               |       |             |       |
| Net sales (5)                                                             |       | 1,321,887      |       | 3,076,503                                    |       | 603,640                |       | 761,955              |       | (1,087,828                         | )          | 4,676,156        |       |
| Income from operations                                                    |       | 389,275        |       | 331,002                                      |       | 33,841                 |       | 79,397               |       | (77,528                            | )          | 755,987          |       |
| Long lived assets, net                                                    |       | 280,692        |       | 387,861                                      |       | 110,099                |       | 8,549                |       | —                             |       | 787,201          |       |
| Total assets                                                              |       | 1,331,719      |       | 2,675,833                                    |       | 748,305                |       | 388,825              |       | (175,804                           | )          | 4,968,878        |       |
|                                                                      |       |           |       |                                         |       |                   |       |                 |       |                               |       |             |       |
| 2007                                                                      |       |           |       |                                         |       |                   |       |                 |       |                               |       |             |       |
| Net sales (5)                                                             |       | 1,506,077      |       | 3,073,086                                    |       | 685,561                |       | 1,114,429            |       | (1,413,099                         | )          | 4,966,054        |       |
| Income from operations                                                    |       | 377,799        |       | 324,167                                      |       | 57,191                 |       | 127,761              |       | (53,605                            | )          | 833,313          |       |
| Long lived assets, net                                                    |       | 326,978        |       | 575,566                                      |       | 134,435                |       | 20,803               |       |                               |       | 1,057,782        |       |
| Total assets                                                              |       | 1,894,546      |       | 4,839,680                                    |       | 804,786                |       | 752,818              |       | (1,134,565                         | )          | 7,157,266        |       |

 

----

(5)    No single customer represents five percentor more of sales in any year presented.

 

(6)   Sales, income from operations andidentifiable assets are the result of combination of legal entities located inthe same geographic area.

 

F-45

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**14.       FINANCIAL INSTRUMENTS**

 

**Concentration of Credit Risk -**

 

Financial instruments which potentially expose theCompany to concentration of credit risk consist primarily of cash investments,accounts receivable and a Euro 17.9 million Pay In Kind (“PIK”) note receivedin connection with the sale of its Things Remembered specialty gift business(See Note 4). The increase in the principal balance of the PIK noteas a result of unpaid interest on this note receivable was Euro 2.8 million andEuro 0.8 million as of December 31, 2007 and 2006, respectively. TheCompany attempts to limit its credit risk associated with cash equivalents byplacing the Company’s investments with highly rated banks and financialinstitutions. With respect to accounts receivable, the Company limits itscredit risk by performing ongoing credit evaluations. As of December 31,2006 and 2007, no single customer balances comprised 10 percent or more of theoverall accounts receivable balance. However, included in accounts receivableas of December 31, 2007 and 2006, was approximately Euro 12.3 million andEuro 13.9 million, respectively, due from the host stores of our license brandsretail division. These receivables represent cash proceeds from sales depositedinto the host stores bank accounts, which are subsequently forwarded to theCompany on a weekly or monthly basis depending on the contract. Thesereceivables are based on contractual arrangements that are short term inlength. The Company believes no significant concentration of credit risk existswith respect to these cash investments and accounts receivable.

 

**Concentration of Supplier Risk -**

 

As aresult of the OPSM and Cole acquisitions, Essilor S.A. has become one of thelargest suppliers to the Company’s Retail Division. For the 2007, 2006 and 2005fiscal years, Essilor S.A. accounted for approximately 15.0 percent, 15.0percent and 10.0 percent of the Company’s total merchandise purchases,respectively. The Company has not signed any specific purchase contract withEssilor. Management believes that the loss of this vendor would not have asignificant impact on the future operations of the Company as it could replacethis vendor quickly with other third-party suppliers.

 

**15.       COMMITMENTS AND CONTINGENCIES**

 

**Royalty Agreements -**

 

The Company is obligated under non-cancellabledistribution agreements with designers, which expire at various dates through2013. In accordance with the provisions of such agreements, the Company isrequired to pay royalties and advertising fees based on a percentage of sales(as defined) with, in certain agreements, minimum guaranteed payments in eachyear of the agreements.

 

On October 7, 2005, the Company announced thesigning of a 10-year license agreement for the design, production and worldwidedistribution of prescription frames and sunglasses under the Burberry name. Theagreement began on January 1, 2006.

 

On February 27, 2006, the Company announced thatit entered into a 10-year license agreement for the design, production andworldwide distribution of prescription frames and sunglasses under the PoloRalph Lauren name. The agreement commenced on January 1, 2007. Based onthe agreement, Luxottica Group provided for an advance payment on royalties toRalph Lauren in January 2007 for a total amount of Euro 150.2 million (US$199 million).

 

In December 2006, theCompany announced the signing of a 10-year license agreement for the design,manufacturing and worldwide distribution of exclusive ophthalmic and suncollections under the Tiffany & Co. name. The Company launched thefirst collection in 2008. The distribution of Tiffany’s collections startedwith Tiffany’s own stores as well as in North America, Japan, Hong Kong, SouthKorea, key Middle East markets and Mexico and will extend over time toadditional markets and through new distribution channels.

 

Minimumpayments required in each of the years subsequent to December 31, 2007 aredetailed as follows (thousands of Euro):

 

F-46

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| **Year Ending December 31,** | ** ** | ** **  | ** ** |
|---------------------------------------------|------------|-------------|------------|
| 2008                                        |       | 85,462      |       |
| 2009                                        |       | 81,683      |       |
| 2010                                        |       | 72,989      |       |
| 2011                                        |       | 52,319      |       |
| 2012                                        |       | 37,081      |       |
| Thereafter                                  |       | 128,549     |       |
| **Total**                                   | ** ** | **458,083** | ** ** |

 

Totalroyalties and related advertising expenses for the fiscal years 2007, 2006 and2005 aggregated Euro 181.6 million, Euro 184.1 million and 121.2 million,respectively.

 

Totalpayments for royalties and related advertising expenses for the fiscal years2007, 2006 and 2005 aggregated Euro 278.2 million, Euro 225.1 million and Euro119.8 million, respectively.

 

**Leases**

 

TheCompany leases through its worldwide subsidiaries various retail store, plant,warehouse and office facilities, as well as certain of its data processing andautomotive equipment under operating lease arrangements expiring between 2007and 2025, with options to renew at varying terms. The lease arrangements forthe Company’s U.S. retail locations often include escalation clauses andprovisions requiring the payment of incremental rentals, in addition to anyestablished minimums contingent upon the achievement of specified levels ofsales volume. In addition, with the acquisition of Cole, the Company operatesdepartments in various host stores paying occupancy costs solely as apercentage of sales. Certain agreements which provide for operations ofdepartments in a major retail chain in the United States contain short-termcancellation clauses.

 

Totalrental expense under operating leases for each year ended December 31 isas follows (thousands of Euro):

 
| ** **      | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------|------------|----------|------------|----------|------------|----------|------------|
|            |       |     |       |     |       |     |       |
| Minimum rent    |       | 264,496  |       | 236,546  |       | 224,913  |       |
| Contingent rent |       | 60,177   |       | 64,091   |       | 57,776   |       |
| Sublease income |       | (38,806  | )          | (35,955  | )          | (27,645  | )          |
|            |       |     |       |     |       |     |       |
|            |       | 285,867  |       | 264,682  |       | 255,044  |       |

 

Futureminimum annual rental commitments for operating leases are as follows(thousands of Euro):

 
| **Years Ending December 31,** | ** ** | ** **    | ** ** |
|----------------------------------------------|------------|---------------|------------|
| 2008                                         |       | 240,946       |       |
| 2009                                         |       | 217,460       |       |
| 2010                                         |       | 178,189       |       |
| 2011                                         |       | 144,829       |       |
| 2012                                         |       | 115,214       |       |
| Thereafter                                   |       | 328,050       |       |
| **Total**                                    | ** ** | **1,224,688** | ** ** |

 

**OtherCommitments**—****The Company, with its acquisition of Oakley, is committedto pay amounts in future periods for endorsement contracts and supplierpurchase commitments. Endorsement contracts are entered into with selectedathletes and others who endorse Oakley products. Oakley is often required topay specified minimal annual commitments and, in certain cases, additionalamounts based on performance goals. Certain contracts provide additionalincentives based on the achievement of specified goals. Purchase commitmentshave been entered into with various suppliers in the normal course of business.Oakley has a five-year agreement with a supplier that is Oakley’s sole sourceof the uncoated lens blanks from which the majority of its sunglass lenses arecut. This agreement gives Oakley the right to purchase lens blanks from thesupplier in return for Oakley’s agreement to fulfill the majority of therequirements of the supplier, subject to certain conditions. Amounts expensedin 2007 for the endorsement contracts and supplier purchase commitments wereimmaterial to the financial statements.

 

Futureminimum amounts to be paid for endorsement contracts and supplier purchasecommitments at December 31, 2007, are as follows (thousands of Euro):

 

F-47

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| **Year ending December 31,** | ** ** | **Endorsement  contracts** | ** ** | **Supplier  commitments** | ** ** |
|---------------------------------------------|------------|----------------------------|------------|---------------------------|------------|
| 2008                                        |       | 5,912                      |       | 4,575                     |       |
| 2009                                        |       | 2,433                      |       | 6,034                     |       |
| 2010                                        |       | 780                        |       | 5,999                     |       |
| 2011                                        |       | 253                        |       | 1,507                     |       |
| **Total**                                   | ** ** | **9,378**                  | ** ** | **18,115**                | ** ** |

 

**Guarantees-**

 

The United States ShoeCorporation, a wholly owned subsidiary of the Company, remains contingentlyliable on seven store leases in the United Kingdom. These leases werepreviously transferred to third parties. The third parties have assumed allfuture obligations of the leases from the date each agreement was signed.However, under the common law of the United Kingdom, the lessor still has theright to seek payment of certain amounts from the Company if unpaid by the newobligor. If the Company is required to pay under these guarantees, it has theright to recover amounts from the new obligor. These leases will expire duringvarious years until December 31, 2015. At December 31, 2007, themaximum amount for which the Company’s subsidiary is contingently liable isEuro 7.8 million.

 

Cole has guaranteedfuture minimum lease payments for certain store locations leased directly byfranchisees. These guarantees aggregated approximately Euro 4.0 million at December 31,2007.  Performance under a guarantee bythe Company is triggered by default of a franchisee on its lease commitment.Generally, these guarantees also extend to payments of taxes and other expensespayable under the leases, the amounts of which are not readily quantifiable.The terms of these guarantees range from one to ten years. Many are limited toperiods less than the full term of the lease involved.  Under the terms of the guarantees, Cole hasthe right to assume the primary obligation and begin operating the store. Inaddition, as part of the franchise agreements, Cole may recover any amountspaid under the guarantee from the defaulting franchisee. The Company hasaccrued a liability at December 31, 2005 for the estimates of the fairvalue of the Company’s obligations from guarantees entered into or modifiedafter December 31, 2002, using an expected present value calculation. Suchamount is immaterial to the consolidated financial statements as of December 31,2007 and 2006.

 

**Credit Facilities -**

 

As of December 31,2007 and 2006, Luxottica Group had unused short-term lines of credit ofapproximately  Euro 291.4 million andEuro 581.1 million, respectively.

 

TheCompany and its wholly-owned Italian subsidiary Luxottica S.r.l. maintainunsecured lines of credit with primary banks for an aggregate maximum credit ofEuro 467.4 million (Euro 543.2 million at December 31, 2006). These linesof credit are renewable annually, can be cancelled at short notice and have nocommitment fees. At December 31, 2007 and 2006, these credit lines wereutilized for Euro 312.0 million and Euro 68.0 million, respectively.

 

USHoldings maintains four unsecured lines of credit with four separate banks foran aggregate maximum credit of Euro 89.0 million (US Dollar 130.0 million).These lines of credit are renewable annually, can be cancelled at short noticeand have no commitment fees. At December 31, 2007, there were Euro 22.0million (US $32.1 million) of borrowings outstanding and there were Euro 23.6million in aggregate face amount of standby letters of credit outstanding underthese lines of credit (see below).

 

Theblended average interest rate on these lines of credit is approximately LIBORplus 0.25 percent.

 

**Outstanding Standby Letters of Credit -**

 

A U.S.subsidiary has obtained various standby and trade letters of credit from banksthat aggregated Euro 31.0 million and Euro 36.1 million as of December 31,2007 and 2006, respectively. Most of these letters of credit are used forsecurity in risk management contracts, purchases from foreign vendors or assecurity on store leases. Most standby letters of credit contain evergreenclauses under which the letter is automatically renewed unless the bank isnotified not to renew. Trade letters of credit are for purchases from foreignvendors and are generally outstanding for a period that is less than sixmonths. Substantially all the fees associated with maintaining the letters ofcredit fall within the range of 50 to 100 basis points annually.

 

F-48

----

 

**Litigation -**

 

***California Vision Health CareService Plan Lawsuit***

 

In March 2002, in Snow v. LensCrafters, Inc.et al., an individual commenced an action in the California Superior Court forthe County of San Francisco against Luxottica Group S.p.A. and certain of itssubsidiaries, including LensCrafters, Inc. and EYEXAM of California, Inc.  The plaintiff, along with a second plaintiffnamed in an amended complaint, seeks to certify this case as a class action.The claims have been partially dismissed. The remaining claims, againstLensCrafters and EYEXAM, allege various statutory violations relating to theconfidentiality of medical information and the operation of LensCrafters’stores in California, including violations of California laws governingrelationships among opticians, optical retailers, manufacturers of frames andlenses and optometrists, and other unlawful or unfair business practices. Theaction seeks unspecified damages, statutory damages of U.S.$1,000 per classmember, disgorgement, restitution of allegedly unjustly obtained sums, punitivedamages and injunctive relief, including an injunction that would prohibitdefendants from providing eye examinations or other optometric services atLensCrafters stores in California.

 

The parties have reached a settlement which offers arange of benefits, including store vouchers and a cash back option, along withcertain enhancements to LensCrafters’ business practices.  On February 4, 2008, the Court gavepreliminary approval to a class action settlement. A hearing to address finalapproval will take place in July 2008. If the settlement is given finalapproval, and no appeals are taken, this matter will be resolved.

 

Although the Company believes that its operationalpractices and advertising in California comply with California law, if thesettlement does not receive final approval and an adverse decision in Snowresults, LensCrafters and EYEXAM may have to modify or cease their activitiesin California. In addition, LensCrafters and EYEXAM might be required to paydamages and/or restitution, the amount of which might have a material adverseeffect on the Company’s consolidated financial statements. Costs associatedwith the Snow litigation incurred for the years ended December 31, 2007and 2006, were approximately Euro 1.1 million and Euro 0.7 million,respectively. For the year ended December 31, 2007, the Company recordedan accrual of Euro 0.9 million as an estimate of the minimum amount it believesit will pay as costs of settlement as it has become probable that such amountwill be paid in 2008. Currently, the maximum amount which may need to be paidunder the settlement conditions cannot be quantified.

 

***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 alleged various statutory violationsrelated to the operation of Pearle Vision Centers in California, includingviolations of California laws governing relationships among opticians, opticalretailers, manufacturers of frames and lenses and optometrists, falseadvertising and other unlawful or unfair business practices. The action seeksunspecified damages, disgorgement, restitution of allegedly unjustly obtainedsums, civil penalties and injunctive relief, including an injunction that wouldhave prohibited defendants from providing eye examinations or other optometricservices at Pearle Vision Centers in California.

 

On July 18, 2007, the trial court entered a final judgment andpermanent injunction, pursuant to a stipulation of the parties, dismissing thecase. The judgment required modification to Pearle Vision’s advertising, andthe payment by the Company of $2.5 million for attorneys’ fees and costs ofinvestigation. The payment was made in August 2007.The judgment does not bar Pearle Vision from advertising the availability of eyeexams and other optometric services provided by Pearle VisionCare at PearleVision optical stores. Costs associated with the *People v. Cole* litigation incurred for the years ended December 31,2007 and 2006, were approximately Euro 0.1 million and Euro 0.5 million,respectively.

 

***Cole Consumer Class ActionLawsuit***

 

In June 2006, in Seiken v. Pearle Vision, Inc.et al, Cole and its subsidiaries were sued by a consumer in a purported classaction which alleges various statutory violations related to the operation ofPearle Vision and its affiliated HMO, Pearle VisionCare in California. Theclaims and remedies sought are similar to those asserted in the LensCraftersand EYEXAM case. In December 2006, the court granted defendants’ motion todismiss the complaint but allowed plaintiff an opportunity to replead.Defendants moved to dismiss the amended complaint in February 2007, and ahearing on the motion was held in March 2007. Such motion to dismiss wasdenied. Plaintiff has moved for class certification and the oral argumentsrelating to that petition, 

 

F-49

----

 

originally scheduled for April 4, 2008, have beenpostponed. Recently, the parties reached an agreement in principle to settlethis case, subject to documentation and Court approval. The proposed settlementprovides a store voucher at Pearle or Lenscrafters to each class member and thepayment of attorneys’ fees and costs. A hearing to address approval of thesettlement has not yet been scheduled. Although we believe that our operationalpractices in California comply with California law, if the settlement does notreceive final approval and an adverse decision results, Pearle Vision or PearleVisionCare may have to modify or cease their activities in California. Inaddition, the Cole subsidiaries might be required to pay damages and/orrestitution, the amount of which might have a material adverse effect on theCompany’s consolidated financial statements. Costs associated with this Coleclass action litigation incurred for the years ended December 31, 2007 and2006 were approximately Euro 0.7 million and Euro 0.1 million, respectively.Management believes, based in part on advice from counsel, that no estimate ofthe range of possible losses, if any, can be made at this time***.***

 

***Oakley Shareholder Lawsuit***

 

On June 26,2007, Pipefitters Local No. 636 Defined Benefit Plan filed a purportedclass action complaint in the Superior Court of California, County of Orange,on behalf of itself and all other shareholders of Oakley Inc. against OakleyInc. and each of its directors.  Thecomplaint alleged, among other things, that the defendants violated theirfiduciary duties to shareholders by approving Oakley’s merger with Luxotticaand claimed that the price per share fixed by the merger agreement isinadequate and unfair. The defendants filed demurrers to the complaint, whichthe Court granted without prejudice.  On September 14,2007, the plaintiff filed an amended complaint containing the same allegationsas the initial complaint and adding purported claims for breach of the duty ofcandor. Because it believed the allegations were without merit, on October 9,2007 the Company demurred to the amended complaint.  Rather than respond to that demurrer, theplaintiff admitted that its claims were moot and on January 4, 2008 fileda motion for attorneys’ fees and expenses. The hearing for this motion,originally scheduled for March 27, 2008, took place on April 17,2008. The parties are currently awaiting the Court’s ruling on that motion. TheCourt did not rule on defendants’ demurrer to the amended complaint and itis unlikely there will be further proceedings with respect to the action otherthan on plaintiff’s motion for fees as both sides have informed the Court thatthe underlying case is now moot and should be dismissed once the Court rules onthe fee motion.

 

Costsassociated with this litigation incurred for the year ended December 31,2007 were immaterial. Management believes, based in part on the advice fromcounsel, that no estimate of the range of possible losses, if any, can be madeat this time.

 

***Fair Credit Reporting ActLitigation***

 

In January 2007, acomplaint was filed against Oakley, Inc. in the United States DistrictCourt for the Central District of California alleging willful violations of theFair and Accurate Credit Transactions Act, 15 U.S.C. §1681c(g) (“FACTA”),related to the inclusion of credit card expiration dates on sales receipts.Plaintiff later filed an amended complaint adding two of Oakley’s wholly-ownedsubsidiaries as additional defendants. Plaintiff purports to sue on behalf of aputative class of Oakley’s customers, but no motion seeking class action statushas yet been filed. The Oakley defendants have denied any liability.

 

Recently, the Oakleydefendants entered into a Memorandum of Understanding with Plaintiff which, ifapproved by the Court, would result in the settlement of this action, with acomplete release in favor of the Oakley defendants, with no cash payment to thepurported class members, but rather an agreement by Oakley to issue vouchersfor the purchase of products at Oakley retail stores during a limited period oftime. The aggregate retail value of the vouchers would depend on how manypurported class members submit valid claims. The settlement contemplated by theMemorandum of Understanding also provides for the payment of attorneys’ feesand claim administration costs by the Oakley defendants. A motion seeking courtapproval of the foregoing settlement will be filed shortly.

 

Costsassociated with this litigation incurred for the year ended December 31,2007 were immaterial. Management believes, based in part on the advice fromcounsel, that no estimate of the range of possible losses, if any, can be madeat this time.

 

The Company is a defendant invarious other lawsuits arising in the ordinary course of business. It is theopinion of the management of the Company that it has meritorious defenses against all suchoutstanding claims, which the Company will vigorously pursue, and that theoutcome of such claims, individually or in the aggregate, will not have amaterial adverse effect on the Company’s consolidated financial position orresults of operations.

 

F-50

----

 

**16.          SUBSEQUENT EVENTS**

 

On January 31, 2008, theCompany announced the signing of the renewal of the partnership agreement foreyewear collections under the CHANEL brand.

 

In February 2008, theCompany exercised an option included in the amendment to the term and revolvingcredit facility disclosed in Note 8 (d) to extend the maturity date ofTranches B and C to March 2013.

 

On April 17, 2008, the Company announced thesigning of a new long-term exclusive license agreement with Stella McCartneyLimited, a joint venture between Ms. Stella McCartney and Gucci GroupN.V., for the design, production and worldwide distribution of sunglasses underthe luxury lifestyle brand Stella McCartney. The agreement, which will begin onJanuary 1, 2009, is for an initial term of six years, automaticallyrenewable for an additional five-year term. The first collection will belaunched in the summer of 2009.

 

* *  *  *  *

 

F-51

----

** **

**Luxottica Group S.p.A. and Subsidiaries**

 

**VALUATION AND QUALIFYING ACCOUNTS**

** **

**ALLOWANCE FOR DOUBTFUL ACCOUNTS**

**(Amounts expressed in thousands of Euro)**

 
| ** ** | ** ** | **Balance at  beginning  of period** | ** ** | **Charged to  costs and  expenses** | ** ** | **Other (1)** | ** ** | **Deductions** | ** ** | **Balance at  end of  period** | ** ** |
|------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|--------------------|------------|----------------|------------|------------------------------------------|------------|
| 2005       |       | 23,407                                         |       | 7,027                                         |       | 2,215              |       | (5,095)        |       | 27,554                                   |       |
| 2006       |       | 27,554                                         |       | 2,198                                         |       | 99                 |       | (7,160)        |       | 22,691                                   |       |
| 2007       |       | 22,691                                         |       | 2,157                                         |       | 8,499              |       | (7,804)        |       | 25,543                                   |       |
|            |            |                                                |            |                                               |            |                    |            |                |            |                                          |            |  |  |  |  |  |

 

**ALLOWANCE FOR INVENTORY RESERVE ACCOUNTS**

**(Amounts expressed in thousands of Euro)**

 
| ** ** | ** ** | **Balance at  beginning  of period** | ** ** | **Charged to  costs and  expenses** | ** ** | **Other (1)** | ** ** | **Deductions** | ** ** | **Balance at  end of  period** | ** ** |
|------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|--------------------|------------|----------------|------------|------------------------------------------|------------|
| 2005       |       | 43,775                                         |       | 40,000                                        |       | 2,500              |       | (27,170)       |       | 59,105                                   |       |
| 2006       |       | 59,105                                         |       | 24,357                                        |       | 4,228              |       | (42,437)       |       | 45,253                                   |       |
| 2007       |       | 45,253                                         |       | 58,057                                        |       | 26,837             |       | (43,002)       |       | 87,146                                   |       |
|            |            |                                                |            |                                               |            |                    |            |                |            |                                          |            |  |  |  |  |  |

 

**VALUATION ALLOWANCE ON DEFERRED TAX ASSETS**

**(Amounts expressed in thousands of Euro)**

 
| ** ** | ** ** | **Balance at  beginning  of period** | ** ** | **Charged to  costs and  expenses** | ** ** | **Other (2)** | ** ** | **Deductions** | ** ** | **Balance at  end of  period** | ** ** |
|------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|--------------------|------------|----------------|------------|------------------------------------------|------------|
| 2005       |       | 22,837                                         |       | 697                                           |       | 1,844              |       | (10,340)       |       | 15,038                                   |       |
| 2006       |       | 15,038                                         |       | 22,291                                        |       | (1,206             | )          | (6,342)        |       | 29,781                                   |       |
| 2007       |       | 29,781                                         |       | 9,391                                         |       | (1,051             | )          | (11,033)       |       | 27,088                                   |       |
|            |            |                                                |            |                                               |            |                    |            |                |            |                                          |            |  |  |  |  |  |

 

----

| (1) | Other  includes the beginning amount relating to the acquired balances of Oakley in  2007 as well as translation differences of the period. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Other  includes translation differences of the period.                                                                                      |

 

F-52

----

 

**ITEM 19. EXHIBITS**

 

*Exhibits.*Thefollowing documents are filed as exhibits herewith, unless otherwise specifiedand incorporated herein by reference:

 
| Exhibit  Number | ** ** | **Exhibits**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.1             |       | Articles of Association of Luxottica  Group S.p.A. (incorporated herein by reference to Amendment No. 3  to Form F-1 (file No. 33-32039) filed with the U.S. Securities and  Exchange Commission (the “Commission”) on January 23, 1990).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 1.2             |       | Amended and Restated By-Laws of Luxottica Group  S.p.A. (Unofficial English translation filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 2.1             |       | Amended and Restated Deposit Agreement, dated as of  March 30, 2006, among Luxottica Group S.p.A., Deutsche Bank Trust  Company Americas, as Depositary, and all owners and holders form time to time  of American Depositary Receipts issued thereunder (incorporated herein by  reference to our Registration Statement on Form F-6, as filed with the  Commission on March 29, 2006.)                                                                                                                                                                                                                                                                                                                                                                                                                              |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 2.2             |       | Subscription Agreement, dated June 18, 1999,  from Luxottica Luxembourg S.A. and Luxottica Group S.p.A., as  guarantor of the Notes, to Credit Suisse First Boston (Europe) Limited and  UniCredito Italiano S.p.A., as joint lead managers and Banca Commerciale  Italiana, Banca d’Intermediazione Mobiliare IMI, Bayerische Hypo-und  Vereinsbank AG, Caboto Holding SIM S.p.A., Merrill Lynch  International and Paribas, as managers (incorporated herein 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 herein by reference to our Report on Form 6-K dated  November 19, 1999, as filed with the Commission on November 23,  1999).                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.1             |       | Luxottica Group S.p.A. 1998 Stock Option Plan  (incorporated herein by reference to our Form S-8, dated  October 20, 1998, as filed with the Commission on October 23,  1998).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.2             |       | Luxottica Group S.p.A. 2001 Stock Option Plan  (incorporated herein by reference to our Form S-8 (file  no. 333-14006), as filed with the Commission on October 15, 2001).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.3             |       | 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 herein 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.4             |       | Form of Parent Guarantee, dated as of  September 3, 2003, granted by Luxottica Group S.p.A. (incorporated  herein 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.5             |       | Form of Subsidiary Guarantee, dated as of  September 3, 2003, granted by Luxottica S.r.l. (incorporated herein  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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.6             |       | Amended and Restated Facilities Agreement, dated  June 3, 2004, for Luxottica Group S.p.A. and Luxottica  U.S. Holdings Corp. arranged by ABN AMRO Bank N.V., Banca  Intesa S.p.A., Banc of America Securities Limited, Citigroup Global  Markets Limited, HSBC Bank plc, Mediobanca—Banca di Credito  Finanziario S.p.A., The Royal Bank of Scotland plc, Calyon S.A.,  Succursale di Milano, Calyon New York Branch, Capitalia S.p.A. and UniCredit  Banca Mobiliare S.p.A. with UniCredito Italiano S.p.A.,  New York branch, and Unicredit Banca d’Impresa S.p.A., acting as  Agents (incorporated herein by reference to our annual report on  Form 20-F for the year ended December 31, 2005, as filed with the  Commission on June 28, 2006). |

 

 

 

92

----

 

 
| 4.7    |   | Amendment Agreement, dated March 10, 2006, for  Luxottica Group S.p.A. and Luxottica U.S. Holdings Corp. arranged  by ABN AMRO Bank N.V., Banca Intesa S.p.A., Banc of America  Securities Limited, Citigroup Global Markets Limited, HSBC Bank plc,  Mediobanca—Banca di Credito Finanziario S.p.A., The Royal Bank of  Scotland plc, Calyon S.A., Succursale di Milano, Calyon New York Branch,  Capitalia S.p.A. and UniCredit Banca Mobiliare S.p.A. with UniCredito  Italiano S.p.A., New York branch, and Unicredit Banca  d’Impresa S.p.A., acting as Agents (incorporated herein by reference to  our annual report on Form 20-F for the year ended December 31,  2005, as filed with the Commission on June 28, 2006).                                                                                                                                                       |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.8    |   | 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 herein  by reference to our report on Form 6-K, dated July 14, 2004, as  filed with the Commission on July 16, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.9    |   | Luxottica Group S.p.A. 2006 Stock Option Plan  (incorporated herein by reference to our Annual Report on Form 20-F for  the year ended December 31, 2005, as filed with the Commission on  June 28, 2006).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.10   |   | Agreement and Plan of Merger, dated as of  June 20, 2007, by and among Luxottica Group S.p.A., Norma Acquisition  Corp. and Oakley, Inc. (incorporated herein by reference to our Report  on Form 6-K, as filed with the Commission on June 25, 2007).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.11   |   | Non-Competition Agreement, dated as of June 20,  2007, by and among Luxottica Group S.p.A., Norma Acquisition Corp.,  Oakley, Inc. and Jim Jannard (incorporated herein by reference to our  Report on Form 6-K, as filed with the Commission on June 25, 2007).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.12   |   | Term Facility Agreement, dated October 12, 2007, among Luxottica  Group S.p.A. and Luxottica U.S. Holdings Corp., as borrowers, Citibank N.A.,  New York / Citibank N.A., Milan Branch, Intesa Sanpaolo S.p.A., Bayerische  Hypo- und Vereinsbank AG, Milan Branch (part of UniCredit Markets and  Investment Banking) / Bayerische Hypo- und Vereinsbank AG, New York Branch  (part of UniCredit Markets and Investment Banking) and The Royal Bank of  Scotland plc, as Underwriters, Citigroup Global Markets Limited, Intesa  Sanpaolo S.p.A., Bayerische Hypo- und Vereinsbank AG, Milan Branch (part of  UniCredit Markets and Investment Banking) and The Royal Bank of Scotland plc,  as Bookrunners, and Bayerische Hypo- und Vereinsbank AG, New York Branch  (part of UniCredit Markets and Investment Banking), as Agent (incorporated  herein by reference to our Report on Form 6-K, as filed with the  Commission on November 8, 2007). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.13   |   | Bridge Facility Agreement, dated October 12,  2007, among Luxottica U.S. Holdings Corp. as borrower, Banc of America  Securities Limited and Bayerische Hypo- und Vereinsbank AG, Milan Branch  (part of UniCredit Markets and Investment Banking) as Arrangers, Bank of  America, N.A. and Bayerische Hypo- und Vereinsbank AG, New York Branch (part  of UniCredit Markets and Investment Banking), as Underwriters and Lenders and  Banc of America Securities Limited, as Agent (incorporated herein by  reference to our Report on Form 6-K, as filed with the Commission on  November 8, 2007).                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.14   |   | Amendment and Transfer Agreement, dated  April 29, 2008, among Luxottica U.S. Holdings Corp., as borrower,  Luxottica Group S.p.A., as the company, Luxottica Group S.p.A. and Luxottica  S.r.l., as original guarantors, Banc of  America Securities Limited and Bayerische Hypo- und Vereinsbank AG, Milan  Branch (part of UniCredit Markets and Investment Banking), as exclusive  bookrunners and arrangers, Bank of America, N.A. and Bayerische Hypo- und  Vereinsbank AG, New York Branch (part of UniCredit Markets and Investment  Banking), as underwriters, Bank of America N.A. and Unicredito Italiano  S.p.A. – New York Branch, as new underwriters, the Existing Lenders and the  New Lenders and Banc of America Securities Limited, as agent (filed  herewith).                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.15   |   | Luxottica Group S.p.A. 2008 Performance Shares Plan  (Unofficial English translation filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.16   |   | Revolving Credit  Facility Agreement, dated May 29, 2008, by and among Luxottica Group  S.p.A, as borrower, Luxottica U.S. Holdings Corp., as guarantor, Intesa  Sanpaolo S.p.A., as agent, and Intesa Sanpaolo S.p.A., Banca Popolare di  Vicenza S.c.p.A. and Banca Antonveneta S.p.A., as lenders (English language  summary filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 8.1    |   | List of Subsidiaries (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 12.1   |   | Certificate of Principal Executive Officer Pursuant  to §302 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

 

 

 

93

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| 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).                                                       |

 

 

 

94

----

 

 

**SIGNATURES**

 

The registrant hereby certifies that it meets all of the requirementsfor filing on Form 20-F and that it has duly caused and authorized theundersigned 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 26, 2008

 

 

 

95

----

 

 

**EXHIBIT INDEX**

 
| Exhibit  Number | ** ** | **Exhibits**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.1             |       | Articles of Association of Luxottica  Group S.p.A. (incorporated herein by reference to Amendment No. 3  to Form F-1 (file No. 33-32039) filed with the Commission on  January 23, 1990).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 1.2             |       | Amended and Restated By-Laws of Luxottica Group  S.p.A. (Unofficial English translation filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 2.1             |       | Amended and Restated Deposit Agreement, dated as of  March 10, 2006, among Luxottica Group S.p.A., Deutsche Bank Trust  Company Americas, as Depositary, and all owners and holders form time to time  of American Depositary Receipts issued thereunder (incorporated herein by  reference to our Registration Statement on Form F-6, as filed with the  Commission on March 29, 2006.)                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 2.2             |       | Subscription Agreement, dated June 18, 1999,  from Luxottica Luxembourg S.A. and Luxottica Group S.p.A., as  guarantor of the Notes, to Credit Suisse First Boston (Europe) Limited and  UniCredito Italiano S.p.A., as joint lead managers and Banca Commerciale  Italiana, Banca d’Intermediazione Mobiliare IMI, Bayerische Hypo-und  Vereinsbank AG, Caboto Holding SIM S.p.A., Merrill Lynch  International and Paribas, as managers (incorporated herein 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 herein by reference to our Report on Form 6-K dated  November 19, 1999, as filed with the Commission on November 23,  1999).                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.1             |       | Luxottica Group S.p.A. 1998 Stock Option Plan  (incorporated herein by reference to our Form S-8, dated  October 20, 1998, as filed with the Commission on October 23,  1998).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.2             |       | Luxottica Group S.p.A. 2001 Stock Option Plan  (incorporated herein by reference to our Form S-8 (file  no. 333-14006), as filed with the Commission on October 15, 2001).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.3             |       | 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 herein 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.4             |       | Form of Parent Guarantee, dated as of  September 3, 2003, granted by Luxottica Group S.p.A. (incorporated  herein 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.5             |       | Form of Subsidiary Guarantee, dated as of  September 3, 2003, granted by Luxottica S.r.l. (incorporated herein  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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.6             |       | Amended and Restated Facilities Agreement, dated  June 3, 2004, for Luxottica Group S.p.A. and Luxottica  U.S. Holdings Corp. arranged by ABN AMRO Bank N.V., Banca  Intesa S.p.A., Banc of America Securities Limited, Citigroup Global  Markets Limited, HSBC Bank plc, Mediobanca—Banca di Credito  Finanziario S.p.A., The Royal Bank of Scotland plc, Calyon S.A.,  Succursale di Milano, Calyon New York Branch, Capitalia S.p.A. and UniCredit  Banca Mobiliare S.p.A. with UniCredito Italiano S.p.A.,  New York branch, and Unicredit Banca D’Impresa S.p.A., acting as  Agents (incorporated herein by reference to our annual report on  Form 20-F for the year ended December 31, 2005, as filed with the  Commission on June 28, 2006). |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.7             |       | Amendment Agreement, dated March 10, 2006, for  Luxottica Group S.p.A. and Luxottica U.S. Holdings Corp. arranged  by ABN AMRO Bank N.V., Banca Intesa S.p.A., Banc of America  Securities Limited, Citigroup Global Markets Limited, HSBC Bank plc,  Mediobanca—Banca di Credito Finanziario S.p.A., The Royal Bank of  Scotland plc, Calyon S.A., Succursale di Milano, Calyon New York Branch,  Capitalia S.p.A. and UniCredit Banca Mobiliare S.p.A. with UniCredito  Italiano S.p.A., New York branch, and Unicredit Banca D’Impresa S.p.A.,  acting as Agents (incorporated herein by reference to our annual report on  Form 20-F for the year ended December 31, 2005, as filed with the  Commission on June 28, 2006).                      |

 

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| 4.8    |   | 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 herein by reference to our report on Form 6-K, dated  July 14, 2004, as filed with the Commission on July 16, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4. 9   |   | Luxottica Group S.p.A. 2006 Stock Option Plan  (incorporated herein by reference to our annual report on Form 20-F for  the year ended December 31, 2005, as filed with the Commission on  June 28, 2006).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.10   |   | Agreement and Plan of Merger, dated as of  June 20, 2007, by and among Luxottica Group S.p.A., Norma Acquisition  Corp. and Oakley, Inc. (incorporated herein by reference to our Report  on Form 6-K, as filed with the Commission on June 25, 2007).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.11   |   | Non-Competition Agreement, dated as of June 20,  2007, by and among Luxottica Group S.p.A., Norma Acquisition Corp.,  Oakley, Inc. and Jim Jannard (incorporated herein by reference to our  Report on Form 6-K, as filed with the Commission on June 25, 2007).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.12   |   | Term Facility Agreement, dated October 12,  2007, among Luxottica Group S.p.A. and Luxottica U.S. Holdings Corp., as  borrowers, Citibank N.A., New York / Citibank N.A., Milan Branch, Intesa  Sanpaolo S.p.A., Bayerische Hypo- und Vereinsbank AG, Milan Branch (part of  UniCredit Markets and Investment Banking) / Bayerische Hypo- und Vereinsbank  AG, New York Branch (part of UniCredit Markets and Investment Banking) and  The Royal Bank of Scotland plc, as Underwriters, Citigroup Global Markets  Limited, Intesa Sanpaolo S.p.A., Bayerische Hypo- und Vereinsbank AG, Milan  Branch (part of UniCredit Markets and Investment Banking) and The Royal Bank  of Scotland plc, as Bookrunners, and Bayerische Hypo- und Vereinsbank AG, New  York Branch (part of UniCredit Markets and Investment Banking), as Agent  (incorporated herein by reference to our Report on Form 6-K, as filed  with the Commission on November 8, 2007). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.13   |   | Bridge Facility Agreement, dated October 12,  2007, among Luxottica U.S. Holdings Corp. as borrower, Banc of America  Securities Limited and Bayerische Hypo- und Vereinsbank AG, Milan Branch  (part of UniCredit Markets and Investment Banking) as Arrangers, Bank of  America, N.A. and Bayerische Hypo- und Vereinsbank AG, New York Branch (part  of UniCredit Markets and Investment Banking), as Underwriters and Lenders and  Banc of America Securities Limited, as Agent (incorporated herein by  reference to our Report on Form 6-K, as filed with the Commission on  November 8, 2007).                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.14   |   | Amendment and Transfer Agreement, dated  April 29, 2008, among Luxottica U.S. Holdings Corp., as borrower,  Luxottica Group S.p.A., as the company, Luxottica Group S.p.A. and Luxottica  S.r.l., as original guarantors, Banc of  America Securities Limited and Bayerische Hypo- und Vereinsbank AG, Milan  Branch (part of UniCredit Markets and Investment Banking), as exclusive  bookrunners and arrangers, Bank of America, N.A. and Bayerische Hypo- und  Vereinsbank AG, New York Branch (part of UniCredit Markets and Investment  Banking), as underwriters, Bank of America N.A. and Unicredito Italiano  S.p.A. – New York Branch, as new underwriters, the Existing Lenders and the  New Lenders and Banc of America Securities Limited, as agent (filed  herewith).                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.15   |   | Luxottica Group S.p.A. 2008 Performance Shares Plan  (Unofficial English translation filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.16   |   | Revolving Credit  Facility Agreement, dated May 29, 2008, by and among Luxottica Group  S.p.A, as borrower, Luxottica U.S. Holdings Corp., as guarantor, Intesa  Sanpaolo S.p.A., as agent, and Intesa Sanpaolo S.p.A., Banca Popolare di  Vicenza S.c.p.A. and Banca Antonveneta S.p.A., as lenders (English language  summary filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 8.1    |   | List of Subsidiaries (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 12.1   |   | Certificate of Principal Executive Officer Pursuant  to §302 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 12.2   |   | Certificate of Principal Financial Officer Pursuant  to §302 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 13.1   |   | Certificate of Principal Executive Officer Pursuant  to §906 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 13.2   |   | Certificate of Principal Financial Officer Pursuant  to §906 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 15.1   |   | Consent of Deloitte & Touche S.p.A.  (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

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