**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

**FORM 20-F**
| **(Mark One)**                                        | ** ** | ** **                                                                                                         |
|-------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|
| **o**                                                 | ** ** | **REGISTRATION STATEMENT PURSUANT TO  SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                            | ** ** | ** **                                                                                                         |
| **OR**                                                |
| ** **                                            | ** ** | ** **                                                                                                         |
| **x**                                                 | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                |
| ** **                                            | ** ** | ** **                                                                                                         |
| **For the  fiscal year ended December 31, 2006** |
| ** **                                            | ** ** | ** **                                                                                                         |
| **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**                   |

 

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

Securities registered or to be registered pursuant toSection 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.**

Indicate the number ofoutstanding shares of each of the issuer’s classes of capital or common stockas of the close of the period covered by the annual report.
| **ORDINARY SHARES, PAR VALUE EURO 0.06 PER SHARE** | **460,216,248** |
|----------------------------------------------------|-----------------|

Indicateby check mark if the Registrant is a well-known seasoned issuer, as defined inRule 405 of 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 financial statement item the registrant has elected tofollow.

Item17 o   Item18 x

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

 

 

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**FORWARD-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 risk that themerger with Oakley will not be completed, 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 recently acquired businesses, aswell as other political, economic and technological factors and other risks anduncertainties described in our filings with the U.S. Securities and ExchangeCommission (the “SEC”). These forward-looking statements are made as of thedate hereof, and we do not assume any obligation to update them.

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

**TRADEMARKS**

Our housebrands 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.

 

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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 December31, 2004, 2005 and 2006, and the selected consolidated balance sheet data as ofDecember 31, 2005 and 2006, are derived from the audited Consolidated FinancialStatements included in Item 18. The selected consolidated income statement datafor the years ended December 31, 2002 and 2003, and the selected consolidatedbalance sheet data as of December 31, 2002, 2003 and 2004, are derived fromaudited consolidated financial statements which are not included in this Form20-F.

[TABLES APPEAR ON THE FOLLOWING PAGE]

 

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| ** **                                                      | ** ** | **Year Ended December 31,**   | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                      | ** ** | **2002**                                     | ** ** | **2003(6)** | ** ** | **2004(7)(8)** | ** ** | **2005(6)(8)** | ** ** | **2006** | ** ** | **2006** | ** ** |
| ** **                                                      | ** ** | **(In thousands of Euro)(3)** | ** ** | **(In thousands  of U.S.$)  (1)(3)** | ** ** |
| **STATEMENT OF INCOME DATA:**                                   |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Net Sales                                                       |       | 3,201,788                                    |       | 2,852,194 |   | 3,179,613 |   | 4,134,263 |   | 4,676,156 |   | 6,171,123 |   |
| Cost of Sales                                                   |       | (946,134                                     | )          | (903,617 | ) | (1,018,633 | ) | (1,316,664 | ) | (1,426,000 | ) | (1,881,892 | ) |
| Gross Profit                                                    |       | 2,255,654                                    |       | 1,948,577 |   | 2,160,980 |   | 2,817,598 |   | 3,250,156 |   | 4,289,230 |   |
| OPERATING EXPENSE                                               |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Selling and Advertising                                         |       | (1,360,339                                   | )          | (1,235,757 | ) | (1,342,982 | ) | (1,774,241 | ) | (1,967,034 | ) | (2,595,895 | ) |
| General and  Administrative                                     |       | (293,806                                     | )          | (281,033 | ) | (338,499 | ) | (461,957 | ) | (527,135 | ) | (695,660 | ) |
| Total                                                           |       | (1,654,146                                   | )          | (1,516,790 | ) | (1,681,481 | ) | (2,236,198 | ) | (2,494,169 | ) | (3,291,555 | ) |
| Income from Operations                                          |       | 601,508                                      |       | 431,787 |   | 479,499 |   | 581,401 |   | 755,987 |   | 997,676 |   |
| OTHER INCOME (EXPENSE)                                          |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Interest Income                                                 |       | 5,036                                        |       | 5,922 |   | 6,662 |   | 5,650 |   | 9,804 |   | 12,938 |   |
| Interest Expense                                                |       | (65,935                                      | )          | (47,117 | ) | (55,378 | ) | (66,171 | ) | (70,622 | ) | (93,200 | ) |
| Other—Net                                                  |       | (1,167                                       | )          | (799 | ) | 13,792 |   | 18,429 |   | (16,992 | ) | (22,424 | ) |
| Other Income  (Expenses)—Net                               |       | (62,066                                      | )          | (41,994 | ) | (34,924 | ) | (42,092 | ) | (77,810 | ) | (102,686 | ) |
| Income Before Provision  for Income Taxes                       |       | 539,442                                      |       | 389,793 |   | 444,575 |   | 539,309 |   | 678,177 |   | 894,990 |   |
| Provision for Income Taxes                                      |       | (162,696                                     | )          | (117,328 | ) | (156,852 | ) | (199,266 | ) | (238,757 | ) | (315,088 | ) |
| Income Before Minority  Interests in Consolidated Subsidiaries  |       | 376,746                                      |       | 272,465 |   | 287,723 |   | 340,043 |   | 439,420 |   | 579,902 |   |
| Minority Interests in  Income of Consolidated Subsidiaries      |       | (4,669                                       | )          | (5,122 | ) | (8,614 | ) | (9,253 | ) | (8,715 | ) | (11,501 | ) |
| Net Income from  Continuing Operations                          |       | 372,077                                      |       | 267,343 |   | 279,109 |   | 330,790 |   | 430,705 |   | 568,401 |   |
| Discontinued  Operations—Net of Taxes and Gain on Sale (8) |       | 0                                            |       | 0 |   | 7,765 |   | 11,504 |   | (6,419 | ) | (8,471 | ) |
|                                                            |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Net Income                                                      |       | 372,077                                      |       | 267,343 |   | 286,874 |   | 342,294 |   | 424,286 |   | 559,930 |   |
| Weighted Average Shares  Outstanding (thousands)                |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| —Basic                                                     |       | 453,174.0                                    |       | 448,664.4 |   | 448,275.0 |   | 450,179.1 |   | 452,898.0 |   | 452,898.0 |   |
| —Diluted                                                   |       | 455,353.5                                    |       | 450,202.1 |   | 450,360.9 |   | 453,303.4 |   | 456,186.0 |   | 456,186.0 |   |
| Basic Earnings per  Share from Continuing Operations (2)        |       | 0.82                                         |       | 0.60 |   | 0.62 |   | 0.73 |   | 0.95 |   | 1.25 |   |
| Basic Earnings per  Share from Discontinued Operations (2)(8)   |       | 0.00                                         |       | 0.00 |   | 0.02 |   | 0.03 |   | (0.01 | ) | (0.01 | ) |
| Basic Earnings per  Share (2)                                   |       | 0.82                                         |       | 0.60 |   | 0.64 |   | 0.76 |   | 0.94 |   | 1.24 |   |
| Diluted Earnings per  Share from Continuing Operations (2)      |       | 0.82                                         |       | 0.59 |   | 0.62 |   | 0.73 |   | 0.94 |   | 1.24 |   |
| Diluted Earnings per  Share from Discontinued Operations (2)(8) |       | 0.00                                         |       | 0.00 |   | 0.02 |   | 0.03 |   | (0.01 | ) | (0.01 | ) |
| Diluted Earnings per  Share (2)                                 |       | 0.82                                         |       | 0.59 |   | 0.64 |   | 0.76 |   | 0.93 |   | 1.23 |   |
| Cash Dividends Declared per Share (4)(5)                   |       | 0.17                                         |       | 0.21 |   | 0.21 |   | 0.23 |   | 0.29 |   | 0.38 |   |

 

5

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(1)             Translatedfor convenience at the rate of Euro 1.00 = U.S.$1.3197, based on the NoonBuying Rate of Euro to U.S. dollar on December 31, 2006. See “—ExchangeRate Information” below for more information regarding the Noon Buying Rate.

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

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

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

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

(6)             Weacquired 82.57 percent of the outstanding shares of OPSM Group Limited (“OPSM”)in August 2003. As such, the results for 2003 include approximately fivemonths of operating results of OPSM and its subsidiaries. In March 2005,we acquired the remaining 17.43 percent of the outstanding shares of OPSM and,from that date, 100 percent of the operating results of OPSM and itssubsidiaries are included above.

(7)             Weacquired all of the outstanding shares of Cole National Corporation (“Cole”) inOctober 2004. Therefore, 2004 includes approximately three months ofoperating results of Cole.

(8)             Certainamounts in prior years have been reclassified to conform to the 2006presentation. The 2006 presentation includes the reclassification of theoperations of the Things Remembered, Inc. (“Things Remembered”) specialty giftbusiness, which was acquired as part of the Cole acquisition in 2004 and wassold to a private equity consortium in September 2006. The TR operations havebeen reclassified as discontinued operations for all periods presented.
| ** **                                                           | ** ** | **As of December 31,**                                      | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2002**                                                                   | ** ** | **2003** | ** ** | **2004 (3)** | ** ** | **2005 (3)** | ** ** | **2006 (3)** | ** ** | **2006 (3)** | ** ** |
| ** **                                                           | ** ** | **(In thousands of Euro except share data)** | ** ** | **(In thousands  of U.S.$)(1)** | ** ** |
| **BALANCE  SHEET DATA:**                                             |       |                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| Working  Capital(2)                                                  |       | 141,390                                                                    |       | (56,185 | ) | 218,807 |   | 368,863 |   | 59,539 |   | 78,574 |   |
| Total Assets                                                         |       | 3,586,332                                                                  |       | 3,912,676 |   | 4,556,058 |   | 4,973,522 |   | 4,915,025 |   | 6,486,359 |   |
| Total Debt(4)                                                        |       | 1,033,989                                                                  |       | 1,253,427 |   | 1,680,452 |   | 1,528,909 |   | 1,319,262 |   | 1,741,030 |   |
| Shareholders’  Equity                                           |       | 1,417,895                                                                  |       | 1,374,534 |   | 1,495,607 |   | 1,954,033 |   | 2,215,849 |   | 2,924,256 |   |
| Capital Stock                                                        |       | 27,256                                                                     |       | 27,269 |   | 27,312 |   | 27,479 |   | 27,613 |   | 36,441 |   |
| Number of Shares  Adjusted to Reflect Changes in Capital (thousands) |       | 454,263.6                                                                  |       | 454,477.0 |   | 455,205.5 |   | 457,975.7 |   | 460,216.2 |   |   |   |

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(1)             Translatedfor convenience at the rate of Euro 1.00 = U.S.$1.3197, based on the NoonBuying Rate of Euro to U.S. dollar on December 31, 2006. See “—ExchangeRate Information” below for more information regarding the Noon Buying Rate.

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

(3)             Certainamounts in prior years have been reclassified to conform to the 2006presentation. The 2006 presentation includes the reclassification of theoperations of the Things Remembered specialty gift business which was acquiredas part of the Cole acquisition in 2004 and was sold to a private equityconsortium in September 2006. The Things Remembered assets and liabilities havebeen reclassified as assets and liabilities held for sale for all periodspresented.

(4)             Thecurrent portion of long-term debt was Euro 178.3 million, Euro 390.9million,  Euro 405.1 million, Euro111.0 million and Euro 359.5 million for the years ended December 31, 2002,2003, 2004, 2005 and 2006, respectively.

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**Dividends**

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

At ourannual ordinary meeting of shareholders held on May 15, 2007, our shareholdersapproved the distribution of a cash dividend in the amount of Euro 0.42 perordinary share. Our Board of Directors proposed, and the shareholders approved,the date of May 24, 2007 as the date for the payment of such dividend to allholders of record of our ordinary shares on May 18, 2007, including DeutscheBank Trust Company Americas, as depositary on behalf of holders of our AmericanDepositary Shares, or ADSs. Each ADS represents the right to receive oneordinary share and is evidenced by an American Depositary Receipt, or ADR. TheADSs were traded ex-dividend on May 21, 2007, and dividends in respect of theordinary shares represented by ADSs were paid to Deutsche Bank Trust CompanyAmericas on May 24, 2007. Deutsche Bank Trust Company Americas converted theEuro amount of such dividend payment into U.S. dollars on May 24, 2007. Thedividend amount for each ADS holder was paid commencing on June 1, 2007 to allsuch holders of record on May 23, 2007. Future determinations as to dividendswill depend upon, among other things, our earnings, financial position andcapital requirements, applicable legal restrictions and such other factors asthe Board of Directors and our shareholders 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.$)**                                                          | ** ** |
| 2002       |       | 0.170                                                          |       | 0.165                                                                |       |
| 2003       |       | 0.210                                                          |       | 0.242                                                                |       |
| 2004       |       | 0.210                                                          |       | 0.254                                                                |       |
| 2005       |       | 0.230                                                          |       | 0.276                                                                |       |
| 2006       |       | 0.290                                                          |       | 0.363                                                                |       |
| 2007       |       | 0.420                                                          | (5)        | 0.564                                                                |       |

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

(2)             EachADS represents one ordinary share.

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

(4)             Translatedat the Noon Buying Rate on the payment date to holders of ADSs. See “—ExchangeRate Information” below for more information regarding the Noon Buying Rate.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 2006 fiscal year to U.S.$0.564 per ADS on May 24, 2007.

(5)             Thedividend of Euro 0.42 per ordinary share was approved by our Board of Directorson March 5, 2007 and was voted upon and approved by our shareholders at theannual ordinary meeting of shareholders held on May 15, 2007.

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**ExchangeRate Information**

Thefollowing tables set forth, for each of the periods indicated, certaininformation regarding the Noon Buying Rate in New York City for cable transfersin foreign currencies as certified for customs purposes by the Federal ReserveBank of New York, which we refer to as the Noon Buying Rate, expressed in U.S.$per Euro 1.00:
| **Period**                         | ** ** | **High** | ** ** | **Low** | ** ** | **Average(1)** | ** ** | **End of Period** | ** ** |
|------------------------------------|------------|----------|------------|---------|------------|----------------|------------|-----------------------------|------------|
| Year Ended  December 31, 2002 |       | 0.8594   |       | 1.0485  |       | 0.9495         |       | 1.0485                      |       |
| 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                      |       |

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(1)             The average of the Noon Buying Rates in effect on the lastbusiness day of each month during the period. When the Company consolidates itsprofit and loss statement, it translates U.S. dollar denominated amounts intoEuro using an average U.S. dollar/Euro exchange rate of each business dayduring the applicable period.
| **Month**          | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------------|------------|----------|------------|---------|------------|
| December 2006 |       | 1.3073   |       | 1.3327  |       |
| January 2007  |       | 1.2904   |       | 1.3286  |       |
| February 2007 |       | 1.2933   |       | 1.3246  |       |
| March 2007    |       | 1.3094   |       | 1.3374  |       |
| April 2007    |       | 1.3363   |       | 1.3660  |       |
| May 2007      |       | 1.3416   |       | 1.3616  |       |

 

OnJune 26, 2007, the Noon Buying Rate was U.S.$ 1.3468 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.

8

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**RiskFactors**

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

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

Aspart of our growth strategy, we have made, and may continue to make, strategicbusiness acquisitions to expand or complement our business. For example, weannounced on June 20, 2007 that we entered into a merger agreement for theacquisition of Oakley, Inc (“Oakley”). Our acquisition activities, however, canbe disrupted by overtures from competitors for the targeted candidates,governmental regulation and rapid developments in our industry. We may faceadditional risks and uncertainties following an acquisition, including:(i) difficulty in integrating the newly-acquired business and operationsin an efficient and effective manner; (ii) inability to achieve strategicobjectives, cost savings and other benefits from the acquisition;(iii) the lack of success by the acquired business in its markets;(iv) the loss of key employees of the acquired business; (v) thediversion of the attention of senior management from our operations; and(vi) liabilities that were not known at the time of acquisition or theneed to address tax or accounting issues. If we fail to timely recognize or address these matters orto devote adequate resources to them, we may fail to achieve our growthstrategy or otherwise not realize the intended benefits of any acquisition.

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

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

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

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

Theeyewear industry is also subject to rapidly changing consumer preferences andfuture sales may suffer if the fashion eyewear industry does not continue togrow or if consumer preferences shift away from our products. Changes infashion could also affect the popularity and, therefore, the value of thefashion 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 excess

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inventory andunderutilized manufacturing capacity. In addition, our success depends, inlarge part, on our ability to anticipate and react to changing fashion trendsin a timely manner. Any sustained failure to identify and respond to suchtrends would adversely affect our business, results of operations and financialcondition and may result in the write down of excess inventory and idlemanufacturing facilities.

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

Inorder to achieve and manage our growth effectively, we 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 we donot continue to negotiate and maintain favorable license arrangements, oursales or cost of sales will suffer.*

We have enteredinto license agreements that enable us to manufacture and distributeprescription frames and sunglasses under certain designer names, including *Chanel, Prada, Miu Miu, Dolce & Gabbana, D&G, Versace,Versus, Bvlgari, Salvatore Ferragamo, Donna Karan, DKNY, Brooks Brothers, AnneKlein,**Burberry*, *Polo RalphLauren* and, most recently, *Tiffany & Co.*Theselicense agreements typically have terms of between three and ten years and maycontain options for renewal for additional periods and require us to makeguaranteed and contingent royalty payments to the licensor. See Item 4—“Informationon the Company—Business Overview—Recent Developments” regarding our new licenseagreement for the  Tiffany & Co.name. We believe that our ability to maintain and negotiate favorable licenseagreements with leading designers in the fashion and luxury goods industries isessential to the branding of our products and, therefore, material to thesuccess of our business. For the years ended December 31, 2006 and 2005, thesales realized through the Prada and Miu Miu trade names together representedapproximately 5.5 percent and 4.4 percent of total sales, respectively.Accordingly, if we are unable to negotiate and maintain satisfactory licensearrangements with leading designers, our growth prospects and financial resultscould suffer from a reduction in sales or an increase in advertising costs androyalty payments to designers.

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

Ourbusiness could be negatively impacted by the availability and acceptance ofvision correction alternatives to prescription eyeglasses, such as contactlenses and refractive optical surgery. According to industry estimates, 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.

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

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

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

Wecurrently operate worldwide and 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;

•                    currency exchange rate fluctuations and currencycontrols;

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

•                    investment restrictions or requirements; and

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

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

*If we areunable to protect our proprietary rights, our sales might suffer, and we mayincur 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 applications may notgenerate registered trademarks, and any trademark registration that is grantedmay be ineffective in preventing competition and could be held invalid ifsubsequently challenged. In addition, the actions we take to protect ourproprietary rights may be inadequate to prevent imitation of our products andservices. Our proprietary information could become known to competitors, and wemay not be able to meaningfully protect our rights to proprietary information.Furthermore, other companies may independently develop substantially equivalentor better products or services that do not infringe on our intellectualproperty rights or could assert rights in, and ownership of, our proprietary rights.Moreover, the laws of certain countries do not protect proprietary rights tothe same extent as the laws of the United States.

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

*If we areunable to maintain our current operating relationship with Cole Licensed Brandshost stores, we could suffer loss of sales and possible impairment of certainintangible 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 withSears were to end, we would suffer a loss of sales and the possible impairmentof certain intangible assets. This could have a material adverse effect on ourbusiness, results of operations, 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.*

We arecurrently a party to certain legal proceedings as described in Item 8—“FinancialInformation—Legal Proceedings.” In addition, in the ordinary course of ourbusiness, we become involved in various other claims, lawsuits, investigationsand governmental and administrative proceedings, some of which are significant.Adverse judgments or 

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determinations in one ormore of these proceedings could require us to change the way we do business oruse substantial resources in adhering to the settlements and could have amaterial adverse effect on our business including, among other consequences bysignificantly increasing our costs 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.*

Our operations aresubject to regulation by governmental authorities in the United States andother jurisdictions in which we conduct business. Governmental regulations,both in the United States and other jurisdictions, have historically beensubject to change. New or revised requirements imposed by governmentalregulatory authorities could have an adverse effect on us, including increasedcosts of compliance. We may also be adversely affected by changes in theinterpretation or enforcement of existing laws and regulations by governmentalauthorities that could affect sales or the way we currently manufacture ordistribute our products. See Item 4—“Information on the Company—RegulatoryMatters” and Item 8—“Financial Information—Legal Proceedings.”

*Adverse weather conditions couldaffect consumer spending which could adversely impact our future sales andfinancial results.*

Weather conditions aroundthe world can affect consumer spending and could have a significant impact onour sales. Our sunglass sales are particularly vulnerable to weatherconditions.  Unusually bad weather duringthe spring and summer months in one or more of our markets could adverselyaffect 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 implementation of procedures designed tocomply with Section 404 of the Sarbanes-Oxley Act of 2002 causes us to identifymaterial weaknesses in our internal control over financial reporting, thetrading price of our securities may be adversely impacted.***

Commencingwith this annual report, we have included a report from our management relatingto its evaluation of our internal control over financial reporting as requiredunder Section 404 of the U.S. Sarbanes-Oxley Act of 2002. There are inherentlimitations on the effectiveness of internal controls, including collusion,management override and failure of human judgment.  In addition, control procedures are designedto reduce rather than eliminate business risks. As a consequence of the systems and procedures we have implemented tocomply with these requirements, we may uncover circumstances that we determine,with guidance 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 area world leader in the design, manufacture and distribution of prescriptionframes and sunglasses in the mid- and premium-price categories, based on sales.We operate in two industry segments: (i) manufacturing and wholesaledistribution and (ii) retail distribution. See Item 18 —“FinancialStatements” for additional disclosures about our operating segments. Throughour manufacturing and wholesale distribution segment, we are engaged in thedesign, manufacture, wholesale distribution and marketing of house and designerlines of mid- to premium-priced prescription frames and sunglasses. We operateour retail segment principally through LensCrafters, Sunglass Hut, OPSM andCole.

Ourmanufacturing activities are carried out through six production facilities inItaly and two manufacturing facilities in China. In 2006, we manufacturedapproximately 37 million prescription frames and sunglasses.

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Weoperate our distribution activities through an extensive worldwide wholesaleand retail distribution network based primarily in North America, Australiaand, with the acquisitions in 2006, in mainland China and in Hong Kong. In2006, through our wholesale and retail networks, we distributed approximately18.6 million prescription frames and approximately 24.8 millionsunglasses in approximately 5,100 models. Our products are distributed inapproximately 130 countries worldwide.

Ourproducts are marketed under a variety of well-known brand names. Our housebrands include *Ray-Ban, Revo, Arnette, Killer Loop, Persol,Vogue, Luxottica* and *Sferoflex*. Ourdesigner lines include *Prada,**Chanel, Miu Miu, Dolce & Gabbana, D&G, Versace, Versus, Bvlgari,  Salvatore Ferragamo, Donna Karan, DKNY,Brooks Brothers,  Anne Klein, Burberry*,*Polo Ralph Lauren*and*Puma*(distribution license only). In early 2008, we will launch the first collection of *Tiffany & Co.*eyewear. The distribution of the Tiffany collections will start with Tiffany’sown stores as well as through certain of our other distribution channels inNorth America, Japan, Hong Kong, South Korea, key Middle East markets andMexico and will extend over time to additional markets and through newdistribution channels.

Ourwholesale network is comprised of 32 wholly or majority owned subsidiariesoperating in principal markets, over 1,700 sales representatives andapproximately 100 independent distributors. Our primary wholesale customersinclude retailers of mid- and premium-priced eyewear such as independentopticians, optical and sunglass chains, optical superstores, sunglass specialtystores and duty-free shops. In certain countries, and especially in NorthAmerica, wholesale customers also include optometrists and ophthalmologists,health maintenance organizations, or HMOs, and department stores.

Ourretail network is mainly comprised of our subsidiaries: in North America,LensCrafters, Inc. (“LensCrafters”), Sunglass Hut International, Inc.and its subsidiaries (“Sunglass Hut”) and Cole, which operates Pearle Visionand our Licensed Brands (“Sears Optical,” “Target Optical” and “BJ’s Optical”);and in Australia, New Zealand and Asia, OPSM Group Limited (“OPSM”).  Our North American retail business is thelargest optical retail business in North America based on total sales. Ourretail network in Asia expanded in 2006 with three acquisitions that includedan aggregate of  274 retail locationslocated in Beijing, Guangdong and Shanghai, China. In 2007, we continued tostrengthen our North American retail business with the acquisition of certainassets of D.O.C Optics, which operates approximately 100 stores locatedprimarily in the midwest United States. In addition, we expanded our globalretail business by acquiring two prominent specialty sun chains in South Africawith a total of approximately 65 retail locations.

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

**CompanyHistory**

In1961, Leonardo Del Vecchio and others established our original operations inAgordo, near Belluno, in northeastern Italy. Since that time, we have 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 1960’s, we manufactured molds, metal-cuttingmachinery, frame parts and semi-finished products for the optical market. Wethen progressively expanded our production capabilities to enable us to producea 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.

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

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

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

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InJune 1999, we acquired the Global Eyewear Division of Bausch &Lomb Incorporated, which we refer to as our Ray-Ban business. The Ray-Banacquisition significantly increased our presence in the sunglasses market,strengthened our house brand portfolio and provided us with sunglass crystallens manufacturing technology, manufacturing facilities 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 Italian StockExchange.

InApril 2001, we continued to strengthen our sunglasses business byacquiring Sunglass Hut, a leading retailer of sunglasses worldwide based onsales. In May 2001, we acquired all of the issued and outstanding commonstock of First American Health Concepts, Inc., which at that time was aleading provider of managed vision care plans in the United States based onsales. In August 2003, we acquired 82.57 percent of the outstandingshares of OPSM (we acquired the remaining 17.43 percent interest inMarch 2005), resulting in our leadership position in the prescriptionbusiness based on sales in the Australian and New Zealand markets, while at thesame time presenting us with new growth opportunities in the Asia-Pacificmarkets. In October 2004, we strengthened and expanded our North Americanretail and managed vision care business with the acquisition of Cole. In 2006,we expanded our retail presence in China by acquiring three premium retailchains, Beijing Xueliang Optical Technology Co. Ltd. Ming Long Optical, andModern Sight Optics to become a leading operator of premium optical stores inChina based on the number of stores, with a total of 274 locations in three ofthe top premium optical markets in mainland China, as well as Hong Kong, an importantmarket in Asia for luxury goods.

Ourcapital expenditures for our continuing operations were Euro 272.2 millionfor the year ended December 31, 2006 and Euro 53.5 million for thethree-month period ended March 31, 2007. We expect 2007 aggregate capitalexpenditures to be approximately Euro 300.0 million, in addition toinvestment for any acquisitions. We will fund these future capital expenditureswith our current available borrowing capacity and available cash. For adescription of capital expenditures for the previous three years, see Item 5—“Operatingand Financial Review and Prospects—Liquidity and Financial Resources—Our CashFlows—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.Our agent for service for limited purposes in the United States is CTCorporation, 111 Eighth Avenue, New York, New York 10011, telephone number(212) 894-8940. We are domiciled in Milan, Italy.

**BusinessOverview**

***RecentDevelopments***

*Acquisitions*

OnJune 20, 2007, weannounced that we entered into a definitive merger agreement with Oakley, aworldwide specialist in sport performance optics with brands including Dragon,Eye Safety Systems, Fox Racing, Mosley Tribes, Oliver Peoples and Paul SmithSpectacles, and retail chains including Bright Eyes, Oakley Stores, SunglassIcon and The Optical Shop of Aspen. As part of the merger, we will acquire allof the outstanding shares of Oakley for a cash purchase price of U.S.$29.30 pershare, together with the purchase of all outstanding options and other equityrights at the same price per share less the exercise price. The total purchaseprice will be approximately U.S.$2.1 billion (approximately Euro 1.6 billion).The transaction is expected to close in the second half of 2007 and is subjectto certain conditions, including regulatory approvals.

In February 2007,we completed 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 expect to rebrand theacquired stores as “LensCrafters” and “Pearle Vision.”

Duringthe second quarter of 2007, we  completedthe acquisitions of two prominent specialty sun chains in South Africa, with atotal of 65 stores, for approximately Euro 10 million. The two acquisitionsrepresent an important step in the expansion of our sun retail presenceworldwide.

*Ray BanIndian Holdings Offer*

OnAugust 29, 2003, the Securities Appellate Tribunal, or SAT, in India upheld thedecision of the Securities Exchange Board of India to require our subsidiaryRay Ban Indian Holdings, Inc. to make a public offer in India to acquire up

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toan additional 20 percent of the outstanding shares of RayBan Sun Optics IndiaLtd. (“RayBan Sun Optics”).  The SupremeCourt of 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 closing dateto all persons who were shareholders of RayBan Sun Optics throughout suchperiod. On April 25, 2007, pursuant to the December 12, 2006 Supreme Courtorder and in compliance with Regulation 10 and 12 of Chapter III of the SEBIRegulations 1997, we launched a public offer through our subsidiary, Ray BanIndian 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 entry of theshare transfers in the share register on June 26, 2007, our stake inRayBan Sun Optics increased to 70.5 percent. We paid totalconsideration of approximately Euro 13.0 million for the tendered shares.RayBan Sun Optics is listed on the Bombay Stock Exchange. We acquired ourinterest in RayBan Sun Optics in connection with the purchase of the RayBaneyewear business from Bausch & Lomb in 1999.

*Sale ofThings Remembered*

InSeptember 2006, we completed the sale of Things Remembered, a personalized giftretail chain based in the United States, for consideration with an approximatevalue of U.S.$200 million.  Thisbusiness, which had been acquired in October 2004 through the acquisition ofCole, was non-core for us.

*License Agreements*

In December 2006, wesigned a 10-year license agreement for the design, manufacturing and worldwidedistribution of ophthalmic and sun collections under the Tiffany & Co.brand. The launch of the first collection is expected in early 2008. Thedistribution of the Tiffany collections will start with Tiffany’s own stores aswell as through certain of our other distribution channels in North America,Japan, Hong Kong, South Korea, key Middle East markets and Mexico, and willextend over time to additional markets and through new distribution channels.

*CreditAgreement*

InFebruary 2007, we exercised an option included in the Amended Euro 1,130Million and U.S.$325 Million Credit Facility to extend the maturity date of TranchesB and C to March 2012.  For additionalinformation, see Note 9 to our Consolidated Financial Statements includedin Item 18 of this annual report.

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**Productsand Services**

***WholesaleOperations***

*OurBrands*

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

*HouseBrands:*  Our housebrands are sold worldwide under brand names such as *Ray-Ban*.We currently produce approximately 1,850 distinct styles of frames within ourhouse brands. Each style is typically produced in three sizes and at least fourcolors. Actual availability of product styles, colors and sizes varies amonggeographic markets depending upon local demand.

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

·                  **Ray-Ban**: Created in 1937, the *Ray-Ban* line isthe brand leader in the eyewear market based on sales and consumer awareness,bringing together renowned sunglass lenses and a timeless style.

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

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

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

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

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

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

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

*DesignerLines:* Our designer lines are produced and distributedthrough license agreements with major fashion houses. Currently, we selldesigner lines under the names *Chanel, Prada, Miu Miu,Dolce & Gabbana, D&G, Versace, Versus, Bvlgari,  Salvatore Ferragamo, Donna Karan, DKNY,  Brooks Brothers, Anne Klein,  Burberry* and *Polo RalphLauren*with its six**lines (*Purple Label, Polo, Ralph Lauren, Ralph, Chaps*and*Club Monaco*). Beginning early in 2008, they will alsoinclude *Tiffany & Co*. The license agreementsgoverning these designer lines are exclusive contracts and typically have termsof between three and ten years. See “—Trademarks, Trade Names and LicenseAgreements—License Agreements.” Designer collections are developed through thecollaborative efforts of our in-house design staff and the brand designer. Ourdesigner lines presently feature approximately 3,200 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 the high-end consumer, reflects the essential characteristicsof the brand: style, elegance and class.

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

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

·                  **Dolce & Gabbana:** Our *Dolce & Gabbana* eyewear collection draws itsinspiration from the 60s and 70s. This collection brings the period’s shapes upto date and highlights its materials, characterized by precious details such aslogos in Swarovski crystals or elegant metal circles.

·              **D&G**: The *D&G* eyewear collection has a youthful,innovative and unconventional spirit. The *D&G* modelsare characterized by vintage forms that take their inspiration from the 70s and80s, as well as loud and colorful sporty frames reminiscent of the racingworld.

·                  **Versace**: *Versace* is a lifestyle brand for themodern man or woman who chooses to express his/her strength, confidence anduniqueness through a bold and distinctive personal style. *Versace*represents the ideal of a sophisticated, free and highly desirable lifestyle.

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

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

·                  **Salvatore Ferragamo:**  The *Salvatore Ferragamo* collections include both optical framesand sunglasses; they are characterized by the greatest attention to detail aswell as by an original use of materials and choice of colors. The eyewearcollection is inspired—like all the other *Salvatore Ferragamo*products—by the craftsmanlike tradition of this fashion house, reinterpretedaccording to contemporary trends.

·                  **Donna Karan**: This product line reflects the design sensibility and spirit of the *Donna Karan* collection, offering men and women styles thatare sophisticated, using modern and lightweight materials.

·                  **DKNY**: *DKNY* is fast fashion with an urbanmind-set, the New York City street-smart look. *DKNY*eyewear addresses modern, urban, fashion-conscious women and men withmultifaceted lifestyles: 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.

·              **Burberry**: A license agreement between Burberry Group Plc and Luxottica was signedin October 2005 with the first release of the *Burberry*eyewear collection in October 2006. This collection features the brand’score values of form and function, innovation and the essence of classic style.

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

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·              **Purple Label**: A small and exclusive eyewear collection, the *Purple Label* combines the elegance of tradition with therequirements of the modern gentleman: high quality, precious materials, detailsand 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 timeless styling with a modern attitude.

·              **Polo**: The *Polo* collection focuses on refineddesigns, inspired by the heritage of *Polo Ralph Lauren*apparel. Emblematic models that are classic and never out of style. *Polo* is the ideal collection for men who appreciate qualityand tradition and are seeking classic styles with a fresh design.

·              **Ralph**: This line is an expression of  the*Ralph Lauren* spirit at an accessibleprice point. It features the latest looks and trends, as well as some moreclassic looks. Vibrant colors for a feminine, flirty and fun look.

·              **Chaps**: *Chaps* features easy, wearable designs inthe classic tradition of *Polo Ralph Lauren*.The line offers a designer name to the young moderately priced sportswearconsumer. 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 are: men and women, between 20 and 40years old, who are urban professionals, style enthusiasts, and who appreciatesophisticated design at a mid-level price point.

·              **Tiffany & Co.**: This world renowned jeweler operates jewelry andspecialty retail stores and manufactures products through its subsidiarycorporation. For 169 years, *Tiffany & Co.*has designed and produced standard-setting jewelry and accessories. We expectour first collection of *Tiffany & Co.*eyewear, which is to launch in early 2008, to remain true to the brand’s highstandards.

Thefollowing table presents the respective percentages of our total unit (a “unit”represents an eyeglass frame or sunglass and excludes sales of other materials)sales that our designer and house brands comprised during the periodsindicated:
| ** **                                                              | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **(as a percentage of total unit sales)** | ** ** | **2002**                                   | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| Designer brands                                                         |       | 39.5                                       |       | 33.6 |   | 32.8 |   | 35.9 |   | 41.2 |   |
| House brands                                                            |       | 60.5                                       |       | 66.4 |   | 67.2 |   | 64.1 |   | 58.8 |   |
| Total unit sales                                                        |       | 100.0                                      |       | 100.0 |   | 100.0 |   | 100.0 |   | 100.0 |   |

 

*PrescriptionFrames and Sunglasses*

In 2006, ourmanufacturing facilities produced a combined total of approximately 37.0 millionprescription frames and sunglasses. In 2005 and 2004, our manufacturingfacilities produced a combined total of approximately 28.5 million and 27.8million prescription frames and sunglasses, respectively.

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

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2007, with the expansion of our sunglass based retail business in SouthAfrica. We expect it to continue to develop once the announced acquisition ofOakley has been completed.

 

Unitsales of sunglasses manufactured by us and third parties in 2006, as apercentage of our total aggregate unit sales, were 57.2 percent, as compared to55.8 percent in 2005 and 57.3 percent in 2004.

Thefollowing table presents the respective percentages of our total unit salesthat our prescription frames and sunglasses comprised for the periodsindicated:
| ** **           | ** ** | **Year Ended December 31,**                              | ** ** |
|----------------------|------------|-------------------------------------------------------------------------|------------|
| ** **           | ** ** | **(as a percentage of total unit sales)** | ** ** |
| ** **           | ** ** | **2002**                                                                | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| Prescription  frames |       | 40.3                                                                    |       | 41.1 |   | 42.7 |   | 44.2 |   | 42.8 |   |
| Sunglasses           |       | 59.7                                                                    |       | 58.9 |   | 57.3 |   | 55.8 |   | 57.2 |   |
| Total unit sales     |       | 100.0                                                                   |       | 100.0 |   | 100.0 |   | 100.0 |   | 100.0 |   |

***Retail Operations***

Ourretail division is operated by our subsidiaries LensCrafters, Sunglass Hut,OPSM, several subsidiaries in Asia and, starting in 2007, in South Africa, andthe Cole group of companies. LensCrafters and Sunglass Hut are strong tradenames in the North American retail market place, and OPSM owns three main tradenames in the Asia-Pacific market. The Cole group of companies operates PearleVision and our Licensed Brands—Sears Optical, Target Optical and BJ’s Optical.In addition to ophthalmic products and sunglasses, we continue to sell watchesand accessories in certain of our retail locations in North America. InSeptember 2006, we sold Things Remembered, a personalized gift retail chainbased in the United States.

*LensCrafters.*Through LensCrafters in North America, we operate a retailnetwork of 902 locations which offer a wide selection of prescription frames,sunglasses, lenses and other optical products. LensCrafters is currently thelargest optical retail chain in North America in terms of sales. LensCraftersstores sell not only Luxottica products, but also a wide range of lenses and opticalproducts made by other suppliers. LensCrafters’ products include innovativelenses, such as FeatherWates® (lightweight, thin and impact-resistant lenses),DURALENS® (super scratch-resistant lenses), ByeLinesÔ(bifocal lenses without visible lines), Invisibles® (anti-reflective lenses)and MVP Maximum View Progressives® (multi-focal lenses without visible lines).Substantially all of our LensCrafters stores are located in high-trafficcommercial malls and shopping centers, have an employed optometrist or anindependent, licensed optometrist on site (thereby allowing the customer tohave an eye examination on site), provide a large range of prescription eyewearchoices and include a laboratory, which enables us to provide the selectedframe with prescription lenses to our customers in approximately one hour.

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

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

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

Whenwe acquired LensCrafters in 1995, LensCrafters had approximately 600 stores.Between 1995 and 1998, we opened new stores and acquired other retail chains, reachingover 850 stores in North America 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 opening of retailchains and stores in areas where we are not already heavily represented and inother prime locations. As of December 31, 2006, LensCrafters leased 902retail stores in North America.

Sincethe LensCrafters’ acquisition, we have improved the efficiency of LensCraftersstores by managing the inventory from our central worldwide distribution centerin Italy. This has improved inventory service and allowed for a more rapidsupply of styles based on daily sales and inventory data. This has alsoincreased the percentage of our products available in LensCrafters stores. Inaddition, we have focused our promotional activities on those customers lookingfor a better purchase experience with high-quality products, rapid and efficientcustomer service and innovative lens and frame technology. As a result of theseinitiatives, LensCrafters’ net sales have increased significantly since 1995.

During thelast few years we have shifted LensCrafters to a more premium brand. Duringthis time we have added additional elements such as a new store concept,associate training, advertising and marketing that together represent thepremium brand and future direction of LensCrafters. 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. LensCrafters is also working to increase itsshare of the contact lens market.  Thisinitiative focuses on selected products (mostly national brand names) and morecompetitive pricing.  This new push forcontact lenses is being supported through in-store displays, marketing andassociate training.

One of the most visiblechanges in LensCrafters’ shift toward a premium and stylish eyewear shoppingexperience is a new design for the stores, which will be adopted in new andremodeled store locations across North America. The store design featureselegant eyewear display boxes, wood flooring, fashion graphics, sleekdecorative accents and artistic lighting fixtures. Every feature of the designdirects the spotlight on the shopping gallery of designer eyewear collections,while the 

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“fit and finish” stations are moreprivate and separated from the shopping and frame selection. We have begun todisplay the eyewear collections by designer brand to help our customers shopfor the style that is right for them.

Aspart of the brand transformation, in North America LensCrafters has rolled outa new style-focused magazine advertising campaign to communicate the brand’sapproach to eyewear style. The ads have appeared in more than two dozen premiumfashion, lifestyle, cultural and entertainment magazines for women and men.Titled “Make an Appearance,” they are distinguished from other LensCrafters’ads, using bold, engaging visuals to emotionally appeal to the fashion andstyle desires within eyeglass wearers. In 2007, the LensCrafters brand launcheda new television and print campaign in North America called “Open Your Eyes”that positions  eyewear as a prizedwardrobe item, just as a favorite black dress, handbag or shoes.

In2006, we began to expand the use of the LensCrafters’name by rebranding certainretail locations that we acquired in China to “LensCrafters”. We expect to haverebranded 153 locations in China and Hong Kong with the LensCrafters name bythe end of 2007.

*MainlandChina and Hong Kong*. In 2006, we acquired three optical retailersoperating in the premium optical markets in mainland China, with a total of 274retail locations in Asia. In addition, they will expand our presence in HongKong, which we believe to be one of the most important markets for luxurygoods.

HongKong is one of the most significant Chinese luxury markets where middle classand affluent mainland Chinese visit frequently to purchase luxury goods.Launching LensCrafters as a premium brand in Hong Kong increases awareness andconsumer demand for our products and services. This strategy supports our nextstage of expansion into mainland China, rebranding the stores we acquired toLensCrafters and developing worldwide recognition for our premium retail brand.

InSeptember of 2006, we launched LensCrafters in Beijing, beginning there-branding strategy of our acquisitions.

*SunglassHut.*With the acquisition of Sunglass Hut in 2001, we becamethe world’s leading specialty retailer of sunglasses based on sales, and aspecialty retailer of popular priced watches. Sunglass Hut has 1,818 retaillocations located throughout North America, Europe and Australia. Sunglass Hutoperates in-line stores and kiosks in shopping malls, as well as stores instreet centers in high-traffic streets and in airports. We have increased salesof Luxottica-manufactured products at Sunglass Hut locations from approximately14.3 percent of total Sunglass Hut net sales in April 2001 (the firstmonth following the acquisition) to 69 percent in December 2006. Inaddition to sunglasses that we manufacture, Sunglass Hut continues to sell avariety of frames manufactured by third-party vendors, including Oakley, MauiJim, Inc. and others. Oakley is our largest third-party supplier,accounting for approximately 6.8 percent, 4.9 percent and 5.7 percent of ourtotal merchandise purchases from suppliers in 2004, 2005 and 2006,respectively. See Item 4—“Information on the Company—Recent Developments—Acquisitions.”Although we buy products from third parties, including Oakley, we do notbelieve that the loss of any one supplier would have a significant impact onour future operations as we could easily replace lost supply with othersunglasses manufactured by us or other third-party vendors. After the acquisitionof Sunglass Hut and Cole, we consolidated the administrative and certain otherfunctions of these businesses with our existing business to allow significantsynergies between sun and optical retail operations. Sunglass Hut outlets arelocated mostly in enclosed malls and airports with an average retail space ofapproximately 400 square feet per kiosk/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 beconverted into Sunglass Hut stores. Both chains have prominent locations inshopping centers in urban areas including Johannesburg and Cape Town as well asattractive airport locations.

*Cole.*With the acquisition of Cole in October 2004, we acquired a group ofdistribution outlets and a provider and administrator of managed vision careservices under one group. Cole, through its wholly owned subsidiaries, operatesretail vision locations under the name “Pearle Vision” as well as under thenames “Sears Optical,” “Target Optical” and “BJ’s Optical,” which we refer toas our Licensed Brands. Managed vision care programs and benefits werepreviously sold through the Cole Managed Vision Division; renewals and newsales are now administered through Eyemed Vision Care. Additionally, Coleoperated a chain of personalized gift stores, e-commerce and catalogs under thename “Things Remembered,” which was sold in September 2006.

TheLicensed Brands optical retail locations are located in the host stores thatbear the names of the hosts. Pearle Vision stores are mostly located in stripmalls outside of the conventional malls where most LensCrafters and SunglassHut stores are located. In addition, we have franchised Pearle Vision locationslocated throughout North America. We believe that

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this combinationwith Cole has allowed us to:

•                    strengthen ourretail operations in the United States;

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

•                    increase oursales of frames manufactured by us in Cole retail stores.

Wesubstantially completed our strategic integration plan with respect to Cole in thethird quarter of 2006. As of December 31, 2006, Cole operated 1,781 ownedand leased department locations and 417 franchise locations throughout NorthAmerica.

Ourretail network in North America has expanded in 2007 with the completion of ouracquisition of D.O.C. Optics, an optical retail business with approximately 100stores located primarily in the midwest United States. This acquisitionrepresents another key step in our strategy to maximize growth opportunitiesfor our optical retail brands, including LensCrafters and Pearle Vision.  We will continue to look to expand our retailoperations in North America through the opening of new stores or kiosks, orstrategic acquisitions when we deem them to be appropriate.

*OPSM*.In August 2003, we completed the acquisition of 82.57 percent of OPSM, and wecompleted the acquisition of the minority interest in OPSM in March 2005. Thisacquisition has resulted in what we believe is a leadership position in theprescription business in the Australian and New Zealand markets and provided uswith new growth opportunities in the Asian market. As of December 31, 2006,OPSM had 466 stores in Australia operating under three brands, OPSM, Laubman& Pank and Budget Eyewear, each of which targets a clearly defined market segment,and operates 22 franchise locations throughout Australia. OPSM is the marketleader in New Zealand, based on corporate-owned store locations, with 39 storesas of December 31, 2006. OPSM sold its businesses in Singapore and Malaysiaduring 2005.

**OurPrincipal Markets**

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

 
| ** **                 | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------|------------|--------------------------------------------|------------|
| ** **                 | ** ** | **(In thousands of Euro)**  | ** ** |
| ** **                 | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| Italy Wholesale            |       | 832,813                                    |       | 998,420 |   | 1,321,887 |   |
| North America  Retail(1)   |       | 1,861,797                                  |       | 2,632,265 |   | 2,840,977 |   |
| North America  Wholesale   |       | 146,076                                    |       | 179,595 |   | 235,526 |   |
| Asia-Pacific  Retail       |       | 348,300                                    |       | 365,867 |   | 388,505 |   |
| Asia-Pacific  Wholesale    |       | 116,605                                    |       | 150,926 |   | 215,135 |   |
| Other Retail               |       | 60,898                                     |       | 61,165 |   | 64,678 |   |
| Other Wholesale            |       | 425,732                                    |       | 514,031 |   | 697,278 |   |
| Adjustment/Eliminations(2) |       | (612,608                                   | )          | (768,006 | ) | (1,087,828 | ) |
| Total                      |       | 3,179,613                                  |       | 4,134,263 |   | 4,676,156 |   |

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(1)             Excludesthe sales of our Things Remembered specialty retail business, which was sold inSeptember 2006. Things Remembered sales for fiscal 2004, 2005 and 2006 wereEuro 75.7 million, Euro 236.5 million and Euro 157.1 million, respectively.

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

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**Seasonality andEffect of 53-Week Year**

Wehave also historically experienced sales volume fluctuations by quarter due toseasonality associated with the sale of sunglasses, which represented 57.2percent and 55.8 percent of our units sold in 2006 and 2005, 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. These seasonal variations couldaffect the comparability of our results from period to period. Our retailfiscal year is either a 53-week year or a 52-week year, which alsocan affect the comparability of our results from period to period. When a 53-weekyear occurs, we generally add the extra week to the fourth quarter. A 53-weekyear occurs in five to six year intervals and is expected to occur again infiscal 2008.

**ProductionProcess**

***Overview***

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

***Designand Prototype Selection***

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

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

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

Allprototypes are subject to review and approval by our licensors and ourdesigners to ensure consistency with the distinctive image of each productline. Our collections consist of both new models and the most successfulexisting models. Each year, we add approximately 1,800 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.”

***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 for frames,eyeglass cases and packaging materials. The Ray-Ban acquisition provided uswith know-how and sunglass crystal lens manufacturing capabilities. We believethat our ability to produce sunglass crystal lenses is strategically importantgiven our expanded presence in the sunglasses market.

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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.Historically, prices of the principal raw materials used in our manufacturingprocess have been stable.

***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 rationalized our operations in Italy by building a new,approximately 32,000 square meters manufacturing facility to produceacetate frames and sunglasses for a total investment of approximately Euro 20.0million. We were able to re-dedicate one of our former facilities to ourlogistics operation for a total investment of Euro 6.2 million. From 1998 to2001, we operated, through our 50 percent-owned joint venture (Tristar OpticalCompany Ltd.) with a Japanese partner, a facility in China to manufactureprescription frames. In 2001, we acquired the remaining 50 percent interest inthis Chinese company so that it became one of our wholly owned subsidiaries. In2006, we increased our manufacturing capacity in mainland China through theconstruction of a new, approximately 26,000 square meters 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 mainland China increased byapproximately 80 percent compared to 2005. The percentage of private label products produced at our facilities inChina has been decreasing in favor of increased production of certain of ourcore, 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 our facilitiesin Sedico, Pederobba and Turin, while metal frames are produced in ourfacilities in Agordo and Rovereto. Certain frame parts are produced in ourfacility in Cencenighe. In 2006, approximately 56 percent of the framesmanufactured by us were metal-based, and the remainder was plastic.

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

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

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

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

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

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

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

We engagein research and development activities relating to our manufacturing processeson an on-going basis. As 

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a result of suchactivities, we have invested, and will continue to invest, in automation, thusincreasing efficiency while improving quality. Much of our manufacturingprocess is automated, including the production of metal and plastic frame partsand the galvanization of metal frames.

Costsassociated with research and development activities are expensed when incurredand are not significant.

***QualityControl***

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

**Distribution**

Wedistribute our products through wholesale and retail channels.

***Distributionby Wholesale Division***

Wecurrently distribute our products in approximately 130 countries and operate 32wholly or majority owned wholesale distribution subsidiaries strategicallylocated in major markets worldwide. In markets where we do not have wholesaledistribution subsidiaries, we employ approximately 100 independentdistributors.

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

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

 
| **Subsidiary**                       | ** ** | **Country of Formation** | ** ** | **Percentage  Ownership** | ** ** |
|--------------------------------------|------------|------------------------------------|------------|---------------------------|------------|
| Luxottica S.r.l.                     |       | Italy                              |       | 100                       | %          |
| Luxottica  Fashion Brillen GmbH      |       | Germany                            |       | 100                       | %          |
| Luxottica  Portugal S.A.             |       | Portugal                           |       | 100                       | %          |
| Luxottica France  S.A.R.L.           |       | France                             |       | 100                       | %          |
| Luxottica  Iberica S.A.              |       | Spain                              |       | 100                       | %          |
| Luxottica U.K.  Ltd.                 |       | United  Kingdom                    |       | 100                       | %          |
| Luxottica  Belgium N.V.              |       | Belgium                            |       | 100                       | %          |
| Luxottica Sweden  AB.                |       | Sweden                             |       | 100                       | %          |
| Oy Luxottica  Finland AB.            |       | Finland                            |       | 100                       | %          |
| Luxottica  Vertriebsgesellschaft MbH |       | Austria                            |       | 100                       | %          |
| Luxottica Norge  AS.                 |       | Norway                             |       | 100                       | %          |
| Avant-Garde  Optics, LLC             |       | U.S.A.                             |       | 100                       | %          |
| Luxottica Canada  Inc.               |       | Canada                             |       | 100                       | %          |
| Luxottica Do  Brasil Ltda            |       | Brazil                             |       | 100                       | %          |
| Luxottica Mexico S.A. de C.V.        |       | Mexico                             |       | 100                       | %          |
| Luxottica Argentina S.r.l.           |       | Argentina                          |       | 75                        | %          |
| Mirari Japan Co  Ltd.                |       | Japan                              |       | 100                       | %          |
| Luxottica South  Africa Pty Ltd.     |       | South  Africa                      |       | 100                       | %          |
| Luxottica Middle  East FZE           |       | United  Arab Emirates              |       | 100                       | %          |
| Luxottica  (Switzerland) A.G.        |       | Switzerland                        |       | 97                        | %          |

 

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|                                       |   |             |   |   |   |
|--------------------------------------------|--------|------------------|--------|--------|--------|
| 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 A.S. |   | Turkey           |   | 64.84  | %      |
| Luxottica Poland  Sp. Z.o.o.               |   | Poland           |   | 100    | %      |
| Luxottica  Central Europe Ltd.             |   | Hungary          |   | 100    | %      |
| Luxottica South  Eastern Europe Ltd.       |   | Croatia          |   | 100    | %      |
| Luxottica  Trading and Finance Limited     |   | Ireland          |   | 100    | %      |
| Mirarian  Marketing Ltd.                   |   | Singapore        |   | 51     | %      |
| RayBan Sun  Optics India Ltd.(1)           |   | India            |   | 70.5   | %      |
| Luxottica Korea Ltd.                       |   | Korea            |   | 100    | %      |

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(1)           The shares of RayBan Sun Optics arepublicly traded on the BSE Stock Exchange, Mumbai. Since we did not own a 50percent equity interest in the entity as of December 31, 2006, we accounted forthis entity under the equity method of accounting for the year ending December31, 2006. Effective as of June 26, 2007, we acquired approximately 70.5 percentof RayBan Sun Optics through 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 and tocontrol the quality of the points of sale that display products. We typicallyenter into distribution agreements with importers and distributors thatestablish minimum annual purchases and impose territorial limitations. Inaddition, to the extent permitted by law, we allow for distribution onlythrough specifically authorized retail channels and qualified sales agents.

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. This network enables us to monitor worldwidesales trends and inventory positions on a daily basis and to allocateproduction resources accordingly.

Webelieve that one of our key competitive strengths is our ability to promptlysatisfy customer demand in a timely manner, both prior to and following a sale.In order to further improve our customer service capabilities, we have centralizedour distribution centers in Europe (Italy) and Asia (Japan). Since the Coleacquisition, we have consolidated our distribution centers in Memphis and Atlanta,the main distribution center for our retail division, and are in the finalstages of centralizing our wholesale distribution centers in North America. Webelieve that centralizing our distribution centers improves the efficiency ofour distribution operations while reducing the related costs.

***Distributionby Retail Division***

Throughour retail division, we believe we operate the largest group of opticalsuperstores in both the United States and Canada based on both sales and storecount. We believe we are the largest specialty retailer of sunglasses in theworld based on 2006 revenues and believe we have become a leading player in theAustralian prescription segment. We also sell watches and accessories incertain sunglass retail locations and, until September 2006, sold personalizedgifts under the name “Things Remembered.”

In ouroptical retail stores, customers can choose from a large selection of framesand lenses offering a high level of comfort and fit. LensCrafters customers canobtain a completed pair of prescription glasses in approximately one hourbecause of on-site lens grinding laboratories. In our Sunglass Hut locations,customers can choose from a large selection of Luxottica and third-party vendormanufactured sunglasses. In addition, Sunglass Hut locations can assistcustomers in purchasing other accessories to complement their sunglasses. As ofDecember 31, 2006, our retail division consisted of 5,280 owned or leaseddepartment retail locations and 454 franchised locations as follows:

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| ** **                         | ** ** | **North  America** | ** ** | **Europe/  Middle  East** | ** ** | **Australia  / New  Zealand** | ** ** | **China /  Hong  Kong** | ** ** | **Total** | ** ** |
|------------------------------------|------------|--------------------|------------|---------------------------|------------|------------------------------------|------------|------------------------------|------------|-----------|------------|
| LensCrafters                       |       | 902                |       |                      |       |                               |       | 75                           |       | 977       |       |
| Sunglass Hut                       |       | 1,502              |       | 92                        |       | 224                                |       |                         |       | 1,818     |       |
| Pearle Vision  and Licensed Brands |       | 1,781              |       |                      |       |                               |       |                         |       | 1,781     |       |
| OPSM Group                         |       |               |       |                      |       | 505                                |       | 199                          |       | 704       |       |
| Franchised  Locations              |       | 417                |       | 15                        |       | 22                                 |       |                         |       | 454       |       |
|                               |       | 4,602              |       | 107                       |       | 751                                |       | 274                          |       | 5,734     |       |

 

In 2006, unitsmanufactured with our own brand names or our licensed brands, represented approximately72.4 percent, 42.1 percent, 42.1 percent and 66.6 percent of the total sales offrames based on units sold by LensCrafters, Cole, OPSM and Sunglass Hut, respectively.OPSM was acquired in August 2003 and at such time 3.5 percent of the totalsales of frames sold were supplied by us. Cole was acquired inOctober 2004, and at such time less than one percent of the total sales offrames sold were supplied by us. The retail division’s outlets sell not onlyframes that we manufacture but also a wide range of frames, lenses and otherophthalmic products manufactured by other companies.

Substantiallyall LensCrafters (excluding the LensCrafters rebranded stores in China), Coleand OPSM stores have an employed or independent optometrist on site, allowingthe customer to have an eye examination, select from a large range ofprescription eyewear, and receive the selected frame with prescription lensesfrom one location. In addition, substantially all of our LensCrafters stores(excluding the LensCrafters rebranded stores in China), have a lens grindinglaboratory on site, which allows our customers to receive a complete set ofprescription frames or sunglasses in approximately one hour.

**Competition**

Theprescription frame and sunglasses industry is highly competitive andfragmented. As we market our products throughout the world, we compete withmany prescription frame and sunglasses companies in various local markets. Webelieve that our principal competitor in the design, manufacture anddistribution of eyewear within the prescription frames market is SafiloGroup S.p.A., or Safilo. We believe that our principal competitors in thesunglasses market include Safilo, De Rigo S.A. and Oakley. See “—BusinessOverview—Recent Developments—Acquisitions” for more information regarding theOakley acquisition. Several of our most significant competitors in themanufacture and distribution of eyewear are significant vendors to our retaildivision. Our success in these markets will depend on, among other things, ourability to manage an efficient distribution network and to market our productseffectively as well as on the popularity and market acceptance of our brands.See Item 3—“Key Information—Risk Factors—If we are unable to successfullyintroduce new products, our future sales and operating performance will suffer”and “—If we fail to maintain an efficient distribution network in our highlycompetitive markets, our business, results of operations and financialcondition could suffer.”

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 retail chains inNorth America, including Wal-Mart and Eye Care Centers of America, and, in thesunglasses area, numerous sunglass outlet centers. Our optical retailoperations emphasize product quality, selection, customer service andconvenience. We do not compete primarily on the basis of price.

**Marketing**

Ourmarketing and advertising activities are designed primarily to enhance theimage of Luxottica and our brand portfolio and to drive traffic into our retaillocations. Advertising expenses amounted to approximately six percent of ournet sales in each of 2004, 2005 and 2006.

***MarketingStrategy for Our Wholesale Distribution Business***

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

In ourmedia advertising, we utilize direct media, such as print, radio and television,as well as billboard advertising. The extent of our advertising activities andthe selection of different media depend upon the competitive conditions in eachparticular market. In addition, we advertise in publications targeted toindependent practitioners and other market-specific magazines.

Ourpoint-of-sale marketing materials consist of displays, counter cards, catalogs,posters and product literature. Many of these materials are linked to ourconsumer advertising campaigns. Because the point-of-sale has becomeincreasingly important both as a communication medium and in terms of theconsumer brand experience. In 2007, we have

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developed a newapproach for our Ray-Ban brand with a shop-in-shop modular concept. Thisconcept can be adapted to the stores we identify as the most suitable,permitting the best delivery of Ray-Ban’s clear and unique brand signature.

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

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

***MarketingStrategy for Our Retail Business***

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

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

**Trademarks,Trade Names and License Agreements**

***Trademarksand Trade Names***

As ofDecember 31, 2006, our principal trademarks or trade names included *Luxottica, Ray-Ban, Persol, Vogue, LensCrafters, Sunglass Hut, PearleVision, OPSM, Laubman & Pank and Budget Eyewear*. Our principaltrademarks are registered world-wide. Other than *Luxottica,Ray-Ban, LensCrafters, Sunglass Hut, Pearle Vision*, *OPSM, Laubman & Pank*and*BudgetEyewear*, we do not believe that any single trademark or trade nameis material to our business or results of operations. *Ray-Ban*products accounted for approximately 13.5 percent of our net sales in 2006.Management believes that our trademarks have significant value in marketing ourproducts.

LensCraftershas introduced several trademarked lenses in recent years that containinnovative 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 with third parties. The names of the lensesused by LensCrafters are typically trademarked, and the trademarks aretypically owned by us. OPSM has trademarked several lenses in recent years thatit uses in its advertising. They include ActiviseÔfor contact lenses, ActiveÔ for polycarbonateeyeglass lenses and InvisiblesÔ for multi-coatedeyeglass lenses.

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

SeeItem 3 —“Key Information—Risk Factors—If we are unable to protect ourproprietary rights, our sales might suffer and we may incur significant costs todefend such rights.”

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***License Agreements***

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

 
| Licensor                                                                                                    | ** ** | **Licensed Marks**                                                                                                                                         | ** ** | **Territory**                             | ** ** | **Expiration**                                                   |
|-------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------------------------------|
| Jones Investment  Co. Inc                                                                                   |       | Anne Klein                                                                                                                                                 |       | U.S. and rest of world exclusive licenses |       | December 31, 2009                                           |
| Bulgari S.p.A.                                                                                              |       | Bulgari                                                                                                                                                    |       | Worldwide exclusive license               |       | December 31, 2010                                           |
| Salvatore  Ferragamo Italia S.p.A.                                                                          |       | Salvatore Ferragamo Ferragamo                                                                                                                              |       | Worldwide exclusive license               |       | December 31, 2008 (Renewable until  December 31, 2013) |
| Retail Brand  Alliance, Inc.*                                                                          |       | Brooks Brothers                                                                                                                                            |       | Worldwide exclusive license               |       | December 31, 2009                                           |
| Prada S.A.                                                                                                  |       | Prada, Miu Miu                                                                                                                                             |       | Worldwide exclusive license               |       | December 31, 2013 (Renewable until  December 31, 2018) |
| Gianni Versace  S.p.A.                                                                                      |       | Gianni Versace, Versace, Versace Sport, Versus                                                                                                             |       | Worldwide exclusive license               |       | December 31, 2012 (Renewable until  December 31, 2022) |
| Chanel SARL  Chanel SA, Chanel SAS (FR), Chanel Limited (UK), Chanel Inc. (USA) and Chanel  Sok RL (Panama) |       | Chanel                                                                                                                                                     |       | Worldwide exclusive license               |       | March 31, 2008                                              |
| Donna Karan  Studio LLC                                                                                     |       | Donna Karan, DKNY                                                                                                                                          |       | Worldwide exclusive license               |       | December 31, 2009 (Renewable until  December 31, 2014) |
| Adrienne  Vittadini LLC**                                                                                   |       | Adrienne Vittadini                                                                                                                                         |       | Worldwide exclusive license               |       | December 31, 2009                                           |
| Dolce &  Gabbana S.r.l.                                                                            |       | D&G, Dolce & Gabbana                                                                                                                          |       | Worldwide exclusive license               |       | December 31, 2010 (Renewable until  December 31, 2015) |
| Burberry Limited                                                                                            |       | Burberry                                                                                                                                                   |       | Worldwide exclusive license               |       | December 31, 2015                                           |
| PRL USA 

The Polo/Lauren  Company LP                                                                       |       | Polo Ralph Lauren

Ralph Lauren

Ralph (Polo Player Design) Lauren

RLX

RL

Ralph

Ralph/Ralph Lauren Lauren by Ralph Lauren Polo Jeans  Company Chaps*** |       | Worldwide exclusive license               |       | March 31, 2017                                              |
| Club Monaco  Corp.                                                                                          |       | Club Monaco                                                                                                                                                |       | U.S. and Canada exclusive license         |       | March 31, 2012 (renewable until March 31, 2017)                  |
| Tiffany &  Co.                                                                                          |       | TIFFANY & CO.

Tiffany                                                                                                                                 |       | Selective worldwide exclusive license     |       | December 31, 2017                                                |

 

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

**                                 AdrienneVittadini LLC was indirectly owned and controlled by one of our directors untilNovember 2006, at which time it was transferred to a third party.

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

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Underthese license agreements, we are required to pay a royalty which generallyranges from five percent to twelve percent of net sales of the relevantcollection, which may be offset by any guaranteed minimum royalty payments. Thelicense agreements also provide for a mandatory marketing contribution thatgenerally amounts between  five percentand ten percent of net sales. The particular licensor is responsible for themanner and form of advertising for its collection. These license agreementstypically have terms ranging from three to ten years, but may be terminatedearly by either party for a variety of reasons, including non-payment ofroyalties, failure to meet minimum sales thresholds, product alteration and,under certain agreements, any change in the ownership of the ordinary sharesresulting in a change in control of Luxottica Group S.p.A.

Otherthan Prada and Miu Miu (which in aggregate account for 5.5 percent of netsales), no single designer line accounted for more than five percent of netsales for the year ended December 31, 2006. Management believes that,while the early termination of one or a small number of the current licenseagreements may have an adverse effect on our results of operations in the shortterm, any such termination would not have a material adverse effect on ourlong-term results of operations or financial condition. Upon any earlytermination of an existing license agreement, we expect that we would seek toenter into alternative arrangements with other designers to reduce any negativeimpact of such a termination.

**RegulatoryMatters**

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

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

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

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

**OrganizationalStructure**

We area holding company, and virtually all of our operations are conducted throughour wholly owned subsidiaries. We operate in two industry segments:(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 wholesale distribution segment, we operatethrough approximately eight manufacturing plants and 32 geographically orientedwholesale distribution subsidiaries. See “—Distribution” for a breakdown of thegeographic areas.

 

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

 

**Property, Plants and Equipment**

Our corporate headquarters is located at Via C. Cantù 2, Milan, Italy.Information regarding the location, use and approximate size of our principaloffices and facilities as of December 31, 2006 is set forth below:
| **Location**                          | ** ** | **Use**                                                | ** ** | **Owned/Leased** | ** ** | **Approximate  Area in Square  Feet** |
|---------------------------------------|------------|--------------------------------------------------------|------------|------------------|------------|-------------------------------------------------|
| Milan, Italy                          |       | Corporate Headquarters                                 |       | Owned            |       | 51,548                                          |
| Agordo, Italy                         |       | Administrative offices and manufacturing facility      |       | Owned            |       | 827,292                                         |
| 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. offices and U.S. wholesale distribution center    |       | Owned            |       | 140,700                                         |
| Espoo, Finland                        |       | Offices, warehouse                                     |       | Leased           |       | 2,884                                           |
| Oulu, Finland                         |       | Offices                                                |       | Leased           |       | 484                                             |
| Goteborg, Sweden                      |       | Offices, warehouse                                     |       | Owned            |       | 6,942                                           |
| Stockholm, Sweden                     |       | Offices                                                |       | Leased           |       | 258                                             |
| Kongsberg, Norway                     |       | Offices                                                |       | Leased           |       | 3,132                                           |
| Macquarie Park, Australia             |       | Offices                                                |       | Leased           |       | 61,496                                          |
| Chipping Norton, Australia            |       | Ophthalmic laboratory                                  |       | Leased           |       | 60,172                                          |
| Revesby, Australia                    |       | Distribution center                                    |       | Leased           |       | 61,054                                          |
| Auckland, New Zealand                 |       | Offices                                                |       | Leased           |       | 31,011                                          |
| Millennium City, Hong Kong            |       | Offices,                                               |       | Leased           |       | 9,072                                           |
| Kwong Sang, Hong Kong                 |       | Distribution center and warehouse                      |       | Leased           |       | 3,760                                           |
| Heemstede, Holland                    |       | Offices                                                |       | Leased           |       | 8,073                                           |
| São Paulo, Brazil                |       | Offices, warehouse                                     |       | Leased           |       | 18,363                                          |
| Buenos Aires, Argentina               |       | Offices, warehouse, showroom                           |       | Leased           |       | 3,438                                           |
| Cincinnati (Ohio), United States      |       | Ophthalmic laboratory, warehouse, distribution  center |       | Leased           |       | 132,000                                         |
| Dallas (Texas), United States         |       | Ophthalmic laboratory, distribution center             |       | Leased           |       | 80,000                                          |
| Memphis (Tennessee), United States    |       | Ophthalmic laboratory                                  |       | Leased           |       | 59,350                                          |
| Columbus (Ohio),  United States       |       | Ophthalmic laboratory,  distribution center            |       | Leased           |       | 43,392                                          |
| Knoxville  (Tennessee), United States |       | Ophthalmic  laboratory                                 |       | Leased           |       | 38,500                                          |
| Winnipeg  (Manitoba), Canada          |       | Ophthalmic  laboratory, distribution center            |       | Leased           |       | 21,687                                          |

 

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| Salonica - Thessalinki, Greece |   | Sales office                                         |   | Leased |   | 2,813     |
|--------------------------------|--------|------------------------------------------------------|--------|--------|--------|-----------|
| Athens-Anthousa, Greece        |   | Offices                                              |   | Leased |   | 40,137    |
| Deurne, Belgium                |   | Offices, archive-small deposit                       |   | Leased |   | 4,560     |
| Barcelona, Spain               |   | Offices, warehouse, showroom                         |   | Leased |   | 23,338    |
| Madrid, Spain                  |   | Showroom                                             |   | Leased |   | 1,729     |
| Hammersmith, London, UK        |   | Offices                                              |   | Leased |   | 7,400     |
| Park Royal, London, UK         |   | Warehouse for storage                                |   | Leased |   | 3,757     |
| Guangzhou, China               |   | Factory, warehouse                                   |   | Leased |   | 2,900     |
| Dongguan, China                |   | Offices, factory, dormitory                          |   | Owned  |   | 1,097,300 |
| Dongguan, China                |   | Land                                                 |   | Owned  |   | 1,607,500 |
| Klosterneuburg, Austria        |   | Offices                                              |   | Leased |   | 3,767     |
| Prague, Czech Republic         |   | Showroom                                             |   | Leased |   | 215       |
| Bratislava, Slovak Republic    |   | Showroom                                             |   | Leased |   | 150       |
| Tokyo, Japan                   |   | Sales office                                         |   | Leased |   | 13,149    |
| Fukui, Japan                   |   | Offices, distribution center                         |   | Owned  |   | 45,364    |
| Fukui, Japan                   |   | Warehouse                                            |   | Leased |   | 3,389     |
| Osaka, Japan                   |   | Sales office                                         |   | Leased |   | 1,949     |
| Nagoya, Japan                  |   | Sales office                                         |   | Leased |   | 1,159     |
| Fukuoka, Japan                 |   | Sales office                                         |   | Leased |   | 1,065     |
| Shanghai, China                |   | Sales office, distribution center and warehouse      |   | Leased |   | 13,046    |
| Schonbuhl, Switzerland         |   | Offices                                              |   | Leased |   | 3,164     |
| Dubai, U.A.E.                  |   | Offices                                              |   | Leased |   | 1,645     |
| Krakow, Poland                 |   | Offices                                              |   | Leased |   | 1,615     |
| Lisbon, Portugal               |   | Offices, warehouse                                   |   | Owned  |   | 64,583    |
| Munich, Germany                |   | Offices, showroom                                    |   | Leased |   | 8,212     |
| Bhiwadi, India                 |   | Manufacturing facility, corporate offices            |   | Owned  |   | 343,474   |
| Johannesburg, South Africa     |   | Offices, showroom                                    |   | Leased |   | 5,382     |
| Mexico City, Mexico            |   | Offices, warehouse                                   |   | Leased |   | 17,222    |
| Valbonne, France               |   | Offices                                              |   | Owned  |   | 14,240    |
| Seoul, Korea                   |   | Sales office                                         |   | Leased |   | 4,410     |
| Singapore                      |   | Sales office                                         |   | Leased |   | 1,604     |
| Mississauga, Canada            |   | Offices                                              |   | Owned  |   | 21,000    |
| Hertzelya, Israel              |   | Offices, warehouse                                   |   | Leased |   | 5,382     |
| Rovereto, Italy                |   | Frame manufacturing facility                         |   | Owned  |   | 215,026   |
| Sedico, Italy                  |   | Frame manufacturing facility and distribution center |   | Owned  |   | 392,312   |
| Cencenighe, Italy              |   | Semi-finished product manufacturing facility         |   | Owned  |   | 59,892    |
| Lauriano, Italy                |   | Frame and crystal lenses manufacturing facility      |   | Owned  |   | 174,176   |
| Pederobba, Italy               |   | Frame manufacturing facility                         |   | Owned  |   | 84,111    |
| Sedico, Italy                  |   | Distribution center                                  |   | Owned  |   | 342,830   |
| Budapest, Hungary              |   | Showroom, office space                               |   | Leased |   | 472,440   |
| Gurgaon, India                 |   | Showroom, office space                               |   | Leased |   | 5,052     |
| Dublin, Ireland                |   | Office space                                         |   | Leased |   | 2,487     |
| Izmir, Turkey                  |   | Headquarters, offices, warehouse                     |   | Leased |   | 92,750    |
| Istanbul, Turkey               |   | Sales offices                                        |   | Leased |   | 3,960     |
| Istanbul, Turkey               |   | Sales offices                                        |   | Leased |   | 559       |
| Ankara, Turkey                 |   | Sales offices                                        |   | Leased |   | 688       |
| Ankara, Turkey                 |   | Sales offices                                        |   | Leased |   | 624       |
| Adana, Turkey                  |   | Sales offices                                        |   | Leased |   | 441       |

 

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| Adana, Turkey  |   | Sales offices |   | Leased |   | 591 |
|----------------|--------|---------------|--------|--------|--------|-----|
| Samsun, Turkey |   | Sales offices |   | Leased |   | 785 |

 

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As ofDecember 31, 2006, LensCrafters leased 977 retail stores in North America andChina (including Hong Kong), and Sunglass Hut leased 1,818 retail locationsthroughout North America, Europe and Australia.

As of December 31, 2006, Cole leased 1,781 opticalretail locations including 1,358 stores in licensed departments in host stores.OPSM leased 505 retail stores in Australia and New Zealand and 199 retailstores in mainland China and Hong Kong. All of our leases expire between 2007and 2025 and have terms that we believe are generally reasonable and reflectiveof market conditions.

Webelieve that our current facilities (including our manufacturing capacity) areadequate to meet our present and reasonably foreseeable needs. Other than thecapital lease for our offices in Valbonne (France), there are no encumbranceson any of our principal owned properties.

 

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**ITEM 4A.UNRESOLVED STAFF COMMENTS**

None.

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

**Overview**

We operate in two industrysegments: (i) manufacturing and wholesale distribution and(ii) retail distribution. Through our manufacturing and wholesale distributionsegment, we are engaged in the design, manufacture, wholesale distribution andmarketing of house brand and designer lines of mid- to premium-pricedprescription frames and sunglasses. We operate in our retail segmentprincipally through LensCrafters, Sunglass Hut, OPSM, and sinceOctober 2004, Cole. As of December 31, 2006, the retail segmentconsisted of 5,280 owned or leased corporate-owned retail locations and 454franchised locations as follows:

|                             | ** ** | **North  America** | ** ** | **Europe/  Middle  East** | ** ** | **Australia  / New  Zealand*** | ** ** | **China /  Hong  Kong*** | ** ** | **Total** | ** ** |
|-----------------------------|------------|--------------------|------------|---------------------------|------------|-------------------------------------|------------|-------------------------------|------------|-----------|------------|
| LensCrafters                |       | 902                |       |                      |       |                                |       | 75                            |       | 977       |       |
| Sunglass Hut                |       | 1,502              |       | 92                        |       | 224                                 |       |                          |       | 1,818     |       |
| Pearle and Licensed  Brands |       | 1,781              |       |                      |       |                                |       |                          |       | 1,781     |       |
| OPSM Group                  |       |               |       |                      |       | 505                                 |       | 199                           |       | 704       |       |
| Franchised Locations        |       | 417                |       | 15                        |       | 22                                  |       |                          |       | 454       |       |
|                        |       | 4,602              |       | 107                       |       | 751                                 |       | 274                           |       | 5,734     |       |

 

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LensCraftersand Cole have retail distribution operations located throughout the UnitedStates, Canada and Puerto Rico, while OPSM operates retail outlets located inAustralia, New Zealand, and Hong Kong. Sunglass Hut is a leading retailer ofsunglasses worldwide based on sales.  In2006, we began operating retail locations in mainland China and currently weare in the process of rebranding many of the locations to our premiumLensCrafters brand. We expect to rebrand approximately 153 a stores in China toLensCrafters by the end of 2007.

Ournet sales consist of direct sales of finished products manufactured with ourown brand names or our licensed brands to opticians and other independentretailers through our wholesale distribution channel and sales directly toconsumers through our retail division retail channel. Our average retail unitselling price is significantly higher than our average wholesale unit sellingprice, as our retail sales typically include lenses as well as frames.

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

As aresult of our acquisition of LensCrafters in May 1995 and the subsequentexpansion of our business activities in the United States through theacquisition of the Ray-Ban business, Sunglass Hut and Cole, our results ofoperations, which are reported in Euro, have been rendered more susceptible tocurrency rate fluctuations between the Euro and the U.S. dollar. The U.S.dollar/Euro exchange rate has fluctuated from an average exchange rate of Euro1.00 = U.S.$1.2435 in 2004 to Euro 1.00 = U.S.$1.2444 in 2005 to Euro1.00 = U.S.$1.2553 in 2006. Additionally, with the acquisition of OPSM,our results of operations have been rendered susceptible to currencyfluctuations between the Euro and the Australian dollar. Although we engage incertain foreign currency hedging activities to mitigate the impact of thesefluctuations, they have impacted our reported revenues and expenses during theperiods discussed herein. See Item 11—“Quantitative and QualitativeDisclosures About Market Risk—Foreign Exchange Sensitivity” and Item 3—“KeyInformation—Risk Factors—If the Euro continues to strengthen relative tocertain other currencies, our profitability as a consolidated group willsuffer.”

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**CriticalAccounting Policies**

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

***RevenueRecognition***

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

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

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

***IncomeTaxes***

Incometaxes are recorded in accordance with SFAS No. 109, *Accountingfor Income Taxes*, which requires recognition of deferred tax assetsand liabilities for the expected future tax consequences of events that havebeen included in our consolidated financial statements or tax returns. Underthis method, deferred tax liabilities and assets are determined based on thedifference between the consolidated financial statement and tax basis of assetsand liabilities using enacted tax rates in effect for the year in which thedifferences are expected to reverse. A valuation allowance is recorded fordeferred tax assets if it is determined that it is more likely than not thatthe asset will not be realized. These estimated tax rates and the deferred taxassets, including valuation allowances placed upon those deferred tax assets,and liabilities recorded are based on information available at the time ofcalculation. This information is subject to change due to subsequent tax auditsperformed by different taxing jurisdictions and changes in corporate structurenot contemplated at the time of calculation, as well as various other factors.

Wehave completed our evaluation of the impact of adopting Financial AccountingInterpretation No. 48 (“FIN 48”),  *Accounting for Uncertainty in Income Taxes—an interpretation of FASBStatement No. 109*, which we have adopted beginning on January1, 2007. FIN 48 requires, among other things, a dual-step approach (Recognitionand Measurement) in recognizing uncertain tax positions taken or expected to betaken on tax returns. The recognition test requires that the tax position meeta threshold of “more-likely-than-not,” based solely on its technical merits,that it will be sustained upon examination by the taxing authority. After thistest is met, FIN 48 permits us to recognize a tax benefit equal to the largestamount of benefit that is more than 50 percent likely to be realized upon finalsettlement with the taxing authority. FIN 48 must be applied to all existingtax positions for all open tax periods as of the date of adoption. Thecumulative effect of adoption will be an adjustment to our January 1, 2007retained earnings of Euro 8.2 million.

***Inventories***

Ourmanufactured inventories were approximately 75.4 percent and 66.7 percentof total frame inventory for 2005 and 2006, respectively. All inventories atDecember 31, 2006 were valued using the lower of cost (as determined undera 

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weighted-averagemethod which approximates the first in, first out method) or market.Inventories are recorded net of allowances for possible losses among otherreserves. These reserves are calculated using various factors includingquantity on hand, sales volume, historical shrink results, changes in marketconditions and current trends. In addition, production schedules are made onsimilar factors which, if not estimated correctly, could lead to the productionof potentially obsolete inventory. As such, actual results could differsignificantly from the estimated amounts.

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

Inconnection with various acquisitions, we have recorded as intangible assetscertain goodwill, trade names and certain other identifiable intangibles. AtDecember 31, 2006, the aggregate carrying value of intangibles, includinggoodwill, was approximately Euro 2.5 billion or approximately 51.4 percent oftotal assets.

Asacquisitions are an important element of our growth strategy, valuations of theassets acquired and liabilities assumed on the acquisition dates could have asignificant 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 cashflows, and 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.

SFASNo. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”),sets forth requirements relating to accounting for ongoing intangibles. UnderSFAS No. 142, goodwill and intangible assets deemed to have an indefinitelife are no longer amortized in the same manner as under the previousstandards, but rather are tested for impairment annually and, under certaincircumstances, between annual periods. An impairment charge will be recorded ifthe fair value of goodwill and other intangible assets is less than the carryingvalue. The calculation of fair value may be based on, among other items,estimated future cash flows if quoted market prices in active markets are notavailable. We test our goodwill for impairment annually as of December 31of each year and any other time a condition arises that may cause us to believethat an impairment has occurred. Since impairment tests use estimates of theimpact of future events, actual results may differ and we may be required torecord an impairment in future years.

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

**RecentAccounting Pronouncements**

In March 2006, the FASBissued SFAS No. 156, *Accounting for Servicingof Financial Assets*—*an amendment of FASBStatement No. 140*, with respect to accounting for separatelyrecognized servicing assets and servicing liabilities. The statement requires,among other things, that an entity use fair value to initially measure theseassets and liabilities, if practicable. The adoption of such standard is forfiscal years beginning after September 15, 2006 and is not expected tohave a material effect on our consolidated financial statements.

In September 2006, theFASB 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 clarifies thedefinition, method and disclosure requirements of previously issued standardsthat address fair value measurements. The adoption of such standard is forfiscal years beginning after November 15, 2007. We are currently evaluating thedisclosure requirements and their effect on our consolidated financialstatements.

In September 2006, theFASB issued SFAS No. 158, *Employer’s Accounting forDefined Benefit Pension and Other Postretirement Plans—an amendment of FASBStatements No. 87, 88, 106 and 132(R)*,**whichrequires us to recognize an asset or liability for the funded status (thedifference between the fair value of plan assets and benefit obligation, whichfor defined benefit pension plans is deemed to be the projected benefitobligation) of its retirement plans and recognize changes in the funded statusannually through other comprehensive income (loss).  The statement also changes the date in whichthe funded status can be measured (eliminating the 90-day window) with limitedexceptions. The effective date of the recognition of the funded status is foryears ending after December 15, 2006. See Note 10 to our Consolidated Financial Statements included inItem 18 of this annual report for the effect of adoption. The effectivedate for the change in acceptable measurement date is for fiscal years endingafter December 15, 2008. We are currently evaluating the impact of changing the

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measurement date on our consolidated financialstatements.

In February 2007, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 159, *The Fair Value Option for Financial Assets and Financial Liabilities—Includingan amendment of FASB Statement No. 115*,**whichallows us to record at fair value financial assets and liabilities, with anychanges being recorded in earnings.  Thiscan be done on an instrument-by-instrument basis in most circumstances, isirrevocable after election for that instrument and must be applied to theentire instrument.  The adoption of suchstandard is effective for fiscal years beginning after November 15, 2007 and isnot expected to have a material effect on our consolidated financialstatements.

**Resultsof Operations**

Thefollowing table sets forth, for the periods indicated, the percentage of netsales represented by certain items included in our statements of consolidatedincome:
| ** **                                                 | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                 | ** ** | **2004(1)**                                | ** ** | **2005(1)** | ** ** | **2006(1)** | ** ** |
| Net Sales                                                  |       | 100.0                                      | %          | 100.0 | % | 100.0 | % |
| Cost of Sales                                              |       | 32.0                                       |       | 31.8 |   | 30.5 |   |
| Gross Profit                                               |       | 68.0                                       |       | 68.2 |   | 69.5 |   |
| Operating Expenses:                                        |       |                                       |       |   |   |   |   |
| Selling and  Advertising                                   |       | 42.2                                       |       | 42.9 |   | 42.1 |   |
| General and  Administrative                                |       | 10.6                                       |       | 11.2 |   | 11.3 |   |
| Total                                                      |       | 52.8                                       |       | 54.1 |   | 53.4 |   |
| Income From Operations                                     |       | 15.1                                       |       | 14.1 |   | 16.2 |   |
| Other Income (Expense)—Net                            |       | (1.1                                       | )          | (1.0 | ) | (1.7 | ) |
| Provision For Income  Taxes                                |       | (4.9                                       | )          | (4.8 | ) | (5.1 | ) |
| Minority Interests in  Income of Consolidated Subsidiaries |       | (0.3                                       | )          | (0.2 | ) | (0.2 | ) |
| Net Income From  Continuing Operations                     |       | 8.8                                        |       | 8.0 |   | 9.2 |   |
| Discontinued Operations                                    |       | 0.2                                        |       | 0.3 |   | (0.1 | ) |
| Net Income                                                 |       | 9.0                                        |       | 8.3 |   | 9.1 |   |

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(1)             Resultsof Things Remembered, a former specialty gift business that was sold inSeptember 2006, are reclassified as discontinued operations and are notincluded in results from continuing operations for 2004, 2005 and 2006.

Foradditional financial information by operating segment and geographic region,see Note 13 to our Consolidated Financial Statements included inItem 18 of this annual report.

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**Comparison of the year ended December 31,2006 to the 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-store sales;and (ii) the addition of U.S.$ 26.7 million in sales from the approximately 70new Canadian retail outlets which were acquired in June 2006, which waspartially offset by a negative exchange rate effect of Euro 25.0 million. Anadditional Euro 20.2 million of the increase was attributable to an increase innet sales in the Asia-Pacific retail business, primarily due to Euro 11.3million in additional net sales contributed 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 1,075.0 millionin 2005. This 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 and Bvlgari, and the continued development ofnew branded products such as Dolce & Gabbana (which we began distributingin October 2005). These increases occurred primarily in the European and NorthAmerican markets, which account for approximately 78.5 percent of our net salesto third parties in our manufacturing and wholesale segment.

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.

*Cost of Sales.*Cost of sales increased by 8.3 percent to Euro 1,426.0 million in 2006, fromEuro 1,316.7 million in 2005, primarily attributable to our overall salesgrowth. As a percentage of net sales, cost of sales decreased to 30.5 percentfrom 31.8 percent.  This decrease as apercentage of net sales was primarily attributable to the change in sales mix resulting fromincreased sales of our Ray-Ban brand and sales of branded products of ourdesigner lines, Prada, Bvlgari and Dolce & Gabbana, which carry a higher grossmargin than other lines, increased efficiency in our manufacturing facilitiesleveraging the fixed cost structure to produce more frames, and****increased production to cover the additionaldemand for our products**.** In 2006, the average number of frames produceddaily in Luxottica’s facilities was approximately 153,000 as compared to115,000 for the same period of 2005, attributable to increased production inthe Tristar facility, as well as improved productivity in our Italianfactories.

*Gross Profit.* For the reasons described above, gross profitincreased by 15.4 percent to Euro 3,250.2 million in 2006 from Euro 2,817.6million in 2005. As a percentage of net sales, gross profit increased to 69.5percent in 2006 from 68.2 percent in 2005, primarily due to the increase ingross profit of the manufacturing and wholesale segment**.**

*Operating Expenses.*Totaloperating expenses increased by 11.5 percent to Euro 2,494.2 million in 2006from Euro 2,236.2 million in 2005. As a percentage of net sales, operating expensesdecreased to 53.3 percent in 2006 from 54.1 percent in 2005 primarilyattributable to the increase in net sales while maintaining strong costcontrols in both our manufacturing and wholesale and our retail segments.

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Selling and advertising expenses (including royaltyexpenses) increased by 10.9 percent to Euro 1,967.0 million in 2006, from Euro1,774.2 million in 2005, primarily due to increased net sales. As a percentageof net sales, selling and advertising expenses decreased to 42.1 percent in 2006from 42.9 percent in 2005, primarily attributable to a reduced commissionspercentage relative to sales earned by the wholesale sales force and to lowerstore costs in the North American retail business leveraging the fixed coststore structure by an increase in same store sales. As we integrate the newlyacquired stores in both Canada and China, we expect to further realize areduction in selling expenses as a percentage of sales.

General and administrative expenses, includingintangible asset amortization, increased by 14.1 percent to Euro 527.1 millionin 2006 from Euro 462.0 million in 2005. This includes approximately Euro 48.0million of expense relating to stock options expensed in accordance with SFASNo. 123(R), which we adopted on January 1, 2006, as compared to Euro 22.7million in 2005 (calculated according to APB 25).  As a percentage of net sales, general andadministrative expenses increased to 11.3 percent in 2006 from 11.2 percent in2005.

*Income from Operations.*For the reasons described above, income from operations for 2006increased 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.

Operating margin, which is income from operationsdivided by net sales, in the manufacturing and wholesale segment increased to26.0 percent in 2006 from 23.2 percent in 2005. This increase in operatingmargin is attributable to lower sales commissions as a percentage of sales andhigher gross profit due to a more favorable brand mix, partially offset byhigher advertising expenses (including royalty expenses).

Operating margin in the retail segment increased to13.1 percent in 2006 from 11.6 percent in 2005. This increase in operating margin is attributable to lower store costsin the North American retail business, as well as increased net sales in theNorth American retail business due to the fixed 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 toEuro 678.2 million in 2006 from Euro 539.3 million in 2005. As a percentage ofnet sales, income before taxes increased to 14.5 percent in 2006 from 13.0percent in 2005. Minority interest decreased to Euro 8.7 million in 2006 fromEuro 9.3 million in 2005.  The Company’seffective tax rate was 35.2 percent in 2006, as compared to 37.0 percent in2005 due to a reduction in taxes in foreign jurisdictions.  The most significant portion of the benefitis due to the adoption in Australia of a consolidated tax regime, whichresulted in an increase in the tax basis of certain assets. We have completedour evaluation of the impact of adoption of FIN 48, *Accountingfor Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109*.  See “—Income Taxes” above for a more detaileddiscussion.

Net income from continuing operations increased by 30.2 percent to Euro430.7 million in 2006 from Euro 330.8 million in 2005. Net income fromcontinuing operations as a percentage of net sales increased to 9.2 percent in2006 from 8.0 percent in 2005.

Basic earnings per share from continuing operationsfor 2006 were Euro 0.95 as compared to Euro 0.73 in 2005. Diluted earnings pershare from continuing operations for 2006 were Euro 0.94 as compared to Euro0.73 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.

Basicearnings per share for 2006 were Euro 0.94 as compared to Euro 0.76 in 2005.Diluted earnings per share for 2006 were Euro 0.93 as compared to Euro 0.76 in2005.

 

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**Comparison of theyear ended December 31, 2005 to the year ended December 31, 2004**

*Net Sales.* Netsales increased 30.0 percent to Euro 4,134.3 million during 2005 as compared toEuro 3,179.6 million for 2004. Net sales in the retail segment, throughLensCrafters, Sunglass Hut, OPSM and Cole, increased by 34.8 percent to Euro3,061.7 million for 2005 from Euro 2,271.0 million for 2004. This increase wasprimarily due to the inclusion of Cole sales from the date of acquisition onOctober 4, 2004, which amounted to Euro 761.5 million for the full fiscalyear 2005 compared to Euro 164.8 million for the three-month period followingthe acquisition in 2004.

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

On ageographic basis net of intercompany transactions, operations in North Americaresulted in net sales of Euro 2,811.9 million during 2005, comprising 68.0percent of total net sales, an increase of Euro 804.1 million from 2004. Thisincrease was primarily due to the inclusion of Cole sales from the date ofacquisition on October 4, 2004, which amounted to Euro 761.5 million forthe full fiscal year 2005 compared to Euro 164.8 million for the three-monthperiod following the acquisition in 2004. This sales increase was mostly drivenby our focus on selling premium frames and products at both our Sunglass Hutand LensCrafters North American retail outlets. This focus included theremodeling, opening or relocation of over 250 Sunglass Hut outlets. Net salesfor operations in “Asia-Pacific,” which consists of Australia, New Zealand, Singapore,Malaysia, Hong Kong, Thailand, China, Japan and Taiwan, were Euro 461.2 millionduring 2005, comprising 11.2 percent of total net sales, an increase of Euro26.2 million as compared to 2004. Net sales for the rest of the world accountedfor the remaining Euro 861.2 million of net sales during 2005, whichrepresented a 16.9 percent increase as compared to 2004.

During2005, net sales in the retail segment accounted for approximately 74.0 percentof total net sales, as compared to approximately 71.4 percent of total netsales in 2004 due to the retail acquisition described above.

*Cost of Sales.*Costof sales increased by 29.3 percent to Euro 1,316.7 million in 2005 from Euro1,018.6 million in 2004. Cost of sales in the retail segment increased by Euro273.5 million, which increase is primarily attributable to the inclusion ofCole in our results of operations for three months in 2004 compared to a full12 months in 2005. Cost of sales in the manufacturing and wholesale segmentincreased by Euro 68.6 million due to the increase in net sales. As apercentage of net sales, cost of sales decreased to 31.8 percent from 32.0percent. This was mostly attributable to the placement of more Luxotticamanufactured products in our newly acquired Cole retail locations.Manufacturing labor costs increased by 17.3 percent to Euro 301.3 million in2005 from Euro 256.9 million in 2004. This increase is attributable to theincrease in net sales. As a percentage of net sales, cost of labor decreased to7.3 percent in 2005 from 8.1 percent in 2004, due to higher productivity in thewholesale division, as well as due to the inclusion of Cole results, since Cole’scost of labor as a percentage of sales is lower than that of the rest of theGroup. For 2005, the average number of frames produced daily in our facilities(including Tristar, our Chinese factory) was approximately 125,000, which wasin line with 2004 production.

*Gross Profit.*For the reasons outlined above, gross profit increased by 30.4 percent to Euro2,817.6 million in 2005, from Euro 2,161.0 million in 2004. As a percentage ofnet sales, gross profit increased to 68.2 percent in 2005 from 68.0 percent in2004.

*Operating Expenses.*Total operating expenses increased by 33.0 percent to Euro 2,236.2 million in2005 from Euro 1,681.5 million in 2004. As a percentage of net sales, operatingexpenses increased to 54.1 percent in 2005 from 52.9 percent in 2004.

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Sellingand advertising expenses, including royalty expenses, increased by 32.1 percentto Euro 1,774.2 million during 2005 from Euro 1,343.0 million in 2004. Euro297.4 million of this increase is attributable to the inclusion of Cole in ourresults of operations for the full fiscal year in 2005 compared to only thefourth quarter of 2004 (from the date of acquisition). As a percentage of netsales, selling and advertising expenses increased to 42.9 percent in 2005 from42.2 percent in 2004. This increase as a percentage of sales is primarilyattributable to the consolidation of Cole’s results in our results of operations.

Generaland administrative expenses, including intangible asset amortization, increasedby 36.5 percent to Euro 462.0 million in 2005 from Euro 338.5 million in 2004.Euro 81.0 million of this increase is attributable to the inclusion of Cole inour results of operations for the full fiscal year in 2005 compared to only thefourth quarter of 2004 (from the date of acquisition). As a percentage of netsales, general and administrative expenses increased to 11.2 percent in 2005from 10.6 percent in 2004. This increase was primarily due to the consolidationof Cole results in our results of operations. As we continue the integration ofCole, we expect its operating expenses as a percentage of sales to decrease dueto the expected higher efficiency in the fixed cost structure.

*Income from Operations.*For the reasons outlined above, income from operations for 2005 increased by21.3 percent to Euro 581.4 million from Euro 479.5 million in 2004. As apercentage of net sales, income from operations decreased to 14.1 percent in2005 compared to 15.1 percent for 2004.

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

Operatingmargin in the retail segment decreased to 11.6 percent in 2005 from 13.1percent in 2004, due to the inclusion of the results for Cole, whose operatingmargin is lower than that of our other retail chains. However, we believe thatwhen the final restructuring of the North American Retail Division is completedby the end of 2006, we will return to our historical operating margins.

*Other Income (Expense)-Net.*Other income (expense)-net was a net expense of Euro 42.1 million in 2005 ascompared to a net expense of Euro 34.9 million in 2004. This increase in otherincome (expense)-net is mainly attributable to an increase in interest expenseof Euro 11.2 million due to the debt incurred for the acquisition of Cole, aswell as rising interest rates. We expect an increase in interest expense for2006 due to the rising interest rate environment.

*Net Income from ContinuingOperations.*Income before taxes increased by 21.3 percent toEuro 539.3 million in 2005 from Euro 444.6 million in 2004. As a percentage ofnet sales, income before taxes decreased to 13.0 percent in 2005 from 14.0percent in 2004, mainly due to the integration of the Cole operations. Minorityinterest increased to Euro (9.3) million in 2005 from Euro (8.6) million in2004. Our effective tax rate was 37.0 percent in 2005, while it was 35.4 percentin 2004. Net income increased by 18.5 percent to Euro 330.8 million in 2005from Euro 279.1 million in 2004. Net income from continuing operations as apercentage of net sales decreased to 8.0 percent in 2005 from 8.8 percent in2004.

Basicearnings per share from continuing operations for 2005 were Euro 0.73,increasing from Euro 0.62 for 2004. Diluted earnings per share  from continuing operations for 2005 were Euro0.73 increasing from Euro 0.62 for 2004.

*DiscontinuedOperations.* Discontinued operations resulted in income ofEuro 11.5 million in 2005, as compared to Euro 7.8 million in 2004. Theincrease was due to the consolidation of the Things Remembered operations onlyfor three months in 2004 because the acquisition date occurred on October 4,2004.

*Net Income.*Netincome increased by 19.3 percent to Euro 342.3 million in 2005 from Euro 286.9million in 2004. Net income as a percentage of net sales decreased to 8.3percent in 2005 from 9.0 percent in 2004.

Basic earning per share for 2005 were Euro0.76, increasing from Euro 0.64 for 2004. Diluted earnings per share for 2005were Euro 0.76, increasing from Euro 0.64 for 2004.

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**Taxes**

Our effective tax rates forthe years ended December 31, 2004, 2005 and 2006 were approximately 35.4 percent,37.0 percent and 35.2 percent, respectively. The 2004 effective tax ratewas less than the statutory tax rate due to permanent differences between ourincome for financial reporting and tax purposes which reflect the net losscarry-forward caused by the prior funding of subsidiary losses through capitalcontributions that are deductible for income tax purposes under Italian law,and the reduction in certain investments in subsidiaries. Such subsidiarylosses were primarily attributable to the amortization of certain intangibleassets associated with our acquisitions. This remaining net loss carry-forwardwas completely utilized in 2004. For fiscal 2005 we received a net permanentbenefit caused by the Company complying with an Italian law that allows for thestep up in tax basis of certain intangible assets for which this benefit offsetthe aggregate effect of different rates in foreign jurisdictions. For fiscal2006 the tax rate includes the results from the adoption of a change in the taxlaw in Australia, which introduced a tax consolidation regime for wholly ownedgroup entities. 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, when OPSMfiled its consolidated 2005 tax return, providing a one time permanent benefitto the tax provision.

**Liquidity and Capital Resources**

***Cash Flows***

*OperatingActivities**.*  The Company’s cash provided byoperating activities was Euro 603.3 million, Euro 605.7 million and Euro 508.3million for 2006, 2005 and 2004, respectively. The Euro 2.4 million decrease in2006 as compared to 2005 was primarily attributable to increased net income,partially offset by advance payments made by the Company to certain designersfor future contracted minimum royalties, increases in accounts receivable andinventory and tax payments to comply with an Italian tax law allowing for thestep-up in tax basis of certain intangible assets. The Euro 97.5 millionincrease in 2005 as compared to 2004 was primarily attributable to increasednet income and additional depreciation and amortization resulting from the Coleacquisition, including Euro 17.3 million relating to the amortization of itsintangible assets.

Depreciation andamortization were Euro 220.8 million in 2006 as compared to Euro 184.6 millionin 2005. This increase was primarily attributable to increased fixed assets.Deferred taxes were Euro 72.5 million in 2006 as compared to Euro 91.3 millionin 2005. This decrease was primarily attributable to the fact that deferredtaxes in 2006 included a benefit due to the revaluation of certain tangible andintangible assets in the retail division in Australia, while in 2005 itincluded the effect of the adoption of an Italian tax law allowing for thestep-up in tax basis of certain intangible assets. Non-cash stock-basedcompensation expenses were Euro 47.9 million in 2006 as compared to Euro 22.7million in 2005. This increase was primarily attributable to the adoption ofSFAS 123(R) for stock compensation expense on two new Company stock optionperformance plans implemented in July 2006. The use of cash associated withaccounts receivable was Euro 83.1 million in 2006 as compared to Euro 33.6million in 2005. The increase in accounts receivable balances, thus a use ofcash, was primarily attributable to the increase in sales of our manufacturingand wholesale segment. Prepaid expenses and other was a source of cash of Euro8.6 million in 2006, as compared to a use of cash of Euro 56.7 million in 2005,primarily attributable to advance payments of Euro 30.0 million made in 2005 byus to certain of our licensors and the timing of certain tax payments byforeign subsidiaries in 2005. Inventories were a use of cash in 2006 of Euro27.7 million in 2006 compared to a source of cash of Euro 66.5 million in 2005,primarily attributable to growing inventory level to support the business. Cashprovided by operating activities for accounts payable increased by Euro 26.4million in 2006 as compared to the same period of 2005. The increase wasprimarily attributable to improved timing of payments. Cash provided byoperating activities for accrued expenses decreased by Euro 6.7 million in 2006as compared to the same period of 2005. The decrease was primarily attributableto a termination of sales of the retail division’s priced extended warrantycontracts with terms of coverage of 12 months to 24 months in 2005. Income taxpayable was a source of cash in 2006 of Euro 5.9 million as compared Euro 126.7million for 2005. This decrease was primarily attributable to timing of taxpayments, and to increased accruals for income taxes in 2005 due to theadoption of an Italian tax law to be paid in cash during fiscal 2006.

*Investing Activities.* The Company’s cash used in investing activities was Euro 263.7 million,Euro 166.4 million and Euro 479.7 million in 2006, 2005 and 2004, respectively.The Euro 97.3 million increase in 2006 as compared to 2005 was primarilyattributable to acquisitions of businesses and capital expenditures. In 2006,the Company’s acquisitions of businesses were Euro 134.1 million, net of cashacquired, and included Shoppers Optical, a Canadian-based optical chain, forapproximately Euro 48.7 million, Beijing Xueliang Optical Technology Co. Ltd.for approximately Euro 17.0 million, the remaining 49 percent stake of theTurkish-based distributor Luxottica Gozluk Ticaret A.S. for approximately Euro11.7 million, Ming Long Optical for approximately Euro 29.0 million, and ModernSight Optics for approximately Euro 14.0 million.  Such increase was partially offset by thesale of Things Remembered, a specialty gifts retail business previouslyincluded in the North American retail division, with net proceeds of Euro 128.0million. In 2005, the Company acquired the remaining minority stake of OPSM forEuro 61.9 million and also completed two asset acquisitions by the NorthAmerican retail division for an aggregate amount of Euro 11.1 million and theacquisition of 27 stores in Canada for approximately Euro 13.8 million. Theseuses of cash from investing activities were partially offset by the sale ofPearle Europe, with net proceeds of Euro 144 million. The Euro 313.3 milliondecrease in 2005 as compared to 2004 was primarily attributable to the Coleacquisition in 2004, for an aggregate amount of Euro 363.0 million, net of cash acquired and includingdirect acquisition-related expenses.

Our capital expenditureswere Euro 272.2 million in 2006 as compared to Euro 220.0 million in 2005. Thisincrease was primarily attributable to the investment in manufacturingfacilities for the wholesale division and the opening, remodeling andrelocation of stores in the retail division, in addition to the costsassociated with the expansion of the North American retail division’s homeoffice. Capital expenditures were Euro 53.5 million in the three-month periodended March 31, 2007. It is our expectation that 2007 annual capitalexpenditures will be approximately Euro 300.0 million, in addition to

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investments for any acquisitions. Wewill pay for these future capital expenditures with our currently availableborrowing capacity and available cash.

Cash received from disposals of property, plant andequipment was Euro 21.6 million in 2006 as compared to Euro 1.0 million in2005. This increase in cash provided by the disposal of fixed assets isprimarily attributable to the sale of an obsolete aircraft in October 2006 fora net price of Euro 15.6 million, the sale of unused manufacturing facilitiesin the wholesale division in Italy and a building in the United Kingdom.Acquisitions of intangible assets resulted in a use of cash of Euro 1.1 millionin 2006 compared to Euro 4.5 million in 2005.

*FinancingActivities.*  The Company’s cash used in financingactivities was Euro 349.9 million, Euro 350.0 million and Euro 67.5 million in2006, 2005 and 2004, respectively. Cash used in financing activities in 2006consisted primarily of the proceeds of Euro 84.1 million from long-term debtwhich were used to partially repay Euro 215.3 million of long-term debt. Cashused in financing activities for 2005 consisted primarily of net long termrepayments on maturing debt of approximately Euro 254.4 million.  Dividends paid to the Company’s shareholdersin 2006 and 2005 were Euro 131.4 million and Euro 103.5 million, respectively.In 2004, our cash used in financing activities consisted primarily of: (i) thenet proceeds of Euro 88.6 million from all the credit facilities and (ii) Euro446.9 million of proceeds of Tranche B and Tranche C of the credit facility,which we used in connection with the acquisition of Cole, including therepayment of Cole’s existing notes. We borrowed Euro 405.0 million in June 2004(consisting of the proceeds of Tranche A of the credit facility) to repay Euro400.0 million of long-term debt. Additionally, we used cash provided byfinancing activities to reduce bank overdrafts and to pay Euro 94.1 million ofdividends to our shareholders.

***Our Indebtedness***

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

Our creditfacilities contain certain financial covenants including ratios of NetFinancial Position (“NFP”) (as defined in the agreements) to shareholders’equity, NFP to EBITDA (earnings before interest, taxes and depreciation asdefined in the agreements), and EBITDA to net financial charges (as defined inthe agreements).  As of March 31, 2007,we were in compliance with these financial covenants and we expect to continueto be in compliance in the foreseeable future periods. We believe that aftergiving effect to any additional financing that we may incur in connection withthe announced acquisition of Oakley as discussed in Item 4— “Information on theCompany—Business Overview—Recent Developments—Acquisitions,” such restrictionswould not materially affect our compliance with these covenants, our ability toincur the additional debt or our future business operations.

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

*BankOverdrafts*

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 1,487.6 million as of December 31, 2006. Available additionalborrowings under credit facilities as of such date were Euro 1,137.1 million.

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

Torefinance previously issued Eurobonds, in June 2002, U.S. Holdings, a U.S.subsidiary, entered into a U.S.$350 million credit facility with a groupof four Italian banks led by UniCredito Italiano S.p.A. The term loan portionof the credit facility provided U.S.$200 million of borrowing and requiredequal quarterly principal installments beginning in March 2003. Therevolving loan portion of the credit facility allowed for maximum borrowings ofU.S.$150 million. Interest accrued under the credit facility at LIBOR (asdefined in the agreement) plus 0.5 percent and the credit facility allowed U.S.

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Holdings to selectinterest periods of one, two or three months. The credit facility containedcertain financial and operating covenants. The credit facility was guaranteedby Luxottica Group S.p.A. and matured in June 2005, and at such time werepaid in full all of the outstanding amounts under this credit facility.

InJuly 2002, U.S. Holdings entered into a Convertible Swap Step-Up (“2002Swap”). The beginning and maximum notional amount of 2002 Swap was U.S.$275 million,which decreased by U.S.$20 million quarterly, beginning with the quartercommencing on March 17, 2003. The 2002 Swap was entered into to convertthe floating rate credit agreement referred to in the preceding paragraph to amixed position rate agreement by allowing U.S. Holdings to pay a fixed rate ofinterest if LIBOR remains under certain defined thresholds and for U.S.Holdings to receive an interest payment at the three-month LIBOR rate asdefined in the agreement. These amounts were settled net every three monthsuntil the final expiration of the 2002 Swap which occurred on June 17,2005. The 2002 Swap did not qualify for hedge accounting under SFASNo. 133, *Accounting for Derivative Instruments andHedging Activities*, as amended, and, as such, was marked to marketwith the gains or losses from the change in value reflected in currentoperations. Marked to market gains of Euro 1.491 million are included incurrent operations in 2004, while in 2005 we recognized a loss of Euro 0.163million in current operations.

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

InDecember 2002, we entered into an unsecured credit facility with BancaIntesa S.p.A. The unsecured credit facility provided borrowing availability ofup to Euro 650 million. The facility included a Euro 500 million term loan,which required a balloon payment of Euro 200 million in June 2004 andrepayment of equal quarterly installments of principal of Euro 50 millionsubsequent to that date. The revolving portion provided borrowing availabilityof up to Euro 150 million which could be borrowed and repaid until final maturity. Interest accrued on the boththe term and revolving loan at Euribor as defined in the agreement plus 0.45percent. The final maturity of all outstanding principal amounts and interestwas December 27, 2005 and at such time we repaid in full all of theoutstanding amounts under this credit facility.

InDecember 2002, we entered into two interest rate swap transactions (the “IntesaSwaps”) beginning with an aggregate maximum notional amount of Euro250 million, which decreased by Euro 100 million on June 27,2004 and by Euro 25 million during each subsequent three-month period.These Intesa Swaps expired on December 27, 2005. The Intesa Swaps were enteredinto as a cash flow hedge of a portion of the Banca Intesa Euro650 million unsecured credit facility discussed above. The Intesa Swapsexchanged the floating rate based on Euribor to a fixed rate of2.985 percent.

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

On September 3, 2003, Luxottica U.S. Holdings Corp.(“U.S. Holdings”) closed a private placement of U.S.$300 million of seniorunsecured 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 percentper annum and interest on each of the Series B and Series C Notes accrues at4.45 percent 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 A andSeries C Notes require annual prepayments beginning on September 3, 2006through the applicable dates of maturity. The Notes are guaranteed on a seniorunsecured basis by the Company and Luxottica S.r.l., the Company’s wholly ownedsubsidiary. The Notes can be prepaid at U.S. Holdings’ option under certaincircumstances. The proceeds from the Notes were used for the repayment ofoutstanding debt and for other working capital needs. The Notes contain certainfinancial and operating covenants. As of December 31, 2006, the Company was incompliance with all of its applicable covenants, including calculations offinancial covenants when applicable.

In connection with the issuance of the Notes, U.S.Holdings entered into three interest rate swap agreements with Deutsche Bank AG(collectively, the “DB Swap”). The three separate agreements’ notional amountsand interest payment dates coincide with those of the Notes. The DB Swapexchanged the fixed rate of the Notes for a floating rate of the six-month LIBORrate plus 0.66 percent for the Series A Notes and the six-month LIBOR rate plus0.73 percent for the Series B and Series C Notes. U.S. Holdings terminated allthree agreements comprising the DB Swap in December 2005.

*The OPSM Acquisition and the Euro 200 MillionCredit Facility with Banca Intesa and Related Interest Rate Swaps*

In September 2003, the Company entered into a newcredit facility with Banca Intesa S.p.A. of Euro 200 million. The creditfacility includes a Euro 150 million term loan, which will require repayment ofequal semi-annual installments of principal of Euro 30 million startingSeptember 30, 2006 until the final maturity date. Interest accrues on the termloan at Euribor (as defined in the agreement) plus 0.55 percent (4.27 percent onDecember 31, 2006). The revolving loan provides borrowing availability of up toEuro 50 million; amounts borrowed under the revolving portion can be borrowedand repaid until final maturity. As of December 31, 2006, Euro 25 million hadbeen drawn from the revolving portion. Interest accrues on

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the revolving loan at Euribor (as defined in theagreement) plus 0.55 percent (4.10 percent on December 31, 2006). The finalmaturity of the credit facility is September 30, 2008. The Company can selectinterest periods of one, two or three months. The credit facility containscertain financial and operating covenants. As of December 31, 2006, the Companywas in compliance with all of its applicable covenants, including calculationsof financial covenants when applicable. Under this credit facility, Euro 145million was outstanding as of December 31, 2006.

In June 2005, the Companyentered into four interest rate swap transactions with various banks with anaggregate initial notional amount of Euro 120 million, which will decrease byEuro 30 million every six months starting on March 30, 2007 (“Intesa OPSM Swaps”).These swaps expire on September 30, 2008. The Intesa OPSM Swaps were enteredinto as a cash flow hedge on a portion of the Banca Intesa Euro 200 million unsecuredcredit facility discussed above. The Intesa OPSM Swaps exchange the floatingrate of Euribor for an average fixed rate of 2.38 percent per annum.

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

OnJune 3, 2004, the Company and U.S. Holdings entered into a new credit facilitywith a group of banks providing for loans in the aggregate principal amount ofEuro 740 million and U.S.$325 million. The facility consists of three tranches(Tranche A, Tranche B and Tranche C). On March 10, 2006, this agreement wasamended to increase the available Tranche C borrowings to Euro 725 million,decrease the interest margin and define a new maturity date of five years fromthe date of the amendment for Tranche B and Tranche C. Tranche A is a Euro 405million amortizing term loan requiring repayment of nine equal quarterlyinstallments of principal of Euro 45 million beginning in June 2007, which isto be used for general corporate purposes, including the refinancing ofexisting Luxottica Group S.p.A. debt as it matures. Tranche B is a term loan ofU.S.$325 million which was drawn upon on October 1, 2004 by U.S. Holdings tofinance the purchase price for the acquisition of Cole National. Amountsborrowed under Tranche B will mature in March 2011. Tranche C is a revolvingcredit facility of Euro 725 million-equivalent multi-currency (Euro/U.S.dollar). Amounts borrowed under Tranche C may be repaid and reborrowed with alloutstanding balances maturing in March 2011. On December 31, 2006, U.S.$190million (Euro 144.0 million) had been drawn from Tranche C by U.S. Holdings andEuro 100 million by Luxottica Group S.p.A. The Company can select interestperiods of one, two, three or six months with interest accruing onEuro-denominated loans based on the corresponding Euribor rate and U.S. dollardenominated loans based on the corresponding LIBOR rate, both plus a marginbetween 0.20 percent and 0.40 percent based on the “Net Debt/EBITDA” ratio, asdefined in the agreement. The interest rate on December 31, 2006 was 3.97percent for Tranche A, 5.62 percent for Tranche B, 5.60 percent on Tranche Camounts borrowed in U.S. dollars and 3.96 percent on Tranche C amounts borrowedin Euro. This credit facility contains certain financial and operatingcovenants. The Company was in compliance with those covenants as of December31, 2006. Under this credit facility, Euro 895.2 million was outstanding as ofDecember 31, 2006.  In February 2007, weexercised an option included in the amendment to extend the maturity date ofTranches B and C to March 2012.  Foradditional information, see Note 9 to our Consolidated FinancialStatements included in Item 18 of this annual report.

In June 2005, the Companyentered into nine interest rate swap transactions with an aggregate initialnotional amount of Euro 405 million with various banks which will decrease byEuro 45 million every three months starting on June 3, 2007 (“Club Deal Swaps”).These swaps expire on June 3, 2009. The Club Deal Swaps were entered into as acash flow hedge on Tranche A of the credit facility discussed above. The ClubDeal Swaps exchange the floating rate of Euribor for an average fixed rate of2.40 percent per annum.

*AustralianDollar 30 Million Credit Facility*

InAugust 2004, OPSM re-negotiated its multicurrency (AUD/HKD) loan facility withWestpac Banking Corporation. The credit facility had a maximum available lineof AUD 100 million, which was reduced to AUD 50 million in September 2005. Thisfacility expired on August 31, 2006. After negotiations, the credit facilitywas renewed for AUD 30 million and expires on August 31, 2007. The interestrate margin has been reduced to 0.275 percent. For borrowings denominated inAustralian dollars, the interest accrues on the basis of BBR (Bank Bill Rate),and for borrowings denominated in Hong Kong dollars the rate is based on HIBOR(HK Interbank Offered Rate) plus an overall 0.275 percent margin. At December31, 2006, the interest rate was 4.39 percent on the borrowings denominated inHong Kong dollars and is payable monthly in arrears. The facility was utilizedfor an amount of HKD 125.0 million (AUD 20.2 million) and there was no drawdownin Australian dollars. The credit facility contains certain financial and operatingcovenants. As of December 31, 2006, the Company was in compliance with all ofits applicable covenants, including calculations of financial covenants whenapplicable.

InDecember 2005, the Company entered into an unsecured credit facility with BancaPopolare di Verona e Novara Soc. Coop. a R.L. The 18-month credit facilityconsists of a revolving loan that provides borrowing availability of up to Euro100 million. Amounts borrowed under the revolving portion can be borrowed andrepaid until final maturity. As of March 31, 2007, Euro 60 million had beendrawn and was outstanding from the revolving loan. Interest accrues on therevolving loan at 

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Euribor (asdefined in the agreement) plus 0.25 percent (4.11 percent on March 31, 2007).The Company can select interest periods of one, three or six months. The finalmaturity of the credit facility was June 1, 2007. In June 2007, the Companyrenewed the credit facility with Banca Popolare di Verona e Novara Soc. Coop. aR.L. to replace the December 2005 credit facility that expired on June 1, 2007.The 18-month credit facility consists of a revolving loan that providesborrowing availability of up to Euro 100 million. Amounts borrowed under therevolving portion can be borrowed and repaid until final maturity. The Companycan select interest periods of one, three or six months.

***OurWorking Capital***

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

 

|                      | ** ** | **As of December 31,**    | ** ** |
|----------------------|------------|------------------------------------------|------------|
| ** **           | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **           | ** ** | **(In millions of Euro)** | ** ** |
| Current Assets       |       | 1,557.0                                  |       | 1,604.6 |   | 1,484.8 |   |
| Current  Liabilities |       | (1,338.2                                 | )          | (1,235.7 | ) | (1,425.3 | ) |
| Working Capital      |       | 218.8                                    |       | 368.9 |   | 59.5 |   |

 

Theincrease in working capital in 2005 reflects the repayment of maturing debt andthe refinancing of current debt maturities with long-term debt.  In 2006, working capital decreased due to anincrease in the current portion of long-term debt scheduled to mature in 2007.

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

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

**Off-BalanceSheet Arrangements**

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

We use, from time totime, derivative financial instruments, principally interest rate and currencyswap agreements, as part of our risk management policy to reduce our exposureto market risks from changes in foreign exchange rates. Although we have notdone so in the past, we may enter into other derivative financial instrumentswhen we assess that the risk can be hedged effectively.

**Contractual Obligations and Commercial Commitments**

We are party to numerouscontractual arrangements consisting of, among other things, royalty agreementswith designers, leases for retail store, plant, warehouse and officefacilities, as well as certain data processing and automotive equipment, andoutstanding borrowings under credit agreements and facilities with financialinstitutions to finance our operations. These contractual arrangements maycontain minimum annual commitments. A more complete discussion of theobligations and commitments is included in Notes 9 and 15 to our ConsolidatedFinancial Statements included in Item 18 of this annual report.

The following tablesummarizes the scheduled maturities of our long-term debt, minimum leasecommitments under noncancelable operating leases and minimum payments undernoncancelable royalty arrangements as of December 31, 2006. The table doesnot include pension liabilities. Our pension plans are discussed inNote 10 to our Consolidated Financial Statements included in Item 18 ofthis annual report.

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| ** **                                | ** ** | **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) |       | 359.5                                     |       | 458.9 |   | 500.1 |   | 0.8 |   | 1,319.3 |   |
| Interest Payments(2)                      |       | 35.9                                      |       | 40.2 |   | 17.1 |   | 0.0 |   | 93.2 |   |
| Operating Leases                          |       | 195.5                                     |       | 311.4 |   | 187.9 |   | 220.7 |   | 915.5 |   |
| Minimum Royalty  Arrangements             |       | 73.0                                      |       | 156.9 |   | 112.9 |   | 216.5 |   | 559.3 |   |
| Total                                     |       | 663.9                                     |       | 967.4 |   | 817.8 |   | 438.0 |   | 2,887.3 |   |

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(1)             Asdescribed previously, our long-term debt has certain financial and operatingcovenants that may cause the acceleration of future maturities if we do notcomply with them. We were in compliance with these covenants as ofDecember 31, 2006. In addition, the above table does not take into accountthe February 2007 extension of our Amended Euro 1,130 Million and U.S.$325Million Credit Facility as described above.

(2)             Theseamounts do not include interest payments due under our various revolving creditfacilities as the amounts to be borrowed in future years are uncertain at thistime. In addition, interest rates used to calculate the future interest due onour variable interest rate term loans were calculated based on the interestrate as of December 31, 2006 and assume that we make all scheduledprincipal payments as they mature.

AtDecember 31, 2006, we had available funds of approximately Euro 581.1million under our unused short-term lines of credit. Substantially all of theselines are for less than one year but they have been renewed annually in prioryears. In addition, certain U.S. subsidiaries obtained various letters ofcredit from banks outstanding of Euro 36.1 million as of December 31,2006. 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, 2006, substantially all of our outstanding letters of creditmature within one year.

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

**Directorsand Senior Management**

TheBoard of Directors of Luxottica Group S.p.A. currently consists of 14 members.

Thecurrent term of the Board of Directors expires at the time of the approval ofthe statutory financial statements as of and for the year ended December 31,2008.

Setforth below is certain information regarding the directors and seniormanagement of Luxottica Group S.p.A. as of December 31, 2006, except asotherwise specified:
| ** **            | ** ** | ** ** | ** ** | **Officer or** | ** ** | ** **                                        |
|-----------------------|------------|------------|------------|----------------|------------|---------------------------------------------------|
| ** **            | ** ** | ** ** | ** ** | **Director**   | ** ** | ** **                                        |
| **Name**              | ** ** | **Age(1)** | ** ** | **Since(2)**   | ** ** | **Position(1)**                                   |
| Leonardo Del  Vecchio |       | 71         |       | 1961           |       | Chairman of the Board of Directors                |
| Luigi  Francavilla    |       | 69         |       | 1968           |       | Deputy Chairman                                   |
| Andrea Guerra         |       | 41         |       | 2004           |       | Chief Executive Officer and Director              |
| Roger Abravanel       |       | 60         |       | 2006           |       | Director                                          |
| Tancredi Bianchi      |       | 78         |       | 1990           |       | Director                                          |
| Mario Cattaneo        |       | 76         |       | 2003           |       | Director                                          |
| Enrico Cavatorta      |       | 45         |       | 1999/2003      |       | Group Chief Financial Officer and Director        |
| Roberto Chemello      |       | 52         |       | 1979           |       | Head of Group Operations and Director             |
| Claudio  Costamagna   |       | 51         |       | 2006           |       | Director                                          |
| Claudio Del  Vecchio  |       | 49         |       | 1978           |       | Director                                          |
| Sergio Erede          |       | 66         |       | 2004           |       | Director                                          |
| Sabina Grossi         |       | 41         |       | 2003           |       | Director                                          |
| Gianni Mion           |       | 61         |       | 2004           |       | Director                                          |
| Lucio Rondelli        |       | 82         |       | 1990           |       | Director                                          |
| Frank Baynham         |       | 53         |       | 1987           |       | Executive Vice President—Stores, Retail N.A. |

 

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| Chris Beer                 |   | 40 |   | 2003 |   | Chief Operating Officer, Retail A.P., Australia/NZ |
|----------------------------|--------|----|--------|------|--------|----------------------------------------------------|
| Michael Boxer              |   | 45 |   | 1993 |   | Senior V.P. General Counsel N.A.                   |
| Kerry Bradley              |   | 50 |   | 1988 |   | Chief Operating Officer of Retail N.A.             |
| Tom Coleman                |   | 58 |   | 1987 |   | Executive V.P., Retail A.P.                        |
| Mildred Curtis             |   | 50 |   | 1988 |   | Senior Vice President, Human Resources N.A.        |
| Fabio  D’Angelantonio |   | 37 |   | 2005 |   | Head of Group Marketing                            |
| Jack Dennis                |   | 61 |   | 1982 |   | C.F.O. and C.A.O. of Retail N.A.                   |
| Valerio Giacobbi           |   | 42 |   | 1991 |   | E.V.P. Retail N. A.                                |
| Garland Gunter             |   | 56 |   | 1986 |   | Chief Information Officer of Retail N.A.           |
| Giuseppe La  Boria         |   | 48 |   | 2001 |   | Head of Wholesale Europe & South          |
| Peter McClelland           |   | 38 |   | 2003 |   | C.F.O. and C.A.O. of Retail A.P.                   |
| Seth McLaughlin            |   | 44 |   | 1994 |   | S.V.P. Consumer Marketing of Retail N.A.           |
| George Minakakis           |   | 49 |   | 1994 |   | Chief Operating Officer of Greater China           |
| Enrico Mistron             |   | 37 |   | 1995 |   | Group Controller                                   |
| Antonio Miyakawa           |   | 40 |   | 1993 |   | Head of Wholesale and Group Marketing              |
| Mario Pacifico             |   | 44 |   | 2003 |   | Head of Group Internal Auditing                    |
| Nicola Pelà           |   | 44 |   | 2005 |   | Head of Group Human Resources                      |
| Umberto Soccal             |   | 56 |   | 1988 |   | Group Chief Information Technology Officer         |
| Marco Vendramini           |   | 36 |   | 1997 |   | Group C.A.O.                                       |

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(1)                                  Exceptas otherwise specified, all ages and positions are as of December 31,2006.

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

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Executiveofficers serve at the discretion of the Board of Directors. Messrs. Rondelli,Bianchi, Cattaneo, Mion, Abravanel, Costamagna and Erede and Ms. Grossi are allnon-executive directors. In addition, Messrs. Rondelli, Bianchi, Cattaneo,Mion, Abravanel and Costamagna are also independent directors.

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) comply with applicable law and our bylaws; (ii) respect theprinciples of correct administration; (iii) maintain adequateorganizational structure, internal controls and administrative and accountingsystems; and (iv) ensure that our accounting system represents the factsin a fair and true manner. Although members of the Board of Statutory Auditorsare required to attend the meetings of the Board of Directors and theshareholders, they do not vote on matters submitted to such meetings. Effectiveas of June 14, 2006, the members of the Board of Statutory Auditors are MarcoReboa, Chairman, Giorgio Silva and Enrico Cervellera. The current term of theBoard of Statutory Auditors expires at the time of the approval of thestatutory financial statements as of and for the year ended December 31, 2008.

See “—Summaryof the Significant Differences Between Our Corporate Governance Practices andthe Corporate Governance Standards of the New York Stock Exchange” below formore information regarding the designation of the Board of Statutory Auditorsto act as our audit committee.

Pursuant to Italian law, we also maintain a HumanResources Committee, elected within the members of the Board of Directors. TheHuman Resources Committee has verification, advisory and proposal-makingfunctions, including: (i) recommending to the Board the aggregate remunerationpayable to the Company’s Directors and determining the remuneration criteriafor the top management of the Company and of the entire Group, (ii) reviewingthe Luxottica Group employees’ incentive plans and the criteria for thecomposition of the management bodies of the relevant subsidiaries. Effective asof February 19, 2007, the members of the Human Resources Committee arenon-executive directors Gianni Mion, Roger Abravanel, Claudio Costamagna andSabina Grossi, three of whom are independent. Although the Human ResourcesCommittee does not have a specific term, its term is co-extensive with the termof our Board of Directors since its members are also members of our Board ofDirectors.

See “—Summaryof the Significant Differences Between Our Corporate Governance Practices andthe Corporate Governance Standards of the New York Stock Exchange” below formore information regarding the designation of the Human Resources Committee toact as our compensation committee.

Ashort biography of each of our Directors and executive officers is set forthbelow:

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

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

**AndreaGuerra** was appointed a Director and Chief Executive Officerof the Company on July 27, 2004. Prior to joining the Company,Mr. Guerra was with Merloni Elettrodomestici since 1994, where from 2000,he was its Chief Executive Officer. Prior to being at Merloni, Mr. Guerraworked for Marriott Italia where he became Director of Marketing.Mr. Guerra is also director of the new Parmalat S.p.A. and of BancaNazionale del Lavoro S.p.A. He received a degree in Business Administrationfrom the “La Sapienza” University of Rome in 1989.

**RogerAbravanel**has been a director of the Company since 2006. Heworked at McKinsey&Company from 1972 until June 2006. Mr. Abravanel is alsoinvolved in international consulting projects for the high direction on strategic,organizational and operational development issues. He graduated with a degreein Engineering from the Politecnico di Milano and received a Masters inBusiness Administration from Insead in Fontainebleau (with High Distinctions).  He is author of several studies and articleson business organization and a director of Marazzi S.p.A., Valentino FashionGroup S.p.A., Teva S.p.A. and Banca Nazionale del Lavoro S.p.A.

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

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

**EnricoCavatorta** has been a Director of the Company since 2003. Hehas been Chief Financial Officer since he joined the Group in 1999, and he is adirector of the principal subsidiaries of the Company. Prior to joiningLuxottica, Mr. Cavatorta was with Piaggio S.p.A., most recently as GroupController, responsible for planning and control. From 1993 to 1996,Mr. Cavatorta was a consultant with McKinsey & Co., having joinedthe firm from Procter & Gamble Italy, where he worked from 1985 to1993, most recently as Controller. Mr. Cavatorta graduated with thehighest honors from the LUISS University in Rome with a bachelor’s degree inBusiness Administration.

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

**Claudio Costamagna** has beendirector of the Company since 2006. He held executive positions ininternational companies such as Montedison, Citigroup and Goldman Sachs. Mr.Costamagna is currently Chairman of ALUB (Association of graduates fromBocconi) and a director of Value Partners.

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

**SergioErede** has been a Director of the Company since 2004.Mr. Erede graduated magna cum laude from the University of Milan in 1962with a degree in jurisprudence and obtained an LL.M. from Harvard Law School in1964. From 1965 to 1969, he was head of the legal department of IBM ItaliaS.p.A. Prior to such time, Mr. Erede was an attorney at the law firm ofSullivan & Cromwell from 1964 to 1965, and the law firm ofHale & Dorr from 1963 to 1964. In 1999, he founded the law firm ofBonelli, Erede & Pappalardo (which is the successor by merger to thefirm of Erede e Associati), a leading firm in Italian financial transactions.Additionally, Mr. Erede is Vice Chairman of Banca Nazionale del LavoroS.p.A. and a member of the board of directors of several Italian companiesincluding Marzotto S.p.A., Interpump S.p.A., Autogrill S.p.A., Carraro S.p.A,Valentino Fashion Group S.p.A., and Galbani S.p.A., Gruppo Editoriale l’EspressoS.p.A., Manuli Rubber Industries S.p.A.

**SabinaGrossi** has been a Director of the Company since 2003. Shejoined Luxottica Group S.p.A. in 1996 and was Head of Investor Relations, aposition which she held from 1996 until 2004. Prior to joining Luxottica GroupS.p.A., she was a financial analyst with Caboto Sim S.p.A. from 1994 until1996. From 1991 to 1993, Ms. Grossi was an associate professor in theschool of engineering of the La Sapienza University in Rome, where she taughtundergraduate courses as well as published papers on mathematics andstatistics. Ms. Grossi, who is a C.P.A. in Italy, graduated with thehighest honors from the LUISS University in Rome with a bachelor’s degree inBusiness Administration. Ms. Grossi is currently a member of the Board ofDirectors of Molecular Medicine S.p.A. and of the non-profit Foundation OliverTwist.

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

**LucioRondelli** has been a Director of the Company since 1990.Mr. Rondelli was the Chairman of UniCredito Italiano S.p.A until 2001,having held various positions with the bank continuously from 1947.Mr. Rondelli is currently Chairman of Assiparos GPA and Banca Italease anda director of Spafid. In 1976 he received the honor of Cavaliere di Gran Crocedell’Ordine (Knight of the Great Cross Order) for merit to the Republic ofItaly and in 1988 the President of the Republic of Italy conferred on him thehonor of Cavaliere dell’Ordine al “Merito del Lavoro” (Knight of the Order forLabor Merit).

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

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

**Michael Boxer** has been theSenior Vice President, General Counsel — North America sinceSeptember 2005. Mr. Boxer is responsible for overseeing all legalmatters for the Company’s North American retail and wholesale operations.Mr. Boxer has held various other executive roles since joining the Companyin 1993. Prior to joining Luxottica in 1993, Mr. Boxer served as acorporate attorney with the law firm of Winston & Strawn in New York. Hereceived his undergraduate degree from Columbia University and his law degreefrom the New York University School of Law.

**KerryBradley** has been Chief Operating Officer of Retail NorthAmerica since 2002, prior to which he served as Executive Vice President ofLensCrafters since June of 1998. Mr. Bradley is responsible for allLensCrafters, Sunglass Hut, Cole and EyeMed sales, marketing and operations.Mr. Bradley has held various other senior executive roles since joiningLensCrafters in 1988. Mr. Bradley has a Master’s degree in Business fromthe University of Edinburgh, Scotland and a B.S. degree in Business from AuburnUniversity in Alabama.

**TomColeman** has been Executive Vice President Retail Asia Pacificsince 2003. Mr. Coleman is responsible for all activities of the  Group in the Asia Pacific Region, whichincludes Australia, New Zealand, Hong Kong, Singapore and Malaysia, and priorto this, he served as Executive Vice President of LensCrafters since 1997.Mr. Coleman has held various other senior executive roles since joiningLensCrafters in 1987.

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

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

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

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

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

**GiuseppeLa Boria** joined Luxottica Group S.p.A. in 2001 as Head ofSales for the Wholesale Division. Prior to joining Luxottica Group S.p.A.,Mr. La Boria worked in Safilo S.p.A. as Sales Manager for Italy, duringwhich period he was also responsible for all the commercial and marketingaspects of the Diesel Shades launch.

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

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**Seth McLaughin** has been SeniorVice President, Consumer Marketing of Luxottica Retail North America sinceOctober 2004. He is responsible for overseeing marketing activities acrossall Luxottica Retail brands. Prior to October 2004, he served as VicePresident, Consumer Marketing since July 1998. Prior to joining theLuxottica Group he worked at Boston Consulting Group, from 1990 to 1994, and instrategic consulting for Procter & Gamble, from 1984 to 1990.Mr. McLaughin has a Bachelor of Science degree from Iowa State University.

**George Minakakis** has been ChiefOperating Officer for Greater China since September 2006. He has been withLuxottica for 13 years, most recently in Canada as Senior Vice President andGeneral Manager of our retail operations. Prior to Luxottica, Mr. Minakakisworked with PepsiCo for 7 years. He holds a Masters Degree in BusinessAdministration from Athabasca University, Alberta, Canada.

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

**AntonioMiyakawa** is currently the Head of Wholesale and GroupMarketing for Luxottica Group S.p.A., a position he held since 2003. Previouslyhe was head of our Asian wholesale operations, a position he has held since1999. Prior to this he served as Executive Vice President of Luxottica’sJapanese operations. Prior to joining Luxottica Group S.p.A., Mr. Miyakawawas a junior consultant for Compact S.r.l. (an Italian consulting firm) workingon various Luxottica matters.

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

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

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

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

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**Compensation**

Setforth below is information regarding total cash compensation paid to themembers of our Board of Directors and our Board of Statutory Auditors forservices rendered to Luxottica Group S.p.A. and our subsidiaries during 2006:
| **Name**                                                          | ** ** | **Base  Compensation  (Euro)** | ** ** | **Other  Compensation  (Euro)** | ** ** | **Total Cash  Compensation  (Euro)** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------|------------|---------------------------------|------------|-------------------------------------------|------------|
| Leonardo Del Vecchio*Chairman of the Board of Directors*          |       | 875,366                        |       | 340,624                         |       | 1,215,990                                 |       |
| Luigi Francavilla*Deputy Chairman*                                |       | 139,200                        |       | 1,554,092                       |       | 1,693,292                                 |       |
| Andrea Guerra*Chief Executive Officer*                            |       | 900,000                        |       | 1,362,072                       |       | 2,262,072                                 |       |
| Roger Abravanel*Director*                                         |       | 53,199                         |       | __                              |       | 53,199                                    |       |
| Tancredi Bianchi*Director*                                        |       | 94,113                         |       | —                          |       | 94,113                                    |       |
| Mario Cattaneo*Director*                                          |       | 89,948                         |       | —                          |       | 89,948                                    |       |
| Enrico Cavatorta*Director*                                        |       | 81,198                         |       | 630,047                         |       | 711,245                                   |       |
| Roberto Chemello*Director*                                        |       | 81,198                         |       | 1,322,878                       |       | 1,404,076                                 |       |
| Claudio Costamagna*Director*                                      |       | 47,365                         |       | __                              |       | 47,365                                    |       |
| Claudio Del Vecchio*Director*                                     |       | 81,198                         |       | 247,966                         |       | 329,164                                   |       |
| Sergio Erede*Director*                                            |       | 81,198                         |       | —                          |       | 81,198                                    |       |
| Sabina Grossi*Director*                                           |       | 81,198                         |       | 332                             |       | 81,530                                    |       |
| Gianni Mion*Director*                                             |       | 81,198                         |       | —                          |       | 81,198                                    |       |
| Lucio Rondelli*Director*                                          |       | 99,115                         |       | —                          |       | 99,115                                    |       |
| Giancarlo Tomasin(1)*Chairman of the Board of Statutory Auditors* |       | 66,980                         |       | —                          |       | 66,980                                    |       |
| Mario Medici(1)*Member of the Board of Statutory Auditors*        |       | 47,747                         |       | 11,953                          |       | 59,700                                    |       |
| Walter Pison(1)*Member of the Board of Statutory Auditors*        |       | 28,358                         |       | 59,025                          |       | 87,383                                    |       |
| Marco Reboa(2)*Chairman of the Board of Statutory Auditors*       |       | 56,875                         |       | __                              |       | 56,875                                    |       |
| Enrico Cervellera(2)*Member of the Board of Statutory Auditors*   |       | 37,916                         |       | __                              |       | 37,916                                    |       |
| Giorgio Silva(2)*Member of the Board of Statutory Auditors*       |       | 41,250                         |       | __                              |       | 41,250                                    |       |

 

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(1)                                  Theterms of Messrs. Tomasin, Medici and Pison ended on June 14, 2006.

(2)                                  Theterms of Messrs. Reboa, Cervellera and Silva began on June 14, 2006.

Aggregatecompensation paid by us to our senior management (excluding directors) as agroup (20 people) was approximately Euro 13.1 million in 2006, of whichapproximately Euro 1.0 million represented provision for terminationindemnities and social security charges required by Italian law. Members ofthis group were also granted options to purchase

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an aggregate of 6,880,000of our ordinary shares at a weighted average exercise price of Euro 21.56 pershare in 2006. These options expire on January 31, 2015. The aggregateamount set aside or accrued during the year ended December 31, 2006 toprovide pension and retirement benefits for our directors who are also membersof our management was Euro 1.2 million. Our directors who are not members ofmanagement do not receive such benefits.

Noneof our directors have service contracts with the company or any of itssubsidiaries providing for benefits upon termination of employment.

**Employees**

As ofDecember 31, 2006, we employed approximately 51,000 employees worldwide,of whom approximately 32,400 were employed in the United States and Canada and7,800 were employed in Italy. As of such date, about 200 employees were inmanagement positions, approximately 11,400 were employed in our manufacturingand wholesale segment and approximately 37,300 were employed in our retailsegment. Substantially all of our employees in Italy are covered by collectivebargaining agreements. Other than those Pearle Vision employees subject tocollective bargaining agreements described below, none of our employees in theUnited States are covered by collective bargaining agreements. We have enjoyedgenerally good relations with our employees.

Employmentagreements in Italy are generally collectively negotiated between the nationalassociation of companies within a particular industry and the respectivenational unions. Individual companies must enter into contracts with theiremployees based on the relevant collective agreement. The agreement for opticalworkers, which is part of the national textile agreement, covers approximately5,300 of our employees. This agreement was renewed in 2006 resulting in anaverage wage increase rate of approximately three percent per year. Theagreement for mechanical workers, which covers approximately 586 of ouremployees, was renegotiated in 2006. In addition to the national collectivebargaining agreement for workers, we typically enter into separate, localcontracts with labor unions representing our employees. In December 2006, werenewed a local agreement with optical workers, supplementing the terms of thenational textile contract. The new agreement provides for new profitabilitytargets for employee variable wages.

Italianlaw provides that, upon termination of employment, employees are entitled toreceive certain compulsory separation payments based on their compensationlevels and length of employment. As of December 31, 2006, we had reservedEuro 56.6 million for such separation payments in our consolidatedfinancial statements.

Pearle Visioncurrently has two collective bargaining agreements in place. One collectivebargaining agreement, between Pearle Vision and the Local 888, United Food andCommercial Workers (the “888 CBA”), has been extended (by agreement) while theparties are negotiating a new agreement. The 888 CBA covers approximately 16Pearle Vision employees holding the positions of Lab Associate, Lead LabAssociate, Sales Associate and Optician. The other collective bargainingagreement, between Pearle Vision and the Local 108, Retail, Wholesale andDepartment Store Union (the “108 CBA”), has also been extended (by agreement)while the parties are negotiating a new agreement. The 108 CBA coversapproximately 60 Pearle Vision employees holding the positions of LabAssociate, Lead Lab Associate and Sales Associate.

**ShareOwnership**

Set forth below iscertain information concerning the beneficial ownership of our ordinary sharesas of May 15, 2007, by each of our directors and executive officers who owns inexcess of one percent of our outstanding ordinary shares.
| **Shareholder**       | ** ** | **Issuer**             | ** ** | **Shares owned as of  May 15, 2007** | ** ** | **Percentage  Ownership** | ** ** |
|-----------------------|------------|------------------------|------------|---------------------------------------------------------------|------------|---------------------------|------------|
| Leonardo Del  Vecchio |       | Luxottica Group S.p.A. |       | 314,803,339                                                   | (1)        | 68.23                     | %          |

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

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

InMarch 1998, we adopted an employee stock option plan providing for theissuance of options covering up to 12,250,000 ordinary shares of nominal valueEuro 0.06 each. As a result of the change in the par value of our ordinaryshares from Lire to Euro, which was approved by our shareholders at the annualmeeting held on June 26, 2001, the number of ordinary shares available forissuance under the plan was reduced to 10,798,642. Our Board of Directorsadministers the stock option plan. The purpose of the plan is to provideadditional incentives to our key employees. Grants under the stock option planmay be of non-qualified options and/or incentive stock options. Under the plan,the Board of Directors may not grant an option for a term of more than nineyears from the date of grant, or for a term that expires after March 31,2011. The exercise price of these options is equal to the market value of theunderlying ordinary shares on the date of grant, defined as the higher of(i) the closing market price of our ADRs on the business day immediatelypreceding the date of the grant, and (ii) the average of the closingmarket 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.

InSeptember 2001, we adopted an additional employee stock option planproviding for the issuance of options covering up to 11,000,000 ordinary sharesof nominal value Euro 0.06 each. The purpose and administration of the 2001stock option plan are similar to those of the 1998 stock option plan, with theonly significant difference being that the latest option termination date isMarch 31, 2017.

InJuly 2006, we adopted an additional employee stock option plan providingfor the issuance of options covering up to 20,000,000 ordinary shares ofnominal value of Euro 0.06 each. The purpose of the plan is to provideadditional incentives to key employees of the Group. The exercise price ofthese options is equal to the market value of the underlying ordinary shares onthe date of grant, defined as either (i) the average of the closing marketprices for each business day during the 30-day period ending on the dateof the grant or, if higher, (ii) the closing market price of our ADRs on thebusiness day immediately preceding the date of the grant depending on the taxjurisdiction of the beneficiary. Options granted under the plan generallybecome exercisable beginning on January 31 of the third year after thedate of grant and expire nine years after such date.

As ofDecember 31, 2006, there had been 12 separate grants under the optionplans described above, detailed as follows:
| ** **                    | ** ** | **Number of  ordinary shares  underlying  options granted(1)** | ** ** | **Exercise  Price(1)** | ** ** | **Expiration Date** | ** ** | **Options held  by officers  and directors  (1)(2)** |
|-------------------------------|------------|-------------------------------------------------------------------------------|------------|------------------------|------------|--------------------------|------------|---------------------------------------------------------------------|
| **1998  Grant**               |       | 3,380,400                                                                     |       | Euro                   |       | 7.38                     |       | January 31, 2007                                               |   | — |
| **1999  Grant**               |       | 3,679,200                                                                     |       | Euro                   |       | 4.38                     |       | January 31, 2008                                               |   | 81,600 |
| **2000  Grant**               |       | 2,142,200                                                                     |       | Euro                   |       | 9.52                     |       | January 31, 2009                                               |   | 75,600 |
| **2001  Grant**               |       | 2,079,300                                                                     |       | U.S.$                  |       | 15.20                    |       | January 31, 2010                                               |   | 85,800 |
| **2002  Grant**               |       | 2,348,400                                                                     |       | U.S.$                  |       | 17.80                    |       | January 31, 2011                                               |   | 129,300 |
| **2003  Grant**               |       | 2,397,300                                                                     |       | Euro                   |       | 10.51                    |       | January 31, 2012                                               |   | 190,600 |
| **2004  Grant**               |       | 2,035,500                                                                     |       | Euro                   |       | 13.79                    |       | January 31, 2013                                               |   | 637,300 |
| **2004  Performance Grant**   |       | 1,000,000                                                                     |       | U.S.$                  |       | 18.59                    |       | January 31, 2012                                               |   | 920,000 |
| **2004  Shareholder Grant**   |       | 9,600,000                                                                     |       | Euro                   |       | 13.67                    |       | December 31, 2014                                              |   | 9,600,000 |
| **2005  Grant**               |       | 1,512,000                                                                     |       | Euro                   |       | 16.89                    |       | January 31, 2014                                               |   | 360,000 |
| **2006  Grant**               |       | 1,725,000                                                                     |       | Euro                   |       | 22.19                    |       | January 31, 2015                                                    |   | 900,000 |
| **2006  Performance Grant 1** |       | 3,500,000                                                                     |       | Euro                   |       | 22.09                    |       | July 27, 2015                                                       |   | 2,900,000 |
| **2006  Performance Grant 2** |       | 9,500,000                                                                     |       | Euro                   |       | 20.97                    |       | July 27, 2015                                                       |   | 9,500,000 |

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

(2)           As restated to reflect changes in ourmanagement during 2006.

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SeeItem 7—”Major Shareholders and Related Party Transactions—Related PartyTransactions—Shareholder Plan” below for information regarding another stockoption plan for our top management.

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

*Overview*

OnNovember 4, 2003, the New York Stock Exchange (the “NYSE”) established newcorporate governance rules for listed companies. Under these NYSE rules,we are permitted, as a listed foreign private issuer, to adhere to thecorporate governance standards of our home country in lieu of certain NYSEcorporate governance rules, so long as we disclose the significant ways inwhich our corporate governance practices differ from those followed by U.S.companies under the NYSE listing standards.

Ourcorporate governance practices are governed principally by the Italian Code ofCorporate Governance, amended in March 2006, issued by Borsa Italiana and generally by the rules and regulationsof Commissione Nazionale per le Società e la Borsa, or CONSOB for Italiancompanies (collectively, the “Italian Corporate Governance Policies”).

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

*Compositionof Board of Directors; Independence*

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

TheItalian Corporate Governance Policies recommend that an “adequate number” ofnon-executive and independent directors serve on the board of directors of anItalian company, but do not require the board of directors to consist of amajority of independent directors. Italian law requires that at least onedirector, or, in the event the board of directors is composed of more thanseven members, at least two directors, must fulfill the requirements to beindependent.

Thestandards for determining director independence under the Italian CorporateGovernance Policies are substantially similar to the NYSE listing standards forU.S. listed companies. The Italian Corporate Governance Policies do not requireour non-executive directors to meet at executive sessions without management.

Basedon standards under the Italian Corporate Governance Policies, our Board ofDirectors has determined that, among its 14 members, 6 directors areindependent. This number of independent directors complies with the “adequatenumber” of non-management directors recommended by the Italian CorporateGovernance Policies. Luxottica’s non-management directors do not have regularlyscheduled executive sessions without management.

*BoardCommittees*

TheNYSE listing standards require a U.S. listed company to have an auditcommittee, a nominating/corporate governance committee and a compensationcommittee. Each of these committees must consist solely of independentdirectors and must have a written charter that addresses certain mattersspecified in the listing standards. The NYSE listing standards contain detailedrequirements for the audit committees of U.S. listed companies. Some, but notall, of these requirements also apply to non-U.S. listed companies such as us.Italian law, on the other hand, requires neither the establishment of boardcommittees nor the adoption of written committee charters.

Italian law doesnot require Italian listed companies to have an audit committee, but doesrequire companies to appoint a Board of Statutory Auditors. The Board ofDirectors has designated the Board of Statutory Auditors as the appropriatebody to act as the “Audit Committee,” as defined in the Sarbanes-Oxley Act, SECregulations and the NYSE listing standards. It operates in accordance withItalian law, the Company’s bylaws and the “Regulations Governing the 

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Duties of the Board ofStatutory Auditors in accordance with U.S. Audit Committee Requirements.” TheBoard of Statutory Auditors has acted as the Audit Committee since the annualmeeting of shareholders on June 14, 2006. From July 31, 2005 anduntil the annual meeting of shareholders on June 14, 2006,  the functions of the Audit Committee wereperformed by the Internal Control Committee, as determined by the Board ofDirectors. Additional information regarding our Internal Control Committee andBoard of Statutory Auditors is set forth below.

Withrespect to the nomination of directors, the Italian Corporate GovernancePolicies recommend that each Italian listed company file with its registeredoffice, at least 15 days before its annual ordinary meeting of stockholders, alist of the personal and professional qualifications of each proposed directornominee. The Italian Corporate Governance Policies also recommend that, if anItalian listed company appoints a committee to select, or recommend theselection by the board of directors of, director nominees for the next annualordinary meeting of stockholders, a majority of this committee be comprised ofnon-executive directors. The Company has elected not to appoint a committee toselect, or recommend the selection of, director nominees. Our director nomineesare selected by our entire Board of Directors, and we comply with the ItalianCorporate Governance Policies’ recommendation that we timely file with ourregistered office a list of the personal and professional qualifications ofeach of our proposed director nominees.

The Italian CorporateGovernance Policies recommend, but do not require, that Italian listedcompanies appoint a compensation committee and that a majority of thiscommittee be comprised of non-executive directors. As of December 31, 2006, ourHuman Resources Committee, which did not consist of a majority of independentdirectors, performed the functions of a compensation committee, including thereview of our officers’ compensation and our stock option plans. On February19, 2007,  the Board of Directors of theCompany, appointed new members of the Human Resources Committee amongnon-executive members of the Board, three of which were independent directors,to comply with the provisions of the amended Italian Corporate GovernancePolicies.

For moreinformation on the resolution adopted by the Company to comply with theprovisions of the Corporate Governance Policies, as amended on March 2006,please see our annul report on corporate governance available on the companywebsite.

*InternalControl Committee*

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

*Board ofStatutory Auditors*

OurBoard of Statutory Auditors consists of three regular members and two alternatemembers .The Board of Statutory Auditors is appointed by our stockholders andserves for a period of three years. Italian law establishes the qualificationsof candidates that may be appointed as members of the Board of StatutoryAuditors, including the requirement that members not concurrently serve on thelisted company’s board of directors. Our By-Laws are required to ensure that atleast one member of the Board of Statutory Auditors may be elected by ourminority stockholders. Our By-Laws comply with this requirement by providingthat at least one regular member, who shall serve as chairman, and onealternate member may be elected by our minority stockholders in accordance withItalian law.

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

*CorporateGovernance Guidelines; Certification*

TheNYSE listing standards require U.S. listed companies to adopt, and post ontheir websites, a set of corporate governance guidelines. The guidelines mustaddress, among other things, director qualification standards, directorresponsibilities, director access to management and independent advisers,director compensation, director orientation and continuing education, managementsuccession, and an annual performance evaluation of the Board of Directors. Inaddition, the chief executive officer of a U.S. listed company must certify tothe NYSE annually that he or she is not aware of any 

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violations by thecompany of the NYSE’s corporate governance listing standards. The certificationmust be disclosed in the company’s annual report to stockholders.

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

*Code ofBusiness Conduct and Ethics*

TheNYSE listing standards require each U.S. listed company to adopt, and post onits website, a code of business conduct and ethics for its directors, officersand employees. Under SEC rules, all companies required to submit periodicreports to the SEC, including us, must disclose in their annual reports whetherthey have adopted a code of ethics for their chief executive officer and seniorfinancial officers. In addition, they must file a copy of the code withthe SEC, post the text of the code on their website or undertake to provide acopy upon request to any person without charge. There is significant, thoughnot complete, overlap between the code of business conduct and ethics requiredby the NYSE listing standards and the code of ethics for the chief financialofficer and senior financial officers required by the SEC’s rules.

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

*StockholderApproval of Equity Compensation Plans*

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

**ITEM 7.MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS**

**MajorShareholders**

Thefollowing table sets forth, as of May 15, 2007, the beneficial ownership ofordinary shares by (1) each person (or group within the meaning ofSection 13(d)(3) of the Securities Exchange Act of 1934) known by usto own five percent or more of the outstanding ordinary shares (includingordinary shares represented by ADSs); and (2) all directors and executiveofficers as a group.
| **Identity of  Person or Group** | ** ** | **Amount of  Shares Owned** | ** ** | **Percent of  Class** | ** ** |
|-------------------------------------------------|------------|---------------------------------------|------------|----------------------------|------------|
| Leonardo Del  Vecchio                           |       | 314,803,339                           | (1)        | 68.23%                     |       |
| Directors and Executive  Officers as a Group    |       | 8,044,531                             | (2)        | 1.72%                      |       |

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

(2)                                Includesordinary shares represented by ADSs owned by directors and members of seniormanagement. Excludes shares beneficially owned by Mr. Leonardo DelVecchio.

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

Mr. DelVecchio beneficially owns 314,803,339 ordinary shares (including any sharesrepresented by ADSs, or approximately 68.23 percent) and serves as Chairman ofour Board of Directors. We are not otherwise directly or indirectly owned orcontrolled by another corporation or by any foreign government.

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

**RelatedParty Transactions**

*Fixed Assets*

In connection withthe acquisition of our headquarters building in Milan, our subsidiary enteredinto an agreement leasing a portion of this building to our Chairman for Euro0.5 million annually. The expiration date of this lease is 2010.

*License Agreements*

We have a worldwideexclusive license agreement to manufacture and distribute ophthalmic productsunder the Brooks Brothers name. The Brooks Brothers trade name is owned byRetail Brand Alliance, Inc. (“RBA”), which is controlled by Claudio DelVecchio, one of our directors. The license agreement expires in 2009. Royaltiespaid to RBA for such agreement were Euro 0.9 million, Euro 0.5 million and Euro1.3 million in the years ended December 31, 2004, 2005 and 2006,respectively.

In July 2004,we signed a worldwide exclusive license agreement to manufacture and distributeophthalmic products under the name of Adrienne Vittadini. The AdrienneVittadini trade name was owned by RBA until November 2006 when the license wassold by RBA to a party that is unaffiliated with the Company. The licenseagreement expires on December 31, 2008. For the years ended December 31,2004,  2005 and 2006, royalties paid toRBA for such agreement were Euro 0.9 million, Euro 0.9 million and Euro 1.0million, respectively.

*ServiceRevenues*

During the yearsended December 31, 2004, 2005 and 2006, U.S. Holdings performed certainservices for RBA. Amounts received for the services provided were Euro 0.7million, Euro 0.6 million and Euro 0.7 million in fiscal 2004, 2005 and 2006,respectively.

*Shareholder Plan*

OnSeptember 14, 2004, our Chairman and majority shareholder,Mr. Leonardo Del Vecchio, had allocated shares held through La LeonardoFinanziaria S.r.l., now held through Delfin S.a.r.l, both Italian holdingcompanies of the Del Vecchio family, representing 2.11 percent (or 9.6 millionshares) of the Company’s currently authorized and issued share capital, to astock option plan for our top management at an exercise price of Euro 13.67 pershare (see Note 10 to the Consolidated Financial Statements included inItem 18 of this annual report). The stock options to be issued under the stockoption plan vested upon meeting of certain economic objectives in 2006. During2005 and 2006, the Company recorded compensation expense of approximately Euro19.9 million and Euro 48.0 million, respectively, and as of December 31, 2005recorded future unearned compensation expense in equity of approximately Euro45.8 million net of taxes, with an offsetting increase in additional paid-incapital for such amounts. As of January 1, 2006, we have adopted SFAS 123(R) inaccordance with the transitional guidance as prescribed in the statement. Assuch, the previous unearned compensation as of December 31, 2005 of Euro 45.8million has been charged against additional paid-in capital.

**ITEM 8.FINANCIAL INFORMATION**

**FinancialStatements**

See Item 18—“FinancialStatements.”

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**LegalProceedings**

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

*Sunglass Hut Shareholder Lawsuit*

InMay and June 2001, certain former stockholders of Sunglass Hutcommenced actions in the U.S. District Court for the Eastern District of NewYork against Luxottica Group S.p.A., and its acquisition subsidiary formed toacquire Sunglass Hut on behalf of a purported class of former Sunglass Hutstockholders. These actions were subsequently consolidated into a singleamended consolidated class action complaint which alleged, among other claims,that the defendants violated certain provisions of U.S. securities laws andrules thereunder, in connection with the acquisition of Sunglass Hut in atender offer and second-step merger. The plaintiffs’ principal claim was thatcertain payments to James Hauslein, the former chairman of Sunglass Hut, undera consulting, non-disclosure and non-competition agreement (the “Agreement”)violated the “best price rule” promulgated by the SEC by resulting in a paymentfor Mr. Hauslein’s Sunglass Hut shares and his support of the tender offerthat was higher than the price paid to Sunglass Hut’s stockholders in thetender offer. The plaintiffs also alleged that the Company andMr. Leonardo Del Vecchio, our Chairman, violatedSection 10(b) of the Securities Exchange Act of 1934 andRule 10b-5 promulgated thereunder. The plaintiffs sought, amongother remedies, the payment of such higher consideration to all tenderingshareholders, other than Luxottica Group S.p.A. and its affiliates.

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

OnAugust 31, 2005, we agreed with the plaintiffs, without acknowledging anywrongdoings to a full and final settlement and release (the “Settlement”) ofall claims against the Company, our acquisition subsidiary and Mr. DelVecchio. The Settlement, which called for a payment of Euro 11.6 million (or U.S.$14.5million), was approved by the Court and fully implemented by the parties, withfinal judgment being entered dismissing the case with prejudice.

*California Vision Health Care Service Plan Lawsuit*

InMarch 2002, an individual commenced an action in the California SuperiorCourt for the County of San Francisco against Luxottica Group S.p.A. andcertain of our subsidiaries, including LensCrafters, Inc. and EYEXAM ofCalifornia, Inc. The plaintiff, along with a second plaintiff named in anamended complaint, seeks to certify this case as a class action.  The claims have been partiallydismissed.  The remaining claims, againstLensCrafters, 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, false advertising and other unlawful or unfairbusiness practices. The action seeks unspecified damages, statutory damages ofU.S.$1,000 per class member, disgorgement and restitution of allegedly unjustlyobtained sums, statutory damages, punitive damages and injunctive relief,including an injunction that would prohibit defendants from providing eyeexaminations or other optometric services at LensCrafters stores in California.The ultimate outcomes of two other disputes pending in other California courtsare expected to have an impact on the outcome of this case. First on June 12,2006, the California Supreme Court rendered its decision in a case against Coleand its subsidiaries, ruling that optical stores such as those operated by Colemust comply with Sections 655 and 2556 of the California Business andProfessions Code.  Second, on December 6,2006, the United States District Court for the Eastern District of Californiaruled on *NAOO v. Lockyer*.  In that case, LensCrafters had challenged theCalifornia regulatory scheme governing relationships between optical retailersand optometrists under which LensCrafters and EYEXAM had been sued.  The court found that statutory scheme to beunconstitutional under the “commerce clause” of the U.S. Constitution. TheAttorney General of the State of California has since appealed that decision,which, if ultimately upheld, should increase the likelihood of a favorableoutcome for us.

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Although webelieve that our operational practices and advertising in California complywith California law, an adverse decision in this action or the suit againstCole might cause LensCrafters and EYEXAM to modify or cease their activities inCalifornia. Further, LensCrafters and EYEXAM might be required to pay damages and/or restitution, the amount of whichmight have a material adverse effect on our operating results, financialcondition 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 PearleVision, Inc. and Pearle Vision Care, Inc. The claims allege variousstatutory violations related to the operation of Pearle Vision Centers inCalifornia including violations of California laws governing relationshipsamong opticians, optical retailers, manufacturers of frames and lenses andoptometrists, false advertising and other unlawful or unfair businesspractices. The action seeks unspecified restitution of allegedly unjustly obtainedsums, civil penalties and injunctive relief, including an injunction that wouldprohibit defendants from providing eye examinations or other optometricservices at Pearle Vision Centers in California. In July 2002, the trialcourt entered a preliminary injunction to enjoin defendants from certainbusiness and advertising practices. Both Cole and the State of Californiaappealed that decision. On November 26, 2003, the appellate court issuedan opinion in which it stated that because California law prohibited thedefendants from providing eye examinations and other optometric services atPearle Vision Centers, the trial court should have enjoined the defendants fromadvertising the availability of eye examinations at Pearle Vision Centers.  The appellate court also ruled in Cole’sfavor with respect to charging dilation fees, which ruling partially lifted thepreliminary injunction with respect to these fees that had been imposed inJuly 2002.****On March 3, 2004, theCalifornia Supreme Court granted Cole’s petition for review of the portion ofthe appellate court’s decision stating that California law prohibiteddefendants from providing eye examinations and other optometric services atPearle Vision Centers.  However, theappellate court’s decision directing the trial court to enjoin the defendantsfrom advertising these activities was stayed pending the Supreme Court’sresolution of the issue. On June 12, 2006, the California Supreme Courtaffirmed the Court of Appeal’s prior decision, and held that optical storessuch as those operated by Cole must comply with Sections 655 and 2556 of theCalifornia Business and Professions Code.   Although we believe that Cole’s operational practices and advertising inCalifornia comply with California law, an adverse decision in this action maycompel Cole and its subsidiaries to modify or cease their  activities in California. Further, Cole andits subsidiaries might be required to pay civil penalties and/or restitution,the amount of which might have a material adverse effect on our operatingresults, financial condition and cash flow. As with the other Californialitigation, the ultimate outcome of this case may depend upon whether thefederal district court’s ruling on the unconstitutionality of the Californialaw in *NAOO v. Lockyer* is upheld on appeal.

*Cole Consumer Class Action Lawsuit*

In June 2006, Cole andits subsidiaries were sued by a consumer in a purported class action whichalleges various statutory violations related to the operation of Pearle Visionand its affiliated HMO, Pearle VisionCare in California.  The claims and remedies sought are similar tothose asserted in the LensCrafters and EYEXAM case. In December 2006, the courtgranted the defendants’ motion to dismiss the complaint but allowed the plaintiffan opportunity to replead.  Defendantsmoved to dismiss the amended complaint in February 2007, and a hearing on themotion was held in March 2007. The motion to dismiss was denied.  Although we believe that our operationalpractices and advertising in California comply with California law, an adversedecision in this action might cause Pearle Vision or Pearle VisionCare tomodify or cease their activities in California. In addition, the Colesubsidiaries might be required to pay damages and/or restitution, the amount ofwhich might have a material adverse effect on our operating results, financialcondition and cash flow.

*Cole SEC Investigation*

Following Cole’s announcement in November 2002 ofthe restatement of its financial statements, the SEC began an investigationinto Cole’s previous accounting. The SEC subpoenaed various documents from Coleand deposed numerous former officers, directors and employees of Cole. Duringthe course of this investigation, the SEC staff had indicated that it intendedto recommend that a civil enforcement action be commenced against certainformer officers and directors of Cole but not against Cole. Cole was obligatedto advance reasonable attorneys’ fees incurred by current and former officersand directors who were involved in the SEC investigation subject toundertakings provided by such individuals. Cole had insurance available withrespect to a portion of these indemnification obligations. In March 2006,the SEC staff indicated that it had concluded its investigation and that,contrary to its earlier indication, it would not be recommending that anenforcement action be commenced against anyone in connection with theinvestigation.

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*Ray Ban Indian Holdings Review by the Supreme Courtof India*

On August 29, 2003, the Securities Appellate Tribunal,or SAT, in India upheld the decision of the Securities Exchange Board of Indiato require our subsidiary Ray Ban Indian Holdings, Inc. to make a public offerin India to acquire up to an additional 20 percent of the outstanding shares ofRayBan Sun Optics India Ltd. (“RayBan Sun Optics”).  The Supreme Court of India, by an order datedDecember 12, 2006, directed that a public offer be made within 45 days of theorder, using April 28, 1999 as the reference date for calculating the offerprice.  The Supreme Court also directedthat interest be paid at the rate of 10 percent per annum for the periodbetween August 27, 1999 and the closing date to all persons who wereshareholders of RayBan Sun Optics throughout such period. On April 25, 2007,pursuant to the December 12, 2006 Supreme Court order and in compliance withRegulation 10 and 12 of Chapter III of the SEBI Regulations 1997, we launched apublic offer through our subsidiary, Ray Ban Indian Holdings, Inc., to acquireup to 4,895,900 shares, representing approximately 20 percent of the equityshare capital of RayBan Sun Optics, which we subsequently increased to up to7,545,200 shares, representing approximately 31 percent of the equity sharecapital of RayBan Sun Optics. 6,454,280 shares were tendered in the offer, which closed on May14, 2007.  Effective upon the entry of the share transfers in theshare register on June 26, 2007, our stake in RayBan Sun Optics increasedto 70.5 percent. We paid total consideration of approximately Euro13.0 million for the tendered shares. RayBan Sun Optics is listed on the BombayStock Exchange. We acquired our interest in RayBan Sun Optics in connectionwith the purchase of the RayBan eyewear business from Bausch & Lomb in1999.

*Cole Shareholder Class Action Lawsuit*

On July 14,2004, a shareholder of Cole filed a shareholders’ class action complaintagainst Cole, its directors and the Company in the Delaware Chancery Court,known as Pfeiffer v. Cole National Corp., et al., Civil Action No. 569-N.The complaint alleged, among other things, that the individual defendantsbreached their fiduciary duties as directors and/or officers of Cole by causingCole to enter into an agreement to be acquired by the Company for U.S.$22.50per share “without having exposed the company to the marketplace through fairand open negotiations with all potential bidders and/or an active market checkor open auction for sale of the company.” The complaint sought preliminary andpermanent injunctive relief against the merger, rescission of the merger if itwere consummated, and/or damages and other associated relief. This action wasvoluntarily dismissed by the plaintiff on January 18, 2006 and is no longerpending.

*Shareholder Litigation Regarding Merger with Oakley*

On June 26, 2007,the Pipefitters Local No. 636 Defined Benefit Plan, a shareholder of Oakley,sued Oakley and its Board of Directors in California Superior Court for OrangeCounty.  The suit alleges breach offiduciary duties by Oakley's directors, and challenges the fairness of theprocess implemented by Oakley and its Board in deciding to support Luxottica'sacquisition of that company.  The suitdoes not seek money damages, but rather seeks an injunction barring Oakley andits Board from moving forward with the transaction unless and until Oakley “adoptsand implements a fair sales process.’’ Luxottica is not named as a defendant. Luxottica believes this suit is without merit and intends to vigorouslydefend the fairness of the transaction.

It is theopinion of management that the outcome of existing claims against us will nothave a material adverse effect on our consolidated financial position orresults of operations. However, the outcome of these litigation claims isinherently uncertain, and there can be no assurance that one or more of theseactions, if adversely determined, will not have a material adverse effect onour business, results of operations and financial condition. In addition, wemay be subject to material claims, judgments or proceedings in the futurewhich, if adversely determined, may have a material adverse effect on ourbusiness, results of operations and financial condition. See Item 3—“KeyInformation—Risk Factors—If we become subject to adverse judgments ordeterminations in legal proceedings to which we are, or may become a party, ourfuture profitability could suffer through a reduction of sales or increasedcosts.”

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**DividendDistributions**

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

**SignificantChanges**

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

**ITEM 9.THE OFFER AND LISTING**

Ourordinary shares were approved for trading on the Italian Stock Exchange onDecember 4, 2000. Our ADSs were admitted for trading on the NYSE onJanuary 24, 1990. Our ADSs are evidenced by ADRs issuable by Deutsche BankTrust Company Americas, as depositary, pursuant to a Deposit Agreement.

Thetable below sets forth, for the periods indicated, high and low closing pricesof the ADSs on the NYSE (in U.S. dollars) and ordinary shares on the ItalianStock Exchange (in Euro).
| ** **         | ** ** | **New York Stock Exchange** | ** ** | **Italian Stock Exchange** | ** ** |
|--------------------|------------|--------------------------------------------|------------|--------------------------------------|------------|
| ** **         | ** ** | **(in U.S.$)**                        | ** ** | **(in Euro)**                   | ** ** |
| ** **         | ** ** | **High**                                   | ** ** | **Low**                              | ** ** | **High** | ** ** | **Low** | ** ** |
|               |       |                                       |       |                                 |       |   |   |   |   |
| **2002**           |       | 20.85                                      |       | 11.82                                |       | 22.95 |   | 11.75 |   |
| **2003**           |       | 18.15                                      |       | 10.23                                |       | 14.82 |   | 9.25 |   |
| **2004**           |       | 20.39                                      |       | 15.18                                |       | 15.51 |   | 12.43 |   |
| **2005**           |       |                                       |       |                                 |       |   |   |   |   |
| First Quarter      |       | 21.99                                      |       | 20.06                                |       | 17.02 |   | 15.11 |   |
| Second Quarter     |       | 21.32                                      |       | 19.69                                |       | 17.55 |   | 15.31 |   |
| Third Quarter      |       | 25.35                                      |       | 20.61                                |       | 21.00 |   | 17.21 |   |
| Fourth Quarter     |       | 25.83                                      |       | 23.75                                |       | 21.94 |   | 19.62 |   |
| Year 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 |   |
| December 2006 |       | 31.39                                      |       | 30.14                                |       | 23.74 |   | 22.53 |   |
| Year 2006     |       | 31.39                                      |       | 24.36                                |       | 24.46 |   | 19.30 |   |
| **2007**           |       |                                       |       |                                 |       |   |   |   |   |
| January 2007  |       | 31.10                                      |       | 29.70                                |       | 23.95 |   | 22.96 |   |
| February 2007 |       | 32.81                                      |       | 30.73                                |       | 24.92 |   | 23.67 |   |
| March 2007    |       | 32.32                                      |       | 30.25                                |       | 24.16 |   | 22.72 |   |
| April 2007    |       | 35.32                                      |       | 32.00                                |       | 25.70 |   | 23.91 |   |
| May 2007           |       | 34.94                                      |       | 33.50                                |       | 26.09 |   | 24.80 |   |

 

Thehigh and low closing prices of the ADSs on the NYSE for the first quarter of2007 were U.S.$32.81 and U.S.$29.70, respectively. The high and low closingprices of the ordinary shares on the Italian Stock Exchange for the firstquarter of 2007 were Euro 24.92 and Euro 22.72, respectively.

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**ITEM 10.ADDITIONAL INFORMATION**

**Articlesof Association and Amended and Restated By-Laws**

*OurObjectives*

OurArticles of Association provide that Luxottica Group S.p.A.’s principalobjectives are, among other things, (i) the ownership and management ofother companies or entities both in Italy and abroad, (ii) financing andmanagerial coordination of the owned companies and entities and(iii) providing credit support for our subsidiaries. The LegislativeDecree No. 58 of February 24, 1998 regulating the Italian financialmarkets (“Decree No. 58”) and our Amended and Restated By-Laws****contain, amongother things, provisions to the following effect:

*Directors*

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

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

Directorsare required to report to the other directors or to the Board of StatutoryAuditors any transactions involving the Company in which such director ora party affiliated with such director may have an interest.

**RightsAttaching to Ordinary Shares**

*Dividends*

We arerequired to pay an annual dividend on the ordinary shares if approved by amajority of shareholders at the annual ordinary meeting that must be heldwithin 180 days after the end of each year. Before dividends may be paid withrespect to the results of any year in compliance with Italian law, an amountequal to five percent of our net income for such year must be set aside to thelegal reserve until the reserve, including amounts set aside during prioryears, is equal to at least one-fifth of the nominal value of our issued sharecapital. See Item 3—“Key Information—Dividends.”

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

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

*Notification of the Acquisitionof Shares and Voting Rights*

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

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

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

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

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

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

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*GeneralMeetings*

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

Meetingsof shareholders may be either ordinary meetings or extraordinary meetings.Shareholders’ meetings may be called by the Board of Directors or the Board ofStatutory Auditors. In the case of a listed company in Italy, shareholders’meetings must be promptly convened upon the request of holders representing atleast ten percent of the issued and outstanding share capital, provided thatthe request contains a summary of the matters to be discussed. The Board ofDirectors may, however, resolve not to convene a meeting if the interest ofLuxottica so requires. In this case, the competent Court, on appeal by theshareholders who have asked for such meeting, can order by decree, after havingconferred with the Board of Directors and the Board of Statutory Auditors, thatsuch meeting be convened.

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

Ordinaryshareholders’ meetings must be convened at least once a year to approve theannual financial statements of Luxottica Group S.p.A. Our By-Laws providethat the meeting for the approval of the financial statements can be convenedwithin 180 days of the closing of the fiscal year.

Atordinary shareholders’ meetings, shareholders resolve upon dividenddistribution, if any, appoint the Directors, Statutory Auditors and externalauditors, determine their remuneration and vote on business matters submittedby the Directors.

Thequorum required, in person or by proxy, for an ordinary meeting, upon firstnotice is at least 50 percent of the total number of issued and outstandingordinary shares, while on second call there is no quorum requirement.Resolutions at ordinary meetings may be adopted, in first and second calls, bya simple majority of ordinary shares represented at such meeting.

To theextent provided by law, shareholders who represent at least 1/40 of the sharecapital issued and outstanding may request, within five days from thepublication of the agenda, a supplement of the agenda provided that the requestcontains a summary of the matters to be discussed.

Extraordinarymeetings of shareholders may be called to vote upon, among other things,proposed amendments to the By-Laws, capital increases, mergers, spin-offs,issuance of debentures, appointment of receivers and similar extraordinaryactions. Extraordinary shareholders’ meetings shall be properly convened when,in the case of the first meeting, shareholders representing at least one-halfof our share capital are present at the meeting, and in the case of the secondand third (and any subsequent) meetings, shareholders representing,respectively, more than one-third and one-fifth of our share capital arepresent at the meeting. Resolutions are adopted on first, second and third callof extraordinary shareholders meetings with the affirmative vote of holders ofat least two-thirds of the shares represented at the meeting.

Pursuantto our By-laws, subject to the concurrent competence of the extraordinarymeeting of stockholders, the Board also has the authority over resolutions inconnection with mergers and demergers in accordance with Articles 2505 and 2505*bis* and 2506 *ter*of the Civil Code, the establishmentor termination of branches, the determination of which directors shall beauthorized to represent the Company, the reduction of the outstanding capitalstock in the event of withdrawal of a stockholder, the amendment of the By-Lawsto comply with legal requirements, or the transfer of the principal place ofbusiness within the national territory.

Themeeting notice period of 30 days is reduced to, respectively, 20 dayswith respect to meetings convened at the request of minority shareholders andmeetings convened to resolve upon Luxottica Group S.p.A.’s dissolution,and 15 days for meetings convened pending a public tender offer launchedwith respect to our ordinary shares. The notice may specify a date for a secondmeeting in the event that a quorum is not obtained at the first meeting. Noticeof any subsequent meeting 

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that must be heldwithin 30 days from the previously adjourned meeting, must be published atleast eight days prior to the date of the meeting. In addition, a meeting willbe deemed duly convened if shareholders representing 100 percent ofLuxottica Group S.p.A.’s share capital, together with a majority of themembers of the Board of Directors and the Board of Statutory Auditors, arepresent at the meeting.

Toattend any shareholders’ meeting, a holder of ordinary shares must, at leasttwo business days prior to the date fixed for the meeting, deposit a certifiedstatement of account which evidences its ownership of the ordinary shares atour offices or with such agent banks as may be specified in the notice ofmeeting in exchange for an admission ticket and proxy form for the meeting.Such statements may be obtained by beneficial owners of the ordinary sharesthrough the intermediaries associated with Monte Titoli (or such authorizedcentralized securities custody and administration system with which theiraccounts are held). Alternatively, beneficial owners may instruct the relevantintermediary to procure the admission tickets and proxy forms.

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

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

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

OurBy-Laws do not contain any limitations on the voting rights in respect ofordinary shares held by any shareholder. Resolutions adopted at a shareholders’meeting are binding on all shareholders. However, each absent, dissenting orabstaining shareholder (as well as any Director or Statutory Auditor) has theright, under Italian law, to ask a court to annul resolutions taken inviolation of applicable laws or the By-Laws. In addition, in a limited numberof cases (including the merger of a listed company with, and its incorporationinto, an unlisted company) applicable law grants dissenting and absentshareholders the right to obtain the redemption of their shares by the issuerat the average market price of the shares during the previous six-month period.A redemption can be effected either by utilizing the available reserves of theissuer (in which case the shares may be held and registered in the name of theissuer) or alternatively by a reduction of share capital of the issuer.

*OptionRights*

Pursuantto Italian law, holders of ordinary shares are entitled to subscribe for issuancesof shares, debentures convertible into shares and rights to subscribe forshares in proportion to their holdings, unless such option rights are waived orlimited by a shareholders’ resolution adopted by the affirmative vote ofholders of more than 50 percent of the ordinary shares and such waiver orlimitation is in the interest of Luxottica Group S.p.A. Particular Italianregulations set forth the procedures to be followed by Italian listed companiesin such circumstances.

It islikely that the option rights generally available to holders of ordinary sharesmay not be fully available to holders of ADRs. See “ —Description of AmericanDepositary Receipts—Share Dividends and Other Distributions.”

Pursuantto Decree n. 58/98, in the event that: (i) the newly issued shares areoffered for subscription to our employees or employees of our subsidiaries; and(ii) the new shares to be issued by us for subscription by theaforementioned parties do not exceed one percent of our share capital, theresolution excluding option rights is to be approved by shareholdersrepresenting the majority required for extraordinary meetings.

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Pursuantto Italian law, such option rights may be eliminated in certain othercases  including contributions in kind.

*Preferential Shares*

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

*Rights onLiquidation*

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

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

We maypurchase up to ten percent of our ordinary shares, subject to certainconditions and limitations provided by Italian law, including that the purchasebe approved by shareholders. Shares may only be purchased out of profitsavailable for dividends or out of distributable reserves in each case 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.

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

*MinorityShareholders’ Rights*

Anabsent or dissenting shareholder (representing 1/1000 of the share capital ofthe Company) may, within three months, ask a court to annul shareholders’resolutions taken in violation of applicable laws or our By-Laws. Anyshareholders may bring to the attention of the Board of Statutory Auditorsfacts or acts which are deemed wrongful. If such shareholders represent morethan 1/50 percent of our share capital, the Board of Statutory Auditors mustinvestigate without delay and report its findings and recommendations at theshareholders’ meeting.

Shareholdersrepresenting more than 1/20 of our share capital have the right to report majorirregularities to the relevant court. In addition, shareholders representing atleast 1/40 of our share capital may initiate a liability suit against thedirectors, Statutory Auditors and general managers of LuxotticaGroup S.p.A. We may waive or settle the suit only if less than fivepercent of the shareholders vote against such waiver or settlement. We willreimburse the legal costs of such action in the event that the claim of suchshareholders is successful and (i) the court does not award such costsagainst the relevant directors, Statutory Auditors or general managers, or(ii) such costs cannot be recovered from such directors, StatutoryAuditors or general managers. In compliance with decree n. 58/98, ourBy-Laws give minority shareholders the right to appoint directors and oneStatutory Auditor as chairman and one Alternate Auditor to the Board ofStatutory Auditors. See Item 6—“Directors, Senior Management andEmployees—Directors and Senior Management.”

*Italian Tender Offer Rules*

UnderDecree n. 58/98, a public tender offer is required to be made by any personthat through share purchases holds more than 30 percent of the votingstock of an Italian listed company. The public tender offer must cover thewhole voting stock of the company. Similarly, under CONSOB rules, a publictender for the entire voting stock of a listed company must be made by anyperson who currently owns more than a 30 percent interest in the votingsecurities of a company (but does not exercise majority voting rights at anordinary shareholders’ meeting) and purchases or acquires,  directly or indirectly, through the exerciseof subscription or conversion rights during a 12-month period more thanthree percent of the ordinary capital with voting rights. The offer mustbe launched within 30 days from the date on which the relevant thresholdwas exceeded, and must be made at a price not lower than the average of theweighted average of the market price for the shares in the previous12 months, and the highest price paid for the shares by the offeror duringthe same period.

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CONSOBregulates these provisions in greater detail through a number of exemptionsfrom the duty to launch a tender offer. Such exemptions include, among others:(i) when another person or persons jointly control the company;(ii) when a party exceeds the threshold as a result of shares transferredto it by a related party; and (iii) when the threshold is exceeded by aparty following the exercise of pre-emption or conversion rights to which suchparty was entitled. Article 107 of the Testo 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 concernedhas exceeded the threshold as a result of a public tender offer launched on60 percent or more of the voting stock of the company. This provision isavailable only (i) if the tender offer is conditional on the acceptance bya majority of the shareholders of the company (excluding, for the purpose ofcalculating such majority, the offeror or any shareholder that holds anabsolute or relative majority shareholding exceeding ten percent as well as theofferor’s subsidiaries, controlling persons, related companies and otherpersons connected to it by virtue, among other things, of a shareholders’agreement (together, “persons or entities acting in concert with the offeror”)),(ii) if the offeror (including the persons or entities acting in concertwith the offeror) has not acquired more than one percent of the voting stock ofthe company in the preceding 12 months and during the offer period and(iii) upon receipt 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 launch an offer for the remaining shares,unless an adequate distribution of the shares is resumed so as to ensure propertrading within a period of four months. Any person who, following a tenderoffer for 100 percent of the voting stock, holds more than 98 percentof such voting stock is entitled to acquire the residual shareholding during aperiod of four months upon conclusion of the tender offer, if it has declaredin the offering documentation its intention to make such acquisition. Sharesheld in breach of these rules cannot be voted and must be sold within12 months.

*DerivativeSuits*

UnderItalian law, action against members of the Board of Directors, members of theBoard of Statutory Auditors and General Managers of a company may be brought onbehalf of the company if authorized by a resolution adopted at an ordinarymeeting of shareholders. In respect of listed companies, the Testo Unicoprovides for a new form of shareholders’ action against members of a board ofdirectors, which may be brought by holders of at least 1/40 of the outstandingshares. We are allowed to not commence, or to settle, the suit provided thatshareholders representing at least five percent of the issued and outstandingshares do not vote against a resolution to this effect. We will reimburse thelegal costs of such action in the event that the claim of such shareholders issuccessful and (i) the court does not award these costs as part of thejudgment against the relevant directors, Statutory Auditors or general managersor (ii) these costs cannot be recovered from such directors, StatutoryAuditors or general managers. In addition, Italian law permits a shareholderacting alone to bring an action against members of a board of directors in theevent that such shareholder has suffered damages directly related to negligenceor willful misconduct.

*NoLimitation of Ownership*

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

**Descriptionof American Depositary Receipts**

Thefollowing is a summary of certain provisions of the Amended and RestatedDeposit Agreement (the “Deposit Agreement”), dated as of March 30, 2006,among Deutsche Bank Trust Company Americas, as depositary, the owners andholders from time to time of ADRs issued thereunder and us. The DepositAgreement supersedes our earlier deposit agreement with The Bank of New York.This summary does not purport to be complete and is qualified in its entiretyby reference to the Deposit Agreement, a copy of which has been filed as anexhibit to this annual report. For more complete information, the entireagreement should be read. Copies of the Deposit Agreement are available forinspection at the principal Corporate Trust Office of Deutsche Bank TrustCompany Americas at 60 Wall Street, New York, New York 10005.

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

***ShareDividends and Other Distributions***

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

*Cash*

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

*Shares*

DeutscheBank Trust Company Americas will, unless otherwise requested by us, distributenew ADRs representing any shares we may distribute as a dividend or freedistribution. Deutsche Bank Trust Company Americas will only distribute wholeADRs. It will sell shares which would require it to issue a fractional ADR anddistribute the net proceeds in the same way as it does with dividends ordistributions of cash. If Deutsche Bank Trust Company Americas does notdistribute additional ADRs, each ADR will also represent the additionaldeposited shares.

*Rights toReceive Additional Shares*

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

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

*Deposit,Withdrawal and Cancellation*

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

 

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*VotingRights*

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

If weask for instructions of an ADR holder, Deutsche Bank Trust Company Americaswill notify the ADR holder of the upcoming vote and arrange to deliver votingmaterials. The materials will (1) describe the matters to be voted on and(2) explain how ADR holders, on a certain date, may instruct Deutsche BankTrust Company Americas to vote the shares or other deposited securitiesunderlying the ADRs as directed. For instructions to be valid, Deutsche BankTrust Company Americas must receive them on or before the date specified.Deutsche Bank Trust Company Americas will try, as far as practical, subject toItalian law and the provisions of our articles of association, to vote or tohave its agents vote the shares or other deposited securities as instructed bythe ADR holder. Deutsche Bank Trust Company Americas will only vote or attemptto vote as instructed by the ADR holder and will not vote any of such holder’sshares or other deposited securities except in accordance with suchinstructions.

DeutscheBank Trust Company Americas shall fix a record date whenever:

·                  any cash dividend or distribution shall becomepayable;

·                  any distribution other than cash shall be made;

·                  rights shall be issued with respect to the depositedsecurities;

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

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

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

·                  entitled to receive such dividend, distribution orrights;

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

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

**MaterialContracts**

Thecontracts described below have been entered into by Luxottica Group S.p.A.and/or its subsidiaries since January 1, 2006 and, as of the date of thisannual report, contain provisions under which we or one or more of oursubsidiaries has an obligation or entitlement which is or may be material tous. This discussion is not complete and should be read in conjunction with theagreements described below, each of which has been filed with the SEC as anexhibit to this annual report.

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*MergerAgreement with Oakley*

On June 20, 2007, we entered into an Agreement andPlan of Merger (the “Merger Agreement”) with Oakley, a developer, manufacturerand 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 will acquire all of the outstandingequity interests of Oakley.  Pursuant tothe Merger Agreement, Norma Acquisition Corp. will be merged with and intoOakley with Oakley surviving as an indirect wholly-owned subsidiary ofLuxottica.  At the effective time of themerger, each outstanding share of Oakley’s common stock will be converted intothe right to receive U.S.$29.30 per share in cash without interest, and eachoutstanding option will be converted into the right to receive U.S.$29.30 pershare in cash less the applicable option exercise price of such option for eachshare of common stock underlying such option. The transaction is expected to close in the second half of 2007.Completion of the merger is subject to customary closing conditions, including,among others: (i) approval by Oakley’s shareholders; (ii) the receiptof antitrust approvals, or the expiration or termination of the applicablewaiting period, under the Hart-Scott-Rodino Antitrust Improvements Act andunder certain non-U.S. laws; (iii) the absence of any order or injunctionprohibiting the consummation of the merger; and (iv) the receipt of allrequisite consents from governmental entities.

The Merger Agreement contains certain terminationrights for both Oakley and us. The Merger Agreement provides that, in certainspecified circumstances, Oakley must pay us a termination fee of U.S.$69 million(generally in the event the Board of Directors of Oakley changes itsrecommendation that its shareholders approve the principal terms of the MergerAgreement and the merger or elects to pursue a superior acquisition proposalfrom a third party). The Merger Agreement also obligates us to pay Oakley atermination fee of U.S.$80 million under specified circumstances whererequisite antitrust approval has not been received.

*Non-CompetitionAgreement with Oakley and Jim Jannard*

Concurrently with the execution of the MergerAgreement, we entered into a Non-Competition Agreement (the “Non-CompetitionAgreement”) with Oakley, Norma Acquisition Corp. and Jim Jannard, the founderand majority shareholder of Oakley, pursuant to which Mr. Jannard agreesto not participate, directly or indirectly, in specified activities consideredto be in competition with Oakley or any of its subsidiaries for a period offive years, subject to certain exceptions.

Those exceptions allow Mr. Jannard to (i) own,directly or indirectly, solely as a passive investment, less than 5.0 percentof any class of securities of any entity in competition with the Business (asdefined in the Non-Competition Agreement) where equity securities are traded onany national securities exchange, provided that he is not a controlling personof, or a member of a group which controls, such entity, and (ii) be aninvestor, partner, member, director or principal of a private equity firm,venture capital firm, or hedge fund that makes investments in a Competitor (asdefined in the Non-Competition Agreement), provided that he completely recuseshimself from selecting, advising or managing the investment in any such Competitor.

*LuxotticaGroup S.p.A. 2006 Stock Option Plan*

In July 2006, we adopted an employee stock optionplan providing for the issuance of options covering up to 20,000,000 ordinaryshares of nominal value of Euro 0.06 each. The purpose of the plan is toprovide additional incentives to key employees of the Group. See Item 6—“Directors,Senior Management and Employees—Share Ownership” for more information.

*AmendedEuro 1,130 Million and U.S.$325 Million Credit Facility and Related InterestRate Swaps*

In March 2006, we amended our credit facilitywith a group of banks to provide for borrowings of an aggregate of Euro 1,130million and an aggregate of U.S.$325 million in favor of Luxottica GroupS.p.A. and our subsidiary U.S. Holdings. The credit facility consists of threetranches: Tranche A is an amortizing term loan of Euro 405 millionthat is to be used to refinance Luxottica Group S.p.A.’s existing debt as itmatures and for other general corporate purposes and will require nine equalquarterly installments of Euro 45 million beginning in June 2007;Tranche B is a term loan of U.S.$325 million that was used by U.S.Holdings to finance the acquisition of Cole and will mature in March 2011;and Tranche C is a revolving credit facility equivalent to Euro725 million, available in Euro or U.S.$, in favor of both Luxottica GroupS.p.A. and U.S. Holdings, that is to be used for general corporate purposes andall outstanding borrowings, if any, will mature in March 2011. On December31, 2006, U.S.$ 190 million (Euro 144.0 million) had been drawn from Tranche Cby US Holdings and Euro 100 million by Luxottica Group S.p.A. We can selectinterest periods of one, two, three or six months with interest accruing onEuro-denominated loans based on the corresponding Euribor rate and U.S.dollar-denominated loans based on the corresponding Libor rate, both plus amargin between 0.20 percent and 0.40 percent based on the “Netdebt/EBITDA” ratio, as defined in

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the agreement. Theinterest rates on December 31, 2006 were 3.97 percent for Tranche A, 5.62 percentfor Tranche B, 5.60 percent on Tranche C amounts borrowed in US dollarsand 3.96 percent on Tranche C amounts borrowed in Euro. This creditfacility contains certain financial and operating covenants. The Company was incompliance with those covenants as of December 31, 2006. Under this creditfacility, Euro 895.2 million was outstanding as of December 31, 2006. InFebruary 2007, we exercised an option included in the amendment to extend thematurity date of Tranches B and C to March 2012.  For additional information, see Note 8to our Consolidated Financial Statements included in Item 18 of thisannual report.

In June 2005, we enteredinto nine interest rate swap transactions with various banks with an aggregateinitial notional amount of Euro 405 million which will decrease by Euro 45million every three months starting on June 3, 2007 (“Club Deal Swaps”).These swaps will expire on June 3, 2009. The Club Deal Swaps were enteredinto as a cash flow hedge on Tranche A of the credit facility discussed above.The Club Deal Swaps exchange the floating rate of Euribor for an average fixedrate of 2.40 percent per annum. The ineffectiveness of cash flow hedgeswas tested both at the inception date and at each year end. The results of thetests indicated that the cash flow hedges are highly effective and the amountsof ineffectiveness, if any, on each date of testing were immaterial. As aconsequence approximately Euro 5.2 million, net of taxes, is included in othercomprehensive income as of December 31, 2006. Based on current interest ratesand market conditions, the estimated aggregate amount to be recognized asearnings from other comprehensive income for these cash flow hedges in fiscal2007 is approximately Euro 3.6 million, net of taxes.

**ItalianExchange Controls**

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

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

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

Individuals,non-profit entities and certain partnerships that are resident in Italy mustdisclose on their annual tax declarations all investments held outside Italyand foreign financial assets held at the end of a taxable period through whichforeign source income taxable in Italy may be derived as well as the totalamount of transfers effected during a taxable period to, from, within andbetween countries other than Italy relating to such foreign investments orfinancial assets, even if at the end of the taxable period such persons nolonger owned such foreign investments or financial assets. No such disclosureis required if the total value of the foreign investments and financial assetsheld at the end of a taxable period and the total amount of the relatedtransfers effected during the taxable period, is not greater than Euro 12,500.In addition, no such disclosure is required in respect of securities depositedfor management with qualified Italian financial intermediaries and in respectof contracts entered into through their intervention, provided that the itemsof income derived from such foreign financial assets are collected through theintervention of the same intermediaries. Corporations and commercialpartnerships resident in Italy are exempt from such disclosure requirementswith respect to their annual tax declarations because this information isrequired to be disclosed in their financial statements.

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

**Taxation**

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

·                  partnershipsand other pass-through entities;

·                  tax-exempt entities;

·                  certain banks, financial institutions and insurancecompanies;

·                  broker-dealers;

·                  traders in securities that elect to mark to market;

·                  investors liable for alternative minimum tax;

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

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

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

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

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

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

This discussion is based on the tax laws of Italy andof the United States, including the Code, its legislative history, existing andproposed regulations, and published rulings and court decisions, as currentlyin effect, as well as on the currently applicable Convention Between the UnitedStates of America and Italy for the Avoidance of Double Taxation with respectto Taxes on Income and the Prevention of Fraud or Fiscal Evasion (the “Treaty”)and the Convention Between the United States of America and the ItalianRepublic for the Avoidance of Double Taxation and the Prevention of FiscalEvasion with respect to Taxes on Estates and Inheritances (the “Estate TaxConvention”). These laws are subject to change, possibly on a retroactive basisand could affect the tax consequences described below. A new tax treaty andprotocol between Italy and the United States (collectively, the “New Treaty”)to replace the current Treaty was signed on August 25, 1999, but is notyet in effect. The New Treaty would include an anti-abuse provision and aprovision limiting treaty benefits to individuals, 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.

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The New Treaty also wouldclarify the availability of treaty benefits to entities that are treated asfiscally transparent under United States or Italian law. The Italian governmenthas recently expressed its intention to reform the tax treatment of income offinancial source by introducing a single tax rate for taxation of suchfinancial income at an intermediate level between the currently applicablerates of 12.5 percent and 27 percent, but not exceeding 20 percent. Ifimplemented, such proposed reform may impact the Italian tax regime assummarized below.

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

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

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

*ItalianTax Law*

*Withholdingor Substitute Tax on Dividends.*In general, dividends paid byItalian corporations to non-Italian resident beneficial owners without apermanent establishment in Italy to which ordinary shares or ADSs areeffectively connected, are subject to final Italian withholding tax (orsubstitute tax, in the case of dividends on underlying shares listed on theItalian 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 tax treatyentered into by Italy. Italy has concluded income tax treaties with over 60foreign 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, Italianwithholding tax (or substitute tax) at a reduced rate of 15 percent willgenerally apply to dividends paid by an Italian corporation to a U.S. residententitled to Treaty benefits who timely complies with the procedures forclaiming such benefits, provided the dividends are not effectively connectedwith a permanent establishment in Italy through which the U.S. resident carrieson a business or with a fixed base in Italy through which the U.S. residentperforms independent personal services. The foregoing treatment will not bechanged by the dividend article of the New Treaty.

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

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

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

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·                  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. InternalRevenue Service (the “IRS”) is six to eight weeks.

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

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

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

*Tax onCapital Gains.*Upon disposal of ordinary shares or ADSs of anItalian resident corporation, capital gains realized by non-Italian residentindividuals and foreign corporations without a permanent establishment in Italyto which the ordinary shares or ADSs are effectively connected may be subjectto taxation in Italy. However, the tax regime 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 whichis listed on a regulated market (such as Luxottica Group S.p.A.) is defined tooccur when a shareholder (i) owns shares, ADSs and/or rights through whichshares may be acquired representing in the aggregate more than five percent ofthe share capital or two percent of the shares with voting rights at an ordinaryshareholders’ meeting of the corporation and (ii) in any twelve-monthperiod following the date the ownership test under (i) is met, suchshareholder engages in the disposal of shares, ADSs and/or of rights throughwhich shares may be acquired that individually or in the aggregate exceed thepercentages indicated under (i) above. Capital gains realized bynon-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.

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Theabove is subject to any provisions of an applicable income tax treaty enteredinto by the Republic of Italy, if the income tax treaty provisions are morefavorable. The majority of double tax treaties entered into by Italy, inaccordance with the OECD Model tax convention, provide that capital gainsrealized from the disposition of Italian securities are subject to taxationonly in the country of residence of the seller. Therefore, the capital gainsrealized by a non-Italian resident entitled to the benefits of a treaty enteredinto by Italy in accordance with the OECD Model in respect of taxation ofcapital gains from the disposition of Italian securities will not be subject toItalian taxation on such capital gains, regardless of whether the shareholdingdisposed of is qualified or non-qualified. Non-Italian residents who dispose ofshares 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).

Underthe Treaty, a person who is considered a U.S. resident for purposes of the Treatyand is fully entitled to benefits under the Treaty will not incur Italiancapital gains tax on disposal of ordinary shares or ADSs, unless the ordinaryshares or ADSs form part of a business property of a permanent establishment ofthe holder in Italy or pertain to a fixed base available to a holder in Italyfor the purpose of performing independent personal services. U.S. residents whosell ordinary shares or ADSs may be required to timely produce appropriatedocumentation establishing that the above-mentioned conditions fornon-taxability of capital gains under the Treaty have been satisfied (includinga certificate of tax residence issued by the competent U.S. tax authorities).

Suchtreatment will not be changed by the capital gains provisions of the NewTreaty.

*TransferTax.*An Italian transfer tax is normally payable on thetransfer of shares in an Italian company by and/or to Italian residents; nogeneral exception is provided from the transfer tax for transfers made bynon-residents of Italy. However, sales of securities on a regulated stockexchange are exempt from the Italian transfer tax.

*Inheritance andGift Tax.* Subject to certainexceptions, Italian inheritance and gift tax is generally payable on transfersof ordinary shares and/or ADSs of an Italian resident corporation by reason ofdeath or donation, regardless of the residence of the deceased or donor andregardless of whether the ordinary 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.

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*UnitedStates Federal Taxation*

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

•                    a citizen or resident of the United States;

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

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

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

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

*Taxationof Dividends.*Under the United States federal income taxlaws, a U.S. holder must include as gross income the gross amount of anydividend paid by Luxottica Group S.p.A. out of its current or accumulatedearnings and profits, as determined for United States federal income taxpurposes. Such holder must also include any Italian tax withheld from thedividend payment in this gross amount even though the holder does not in factreceive such amounts withheld. The dividend is ordinary income that must beincluded in income when the U.S. holder, in the case of ordinary shares, or thedepositary, in the case of ADSs, receives the dividend, actually orconstructively. The dividend will not be eligible for the dividends receiveddeduction generally allowed to United States corporations in respect of dividendsreceived from other United States corporations. The amount of the dividenddistribution that must be included in income for a U.S. holder will be the U.S.dollar value of the Euro payments made, determined at the spot Euro/U.S. dollarrate on the date the dividend distribution is includible in income, regardlessof whether the payment is in fact converted into U.S. dollars. Generally, anygain or loss resulting from currency exchange fluctuations during the periodfrom the date the U.S. holder includes the dividend payment in income to thedate he converts the payment into U.S. dollars will be treated as ordinaryincome or loss. The gain or loss generally will be income from sources withinthe United States for foreign tax credit limitation purposes. Distributions inexcess of current and accumulated earnings and profits, as determined forUnited States federal income tax purposes, will be treated as a return ofcapital to the extent of the U.S. holder’s basis in the shares or ADSs andthereafter as capital gain.

Subjectto certain generally applicable limitations, the Italian withholding orsubstitute tax imposed on dividends in accordance with the Treaty and paid overto Italy will be creditable against a U.S. holder’s United States federalincome tax liability. To the extent a refund of the tax withheld is availableto the U.S. holder under Italian law or under the Treaty, the amount of taxwithheld that is refundable will not be eligible for credit against such holder’sUnited States federal income tax liability. See “—Italian Tax Law—Withholdingor Substitute Tax on Dividends” for the procedures for obtaining a tax refund.

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Dividendspaid by foreign corporations generally constitute income from sources outsidethe United States, but generally will be “passive income”  which is treated separately from other typesof income for purposes of computing the foreign tax credit allowable. Therules governing the foreign tax credit are complex. U.S. holders shouldconsult their tax advisors regarding the availability of a foreign tax creditfor Italian withholding taxes imposed on dividends paid on ordinary shares orADSs.

Certaindividends received by non-corporate U.S. holders in taxable years beginningbefore January 1, 2011 in respect of ordinary shares or ADSs will be taxedat the rate applicable to long-term capital gains (generally at a maximumincome tax rate of 15 percent) if the dividends are “qualified dividends.”This reduced income tax rate is only applicable to dividends paid by U.S.corporations and “qualified foreign corporations” and only with respect toshares held by a qualified U.S. holder (i.e., a non-corporate shareholder suchas 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.*

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

*PassiveForeign Investment Company Considerations.* A corporationorganized outside the U.S. generally will be classified as a passive foreigninvestment company (a “PFIC”) for U.S. federal income tax purposes in anytaxable year in which either: (a) at least 75 percent of its gross incomeis “passive income,” or (b) the average percentage of the gross value ofits assets that produce “passive income” or are held for the production ofpassive income is at least 50 percent. Passive income for this purposegenerally includes dividends, interest, royalties, rents and gains fromcommodities and securities transactions. Under a special “look-through” rule,in determining whether it is a PFIC, a foreign corporation is required to takeinto account a pro rata portion of the income and assets of each corporation inwhich it owns, directly or indirectly, at least a 25 percent interest.Where the “look-through” rule applies, there is eliminated from the determinationof the status of the foreign corporation as a PFIC stock and debt instrumentsissued by such a 25 percent-owned subsidiary as well as dividends andinterest received from such a 25 percent-owned subsidiary. Based on ouraudited financial statements, we strongly believe that we are not a PFIC forU.S. federal income tax purposes for 2006. Based on our audited financialstatements and our current expectations regarding the value and nature of ourassets and the sources and nature of our income, we do not expect to become aPFIC for U.S. federal income tax purposes for future years. Nonetheless, giventhat our PFIC status will be determined by reference to the assets and incometests applied annually, with the assets test being applied by reference to theaverage of the fair market value of our assets at the end of each quarter, andthe income test being applied by reference to our income at the end of thetaxable year, we cannot provide complete assurance that we will not be a PFICfor either the current taxable year or for any subsequent taxable year. If weare classified as a PFIC in any year that a U.S. holder is a shareholder, wegenerally will continue to be treated as a PFIC for that U.S. holder in allsucceeding years, regardless of whether we continue to meet the income or assettest described above. If we are classified as a PFIC in any year, certainmaterially adverse consequences could result for U.S. holders of ordinaryshares or ADSs. Such adverse consequences could, however, be materiallylessened if the U.S. holders timely file either a qualified electing fund or amark-to-market election. In addition, if we were classified as a PFIC, in ataxable year in which we pay a dividend or the prior taxable year, we would notbe a qualified foreign corporation (as described in “—Taxation of Dividends”),and our dividends would not be eligible for the reduced 15 percent U.S.income tax rate.

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

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

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·                  fails to provide an accurate taxpayer identificationnumber;

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

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

A U.S. 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.

AfterDecember 31, 2010, the backup withholding rate will increase to 31 percentunder the sunset provisions of currently applicable U.S. tax law.

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

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

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

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

**Documentson Display**

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

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

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

**InterestRate Sensitivity**

AtDecember 31, 2005 and 2006, our interest rate sensitivity was limited toour unhedged variable rate outstanding debt under our credit facilities andbank overdraft facilities. Included in this amount are the following creditagreements:  (i) Tranche B andTranche C borrowings on our subsequently amended credit facility with a groupof banks of Euro 740 million (Euro 1,130 million starting as of March 10,2006) and U.S.$325 million (of which Euro 294.9 million and 244.0 millionwas outstanding under Tranche C as of December 31, 2005 and 2006, respectively,and U.S.$325 million was outstanding under Tranche B (unchanged from 2005),(ii) our AUD 30 million multi currency loan of which AUD  20.88 million (Euro 13.59 million) andAUD 20.22 million (Euro 12.1 million) was outstanding as of December 31, 2005and 2006, respectively, (iii) our Euro 100 million 18-month creditfacility of which Euro 100 million was outstanding (unchanged from 2005), and(iv) Euro 50 million credit facility of which Euro 25 million was outstanding .As of such date, debt under our credit facility with a group of banks boreinterest at the rate of Euribor, on Euro-denominated loans, and LIBOR, on U.S.$denominated loans, plus a margin between 0.20 percent and 0.40 percent based onthe “Net Debt/EBITDA” ratio as defined in the agreement (5.62 percent for theTranche B loan denominated in U.S.$ and 4.93 percent for the weighted averageTranche C loan for the relevant interest period at December 31, 2006).Debt under the AUD 30 million and new Euro 100 million credit facilityaccrue interest at BBR or HIBOR plus 0.275 percent and EURIBOR plus 0.25percent, respectively. BBR, HIBOR and EURIBOR as defined in the agreements were6.38 percent, 3.91 percent and 3.72 percent, respectively, at December 31,2006.

Additionally,in 2003 we issued U.S.$300 million of fixed rate senior unsecuredguaranteed notes in three series (series A, B and C). We immediately enteredinto three interest rate swaps to hedge such series of notes, therebyeffectively changing the fixed rate to a variable rate of six-month LIBOR plusa spread of 0.6575 percent or 0.73 percent depending on the series.These Swaps were terminated by a payment to the bank in December 2005, andwe will amortize the final fair value adjustment to the debt as an adjustmentto the fixed-rate yield over the remaining life of the debt. This haseffectively increased our fixed rate on such series A, B and C notes to 5.64percent, 5.99 percent, and 5.44 percent, respectively.

However,the effect of a ten percent change in interest rates (upward or downward) atDecember 31, 2005 and 2006 would not have had a material effect on ourfuture annual pretax earnings and cash flows. This was calculated by us, basedon our expected future pretax earning and cash flows with an interest rateadjustment of ten percent above and below the rates in effect as ofDecember 31, 2005 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.$-denominated activities, we used anexchange rate of Euro 1.00 = U.S.$ 1.244 and Euro 1.00 = U.S.$1.35 as ofDecember 31, 2005 and 2006, respectively.

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Wemonitor our exposure to interest rate fluctuations and may enter into hedgingarrangements to mitigate our exposure to increases in interest rates if webelieve it is prudent to do so. We have 13 interest rate derivatives outstandingas of December 31, 2006, unchanged from December 31, 2005:

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

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

**ForeignExchange Sensitivity**

Ourmanufacturing subsidiaries are mainly located in Italy and our sales and distributionfacilities are maintained worldwide. As such, we are vulnerable to foreigncurrency exchange rate fluctuations in two principal areas:

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

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

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

EffectiveJanuary 1, 2001, we adopted SFAS 133. SFAS 133, as amended andinterpreted, which establishes accounting and reporting standards forderivative instruments, including certain derivative instruments embedded inother contracts, and for hedging activities.

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

Fromtime to time, we use derivative financial instruments, principally currencyforward agreements, as part of our risk management policy to reduce ourexposure to market risks from changes in foreign exchange rates. As ofDecember 31, 2006,we had several currency forward derivatives and optionstructures replicating forward contracts (zero cost collar) with a maturity nolonger than 90 days. We may enter into other foreign exchange derivativefinancial instruments when we assess that the risk can be hedged effectively.

*TranslationRisk.*A substantial portion of revenues and costs aredenominated in various currencies other than Euro. The following table providesinformation about our revenues and costs denominated in various currencies forthe years ended December 31, 2005 and 2006 and is not meant to be a tabulardisclosure of market risk:

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

 
| **2005**           | ** ** | ** ** | ** ** | **U.S. Dollars** | ** ** | **Euro** | ** ** | **Other** | ** ** | **Total** | ** ** |
|--------------------|------------|------------|------------|-----------------------|------------|----------|------------|-----------|------------|-----------|------------|
| Revenues           |       | 69.2       | %          | 15.6                  | %          | 15.2     | %          | 100       | %          |
| Operating expenses |       | 69.9       | %          | 16.5                  | %          | 13.6     | %          | 100       | %          |

 

Becausea large portion of our revenues and expenses are denominated in U.S. dollars,fluctuations in the exchange rate between the U.S. dollar and the Euro, ourreporting currency, could have a material effect on our reported financialposition and results of operations. The effect of a ten percent weakening ofthe U.S.$ against the Euro as compared to the actual 2005 and 2006 average exchange rate between the U.S.$ andEuro would have been a decrease in income before taxes of Euro 47.8 million andof Euro 63.2 million, respectively. In addition, a significant change in themix of revenues or expenses between or among geographic or operating segmentscould increase or decrease our exposure to other currency exchange ratefluctuations. We will continue to monitor our exposure to exchange ratefluctuations and enter into hedging arrangements if and to the extent webelieve it to be appropriate.

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

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

None.

**PART II**

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

None.

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

None.

**ITEM 15.CONTROLS AND PROCEDURES**

*DisclosureControls and Procedures*

We maintain disclosure controls and procedures thatare designed to ensure that information required to be disclosed in our reportsunder the Securities Exchange Act of 1934, as amended, is recorded, processed, summarizedand reported 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 31,2006. 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 ofDecember 31, 2006, the disclosure controls and procedures are effective.

*Management’sReport on Internal Control over Financial Reporting*

As required by the SEC rules and regulations for theimplementation of Section 404 of the Sarbanes-Oxley Act, our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in Exchange ActRule 13a-15(f). Our internal control over financial reporting is designedto provide reasonable assurance regarding the reliability of financialreporting and the preparation of our consolidated financial statements forexternal reporting purposes in accordance with accounting principles generallyaccepted in the United States of America.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements in ourconsolidated financial statements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

During 2006, we completed several acquisitionsincluding, Shoppers Optical, a 74 store optical chain in Canada, forapproximately Euro 48.7 million; three retailers in China operating 274 retailstores, for approximately Euro 69.2 million; several retailers in Australia andNew Zealand operating 49 stores, for approximately Euro 9.4 million; thepurchase of the remaining 49 percent stake of our Turkish-baseddistributor Luxottica Gozluk Ticaret A.S. for approximately Euro 15 million andthe merger of our Turkish-based distributor with Standard Gozluk Industri VeTircaret A.S., a Turkish wholesaler, for total consideration of approximatelyEuro 46.7 million.  As of year end, each of these acquired businesses wasa separate control environment. As such, these businesses were excluded frommanagement's report on internal controls over financial reporting, as permittedby SEC guidance, for the year ended December 31, 2006, as the acquisitions werenot material to the consolidated results of operations.

Under the supervision and with the participation ofour management, including our principal executive officer and principalfinancial officer, we have conducted an evaluation of the effectiveness of ourinternal control over financial reporting based on the framework in *Internal Control—Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission. Basedon our evaluation under the framework in *InternalControl—Integrated*

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*Framework*, our management has concludedthat our internal control over financial reporting was effective as ofDecember 31, 2006.

Our independent registered public accounting firm hasaudited and issued its report on management’s assessment of the effectivenessof our internal control over financial reporting as of December 31, 2006, whichappears elsewhere in this Annual Report on Form 20-F.

*Changesin Internal Control over Financial Reporting*

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**

OurBoard of Directors has determined that a member of our Board of StatutoryAuditors, Marco Reboa, qualifies as an “audit committee financial expert,” asdefined in the SEC rules and is “independent”, as defined in such rules. TheBoard of Statutory Auditors has been designated by our Board of Directors asthe appropriate body to act as our “Audit Committee,” as defined in theSarbanes-Oxley Act, SEC regulations and the NYSE listing standards. See Item 6—“Directors,Senior Management and Employees—Summary of the Significant Differences BetweenOur Corporate Governance Practices and the Corporate Governance Standards ofthe New York Stock Exchange—Board Committees.”

**Item 16B.Code of Ethics**

TheBoard of Directors adopted a Code of Ethics, as may be amended from time totime, that applies to our chief executive officer, chief financial officer andall of our directors, members of management bodies, any other employees, andthat is addressed to those who directly or indirectly permanently ortemporarily have relationships and dealings with the Company. We will provide acopy of our Code of Ethics without charge upon a written request sent to ourregistered office at Via C. Cantù 2, 20123 Milan, Italy. You may also obtain acopy of our Code of Ethics on our website at www.luxottica.com.

InMarch 2007, we amended our Code of Ethics to include new rules governing properuse of corporate assets by our employees. In addition, in accordance withItalian law, we adopted a Procedure for Handling Privileged Information inorder to ensure that it is promptly and adequately disclosed to the public andin compliance with the fundamental principles of transparency and truthfulness.We also adopted an updated Internal Dealing Procedure in order to comply withrecent regulatory amendments. The updated procedure governs the disclosureobligations and the limitations concerning transactions carried out on sharesand other financial instruments by a “significant” person (including managers,the main shareholders of the company and the persons closely related to them).

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

Deloitte &Touche S.p.A., or Deloitte & Touche, was engaged as our independentregistered public accounting firm to audit our consolidated financialstatements for the years ended December 31, 2005 and 2006. Due to thenature of our operations, numerous Deloitte & Touche entities andaffiliates perform numerous other accounting, tax and consulting tasks for usaround the world. The Board of Directors is the corporate body competent topre-approve, with the favorable opinion of the Internal Control Committee, allaudit services for the annual audit of Luxottica Group S.p.A.’s own financialstatements and for the audit of the consolidated financial statements ofLuxottica Group S.p.A. and its subsidiaries, and to pre-approve all permissiblenon-audit services permissible for all entities in the group, althoughpre-approval of such services may not always be possible based on the nature ofthe service. Each pre-approval is typically given for a one-year period and isdetailed by category and budgeted cost. Updates on audit and non-audit servicesto be provided by Deloitte & Touche are provided to the Boardquarterly.

Thefollowing table sets forth the aggregate fees paid by the Company toDeloitte & Touche for 2005 and 2006:
| **Thousands of Euro**                                                                          | ** ** | **2005  Fees** | ** ** | **2006  Fees** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------------|------------|----------------|------------|
| Audit fees  (including annual audit and semi-annual reviews)                                             |       | 2,516          |       | 5,258          |       |
| Audit related  fees (including benefit plan audits, acquisition due diligence and  Sarbanes-Oxley audit) |       | 67             |       | 427            |       |
| Tax fees  (including compliance and planning)                                                            |       | 2,136          |       | 1,854          |       |
| All other fees  (including royalty audits)                                                               |       | 387            |       | 221            |       |
| Total fees                                                                                               |       | 5,106          |       | 7,760          |       |

 

OurBoard of Directors has approved all of the audit and non-audit fees ofDeloitte & Touche for the year 2006 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 Listing Standards for Audit Committees**

Werely on the exemption from the listing standards for audit committees set forthin Exchange Act Rule 10A-3(c)(3). We believe that such reliance willnot materially adversely affect the ability of our Board of Statutory Auditorsto act independently and to satisfy the other requirements of the SEC rules.

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

Notapplicable.

**ITEM 17.FINANCIAL STATEMENTS**

Notapplicable.

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**ITEM 18.   FINANCIALSTATEMENTS**
| **Index  to Consolidated Financial Statements**                                                                  |   |   |   |
|------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| Report of  Independent Registered Public Accounting Firm                                                         |   | F-1    |   |
| Consolidated  Balance Sheets, December 31, 2005 and 2006                                                    |   | F-4    |   |
| Statements of  Consolidated Income for the Years Ended December 31, 2004, 2005 and 2006                     |   | F-6    |   |
| Statements of  Consolidated Shareholders’ Equity for the Years Ended December 31, 2004,  2005 and 2006 |   | F-8    |   |
| Statements of  Consolidated Cash Flows for the Years Ended December 31, 2004, 2005 and  2006                |   | F-9    |   |
| Notes to  Consolidated Financial Statements                                                                      |   | F-11   |   |
| **Consolidated  Financial Statement Schedules**                                                                  |   |   |   |
| Schedule II-Valuation  and Qualifying Accounts/Allowance for Doubtful Accounts                              |   | F-54   |   |

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

**To theBoard of Directors and Stockholders ofLUXOTTICA GROUP S.p.A.**

We have audited theaccompanying consolidated balance sheets of Luxottica Group S.p.A. (an Italiancorporation) and subsidiaries (collectively, “the Company”) as of December 31,2006 and 2005, and the related consolidated statements of income, shareholders’equity, and cash flows for each of the three years in the period ended December31, 2006.  Our audits also included the financial statement schedulelisted 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 opinion on the financial statements and financialstatement schedule based on our audits.

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of Luxottica Group S.p.A. and subsidiaries as of December31, 2006 and 2005, and the results of their operations and their cash flows foreach of the three years in the period ended December 31, 2006, in conformitywith accounting principles generally accepted in the United States ofAmerica.  Also, in our opinion, such financial statement schedule, whenconsidered in relation to the basic consolidated financial statements taken asa whole, present fairly, in all material respects, the information set forththerein.

As discussed in Notes 2 and11 to the consolidated financial statements, effective January 1, 2006, theCompany changed its method of accounting for share-based payments to adopt Statementof Financial Accounting Standards (“SFAS”) No. 123(R), “Share-BasedPayment”.  As also discussed in Note 10to the consolidated financial statements, on December 31, 2006, the Companychanged its method of accounting for pensions and other postretirement benefitsto adopt the recognition and disclosure provisions of SFAS No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans — anAmendment of FASB Statement No. 87, 88, 106 and 132R”.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2006, based on the criteria establishedin *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated June 28, 2007 expressed an unqualified opinion onmanagement’s assessment of the effectiveness of the Company’s internal controlover financial reporting and an unqualified opinion on the effectiveness of theCompany’s internal control over financial reporting.

Milan, ItalyJune 28, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 
| Ancona Bari Bergamo Bologna Brescia Cagliari Firenze Genova Milano Napoli  Padova Parma Perugia      |   | Member of                |
|------------------------------------------------------------------------------------------------------|--------|--------------------------|
| Roma Torino  Treviso Verona                                                                          |   | 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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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

**To theBoard of Directors and Stockholders ofLUXOTTICA GROUP S.p.A.**

 

We haveaudited Management's assessment, included in the accompanying Management’sReport on Internal Control over Financial Reporting appearing in Item 15 ofthis Form 20-F, that Luxottica Group S.p.A. and its subsidiaries (the“Company”) maintained effective internal control over financial reporting as ofDecember 31, 2006, based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission.  As described in Management’s Report, Management excluded fromits assessment the internal control over financial reporting the 2006 acquisitions.These acquisitions included Shoppers Optical, a 74 store optical chain inCanada, for approximately Euro 48.7 million; three retailers in China operating274 retail stores, for approximately Euro 69.2 million; several retailers inAustralia and New Zealand operating 49 stores, for approximately Euro 9.4million; the purchase of the remaining 49% stake of the Turkish-baseddistributor Luxottica Gozluk Ticaret A.S. for approximately of Euro 15 millionand the merger of the Turkish-based distributor with Standard GozlukIndustri Ve Tircaret A.S., a Turkish wholesaler,  for totalconsideration of approximately Euro 46.7 million.  As of year end,each of these acquired businesses was a separate control environment. As such,these businesses were excluded from Management's report on internal controlsover financial reporting, as permitted by SEC guidance, for the year endedDecember 31, 2006 as the acquisitions were not material to theconsolidated operations.

 

The Company'sManagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express an opinionon Management's assessment and an opinion on the effectiveness of the Company'sinternal control over financial reporting based on our audit. 

 

We conductedour audit in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal controlover financial reporting, evaluating Management's assessment, testing andevaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinions. 

F-2

----

 

A company's internal control over financial reportingis a process designed by, or under the supervision of, the company’sprincipal executive and principal financial officers, or persons performingsimilar functions, and effected by the company’s Board of Directors,Management, and other personnel to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accounting principles.A company's internal control over financial reporting includes those policiesand procedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the company are being made only in accordancewith authorizations of Management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company's assets that could have a materialeffect on the financial statements. 

 

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper Management override of control, material misstatements due to error orfraud may not be prevented or detected on a timely basis. Also, projections ofany evaluation of effectiveness of the internal control over financialreporting to future periods are subject to the risk that controls may becomeinadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate. 

 

In our opinion, Management's assessment that theCompany maintained effective internal control over financial reporting as ofDecember 31, 2006, is fairly stated, in all material respects, based on thecriteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission. Also in ouropinion, the Company maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2006, based on criteriaestablished in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission. 

 

We have also audited, in accordance withthe standards of the Public Company Accounting Oversight Board (United States),the consolidated financial statements and financial statement schedule of the Company as of December 31, 2006 and 2005 and foreach of the three years in the period ended December 31, 2006 and our reportdated June 28, 2007 expressed an unqualified opinion on those financialstatements and financial statement schedule, and  included an explanatory paragraph related tothe change in the Company’s method of accounting for share-based payments uponadoption of Statement of Financial Accounting Standard (“SFAS”) No. 123(R),“Share-Based Payment” as well as the Company’s changed its method of accounting for pensions and other postretirementbenefits to adopt the recognition and disclosure provisions of SFAS No. 158,“Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans – an Amendment of FASB Statement No. 87, 88, 106 and 132R”. 

Milan, ItalyJune 28, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 
| Ancona Bari Bergamo Bologna Brescia Cagliari Firenze Genova Milano Napoli  Padova Parma Perugia      |   | Member of                |
|------------------------------------------------------------------------------------------------------|--------|--------------------------|
| Roma Torino  Treviso Verona                                                                          |   | 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-3

----

**LUXOTTICAGROUP S.p.A. and Subsidiaries**

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31, 2005 AND 2006 (*)**
| ** **                                                                                                                                                 | ** ** | **2005**       | ** ** | **2006**                 | ** ** | **2006**      | ** **    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|------------|--------------------------|------------|---------------|---------------|
| ** **                                                                                                                                                 | ** ** | **(Euro/000)** | ** ** | **(U.S.$/000) (1)** | ** ** |
|                                                                                                                                                       |       |           |       |                     |       |          |          |
| **ASSETS**                                                                                                                                                 | ** ** | ** **     | ** ** | ** **               | ** ** | ** **    | ** **    |
|                                                                                                                                                       |       |           |       |                     |       |          |          |
| **CURRENT  ASSETS:**                                                                                                                                       |       |           |       |                     |       |          |          |
| Cash and cash equivalents                                                                                                                                  |       | 367,461        |       | 339,122                  |       | $             | 447,539       |   |
| Accounts receivable - net (Less allowance for doubtful accounts,  € 27.6 million in 2005 and € 22.7 million  in 2006, U.S.$30.0 million in 2006) |       | 461,353        |       | 533,772                  |       | 704,419       |          |
| Sales and income taxes receivable                                                                                                                          |       | 45,823         |       | 24,924                   |       | 32,892        |          |
| Inventories                                                                                                                                                |       | 370,289        |       | 400,895                  |       | 529,061       |          |
| Prepaid expenses and other                                                                                                                                 |       | 87,581         |       | 98,156                   |       | 129,536       |          |
| Deferred tax assets                                                                                                                                        |       | 89,781         |       | 87,947                   |       | 116,064       |          |
| Assets of discontinued operations                                                                                                                          |       | 182,296        |       | —                   |       | —        |          |
|                                                                                                                                                       |       |           |       |                     |       |          |          |
| **Total  current assets**                                                                                                                                  |       | **1,604,584**  |       | **1,484,816**            |       | **1,959,512** |          |
|                                                                                                                                                       |       |           |       |                     |       |          |          |
| **PROPERTY,  PLANT AND EQUIPMENT - net**                                                                                                                   |       | 705,166        |       | 787,201                  |       | 1,038,869     |          |
|                                                                                                                                                       |       |           |       |                     |       |          |          |
| **OTHER  ASSETS:**                                                                                                                                         |       |           |       |                     |       |          |          |
| Goodwill                                                                                                                                                   |       | 1,646,673      |       | 1,694,614                |       | 2,236,382     |          |
| Intangible assets - net                                                                                                                                    |       | 955,796        |       | 830,362                  |       | 1,095,829     |          |
| Investments                                                                                                                                                |       | 15,832         |       | 23,531                   |       | 31,054        |          |
| Other assets                                                                                                                                               |       | 45,471         |       | 94,501                   |       | 124,713       |          |
|                                                                                                                                                       |       |           |       |                     |       |          |          |
| **Total  other assets**                                                                                                                                    |       | **2,663,772**  |       | **2,643,008**            |       | **3,487,978** |          |
|                                                                                                                                                       |       |           |       |                     |       |          |          |
| **TOTAL**                                                                                                                                                  |       | **4,973,522**  |       | **4,915,025**            |       | **$**         | **6,486,359** |   |

 

----

See notes toConsolidated Financial Statements

(*) In accordancewith U.S. GAAP

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

 

F-4

----

 

** **
| ** **                                                                                                                                                                                                                                            | ** ** | **2005**       | ** ** | **2006**                 | ** ** | **2006**      | ** **    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|------------|--------------------------|------------|---------------|---------------|
| ** **                                                                                                                                                                                                                                            | ** ** | **(Euro/000)** | ** ** | **(U.S.$/000) (1)** | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                                         | ** ** | ** **     | ** ** | ** **               | ** ** | ** **    | ** **    |
|                                                                                                                                                                                                                                                  |       |           |       |                     |       |          |          |
| CURRENT LIABILITIES:                                                                                                                                                                                                                                  |       |           |       |                     |       |          |          |
| Bank overdrafts                                                                                                                                                                                                                                       |       | 275,956        |       | 168,358                  |       | $             | 222,182       |   |
| Current portion of long-term debt                                                                                                                                                                                                                     |       | 110,978        |       | 359,527                  |       | 474,468       |          |
| Accounts payable                                                                                                                                                                                                                                      |       | 281,348        |       | 349,598                  |       | 461,364       |          |
| Accrued expenses                                                                                                                                                                                                                                      |       |           |       |                     |       |          |          |
| Payroll and related                                                                                                                                                                                                                                   |       | 133,576        |       | 145,005                  |       | 191,363       |          |
| Customers’ right of return                                                                                                                                                                                                                       |       | 7,799          |       | 17,881                   |       | 23,598        |          |
| Other                                                                                                                                                                                                                                                 |       | 245,590        |       | 229,713                  |       | 303,152       |          |
| Income taxes payable                                                                                                                                                                                                                                  |       | 133,382        |       | 155,195                  |       | 204,811       |          |
| Liabilities held for sale                                                                                                                                                                                                                             |       | 47,092         |       | **—**               |       | **—**    |          |
|                                                                                                                                                                                                                                                  |       |           |       |                     |       |          |          |
| **Total current liabilities**                                                                                                                                                                                                                         |       | **1,235,721**  |       | **1,425,277**            |       | **1,880,938** |          |
|                                                                                                                                                                                                                                                  |       |           |       |                     |       |          |          |
| LONG-TERM DEBT                                                                                                                                                                                                                                        |       | 1,417,931      |       | 959,735                  |       | 1,266,562     |          |
|                                                                                                                                                                                                                                                  |       |           |       |                     |       |          |          |
| LIABILITY FOR TERMINATION INDEMNITIES                                                                                                                                                                                                                 |       | 56,600         |       | 60,635                   |       | 80,020        |          |
|                                                                                                                                                                                                                                                  |       |           |       |                     |       |          |          |
| DEFERRED TAX LIABILITIES                                                                                                                                                                                                                              |       | 116,639        |       | 41,270                   |       | 54,464        |          |
|                                                                                                                                                                                                                                                  |       |           |       |                     |       |          |          |
| OTHER LONG-TERM LIABILITIES                                                                                                                                                                                                                           |       | 179,120        |       | 181,888                  |       | 240,038       |          |
|                                                                                                                                                                                                                                                  |       |           |       |                     |       |          |          |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                         |       |           |       |                     |       |          |          |
|                                                                                                                                                                                                                                                  |       |           |       |                     |       |          |          |
| MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES                                                                                                                                                                                                       |       | 13,478         |       | 30,371                   |       | 40,081        |          |
|                                                                                                                                                                                                                                                  |       |           |       |                     |       |          |          |
| **SHAREHOLDERS’ EQUITY:**                                                                                                                                                                                                                        |       |           |       |                     |       |          |          |
| Capital stock par value € 0.06—457,975,723 and 460,216,248 ordinary shares  authorized and issued at December 31, 2005 and 2006, respectively; 451,540,937  and 453,781,462 shares outstanding at December 31, 2005 and 2006,  respectively |       | 27,479         |       | 27,613                   |       | 36,441        |          |
| Additional paid-in capital                                                                                                                                                                                                                            |       | 150,179        |       | 203,016                  |       | 267,920       |          |
| Retained earnings                                                                                                                                                                                                                                     |       | 2,050,883      |       | 2,343,800                |       | 3,093,113     |          |
| Unearned stock-based compensation                                                                                                                                                                                                                     |       | (48,567        | )          | **—**               |       | **—**    |          |
| Accumulated other comprehensive loss, net of tax                                                                                                                                                                                                      |       | (155,954       | )          | (288,593                 | )          | (380,856      | )             |
| **Total**                                                                                                                                                                                                                                             |       | **2,024,020**  |       | **2,285,836**            |       | **3,016,618** |          |
| Less treasury shares at cost; 6,434,786 and 6,434,786 shares at December  31, 2005 and 2006, respectively                                                                                                                                             |       | 69,987         |       | 69,987                   |       | 92,362        |          |
| **Total shareholders’ equity**                                                                                                                                                                                                                   |       | 1,954,033      |       | 2,215,849                |       | 2,924,256     |          |
|                                                                                                                                                                                                                                                  |       |           |       |                     |       |          |          |
| **TOTAL**                                                                                                                                                                                                                                             |       | **4,973,522**  |       | **4,915,025**            |       | **$**         | **6,486,359** |   |

 

----

See notes toConsolidated Financial Statements

(*) In accordancewith U.S. GAAP

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

 

F-5

----

 

**LUXOTTICAGROUP S.p.A. and Subsidiaries**

**STATEMENTSOF CONSOLIDATED INCOME FOR THE YEARS**ENDEDDECEMBER 31, 2004, 2005 AND 2006 (*)**
| ** **                                                     | ** ** | **2004**   | ** ** | **2005**       | ** ** | **2006**   | ** ** | **2006**           | ** ** |
|----------------------------------------------------------------|------------|------------|------------|----------------|------------|------------|------------|--------------------|------------|
| ** **                                                     | ** ** | ** ** | ** ** | **(Euro/000)** | ** ** | ** ** | ** ** | **(U.S.$/000)(1)** | ** ** |
|                                                           |       |       |       |           |       |       |       |               |       |
| NET SALES                                                      |       | 3,179,613  |       | 4,134,263      |       | 4,676,156  |       | $                  | 6,171,123  |   |
|                                                           |       |       |       |           |       |       |       |               |       |
| COST OF SALES                                                  |       | (1,018,633 | )          | (1,316,664     | )          | (1,426,000 | )          | (1,881,892         | )          |
|                                                           |       |       |       |           |       |       |       |               |       |
| GROSS PROFIT                                                   |       | 2,160,980  |       | 2,817,598      |       | 3,250,156  |       | 4,289,230          |       |
|                                                           |       |       |       |           |       |       |       |               |       |
| OPERATING  EXPENSES:                                           |       |       |       |           |       |       |       |               |       |
| Selling and  advertising                                       |       | (1,342,982 | )          | (1,774,241     | )          | (1,967,034 | )          | (2,595,895         | )          |
| General and  administrative                                    |       | (338,499   | )          | (461,957       | )          | (527,135   | )          | (695,660           | )          |
|                                                           |       |       |       |           |       |       |       |               |       |
| Total                                                          |       | (1,681,481 | )          | (2,236,198     | )          | (2,494,169 | )          | (3,291,555         | )          |
|                                                           |       |       |       |           |       |       |       |               |       |
| INCOME FROM  OPERATIONS                                        |       | 479,499    |       | 581,401        |       | 755,987    |       | 997,676            |       |
|                                                           |       |       |       |           |       |       |       |               |       |
| OTHER INCOME  (EXPENSE):                                       |       |       |       |           |       |       |       |               |       |
| Interest income                                                |       | 6,662      |       | 5,650          |       | 9,804      |       | 12,938             |       |
| Interest expense                                               |       | (55,378    | )          | (66,171        | )          | (70,622    | )          | (93,200            | )          |
| Other - net                                                    |       | 13,792     |       | 18,429         |       | (16,992    | )          | (22,424            | )          |
|                                                           |       |       |       |           |       |       |       |               |       |
| Other income  (expense) - net                                  |       | (34,924    | )          | (42,092        | )          | (77,810    | )          | (102,686           | )          |
|                                                           |       |       |       |           |       |       |       |               |       |
| INCOME BEFORE  PROVISION FOR INCOME TAXES                      |       | 444,575    |       | 539,309        |       | 678,177    |       | 894,990            |       |
|                                                           |       |       |       |           |       |       |       |               |       |
| PROVISION FOR  INCOME TAXES                                    |       | (156,852   | )          | (199,266       | )          | (238,757   | )          | (315,088           | )          |
|                                                           |       |       |       |           |       |       |       |               |       |
| INCOME BEFORE  MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES |       | 287,723    |       | 340,043        |       | 439,420    |       | 579,902            |       |
|                                                           |       |       |       |           |       |       |       |               |       |
| MINORITY  INTERESTS IN INCOME OF CONSOLIDATED SUBSIDIARIES     |       | (8,614     | )          | (9,253         | )          | (8,715     | )          | (11,501            | )          |
|                                                           |       |       |       |           |       |       |       |               |       |
| NET INCOME FROM  CONTINUING OPERATIONS                         |       | 279,109    |       | 330,790        |       | 430,705    |       | 568,401            |       |
|                                                           |       |       |       |           |       |       |       |               |       |
| DISCONTINUED  OPERATIONS                                       |       | 7,765      |       | 11,504         |       | (6,419     | )          | (8,471             | )          |
|                                                           |       |       |       |           |       |       |       |               |       |
| NET INCOME                                                     |       | 286,874    |       | 342,294        |       | 424,286    |       | $                  | 559,930    |   |

 

----

See notes toConsolidated Financial Statements

(*) In accordancewith U.S. GAAP

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

F-6

----

 

 

**LUXOTTICAGROUP S.p.A. and Subsidiaries**

**STATEMENTSOF CONSOLIDATED INCOME FOR THE YEARS**ENDEDDECEMBER 31, 2004, 2005 AND 2006 (*)**
| ** **                                                 | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                 | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2006** | ** ** | **2006** | ** ** |
| ** **                                                 | ** ** | ** **                                  | ** ** | **(Euro)** | ** ** | ** ** | ** ** | **(U.S.$) (1)** | ** ** |
|                                                       |       |                                        |       |   |   |   |   |   |   |
| EARNINGS PER SHARE: BASIC                                  |       |                                        |       |   |   |   |   |   |   |
| Continuing Operations                                      |       | 0.62                                        |       | 0.73 |   | 0.95 |   | 1.25 |   |
| Discontinued Operations                                    |       | 0.02                                        |       | 0.03 |   | (0.01 | ) | (0.01 | ) |
| Net income                                                 |       | 0.64                                        |       | 0.76 |   | 0.94 |   | 1.24 |   |
|                                                       |       |                                        |       |   |   |   |   |   |   |
|                                                       |       |                                        |       |   |   |   |   |   |   |
| EARNINGS PER SHARE: DILUTED                                |       |                                        |       |   |   |   |   |   |   |
| Continuing Operations                                      |       | 0.62                                        |       | 0.73 |   | 0.94 |   | 1.24 |   |
| Discontinued Operations                                    |       | 0.02                                        |       | 0.03 |   | (0.01 | ) | (0.01 | ) |
| Net income                                                 |       | 0.64                                        |       | 0.76 |   | 0.93 |   | 1.23 |   |
|                                                       |       |                                        |       |   |   |   |   |   |   |
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (thousands): |       |                                        |       |   |   |   |   |   |   |
| Basic                                                      |       | 448,275                                     |       | 450,179 |   | 452,898 |   | 452,898 |   |
| Diluted                                                    |       | 450,361                                     |       | 453,303 |   | 456,186 |   | 456,186 |   |

 

----

See notes toConsolidated Financial Statements

(*) In accordancewith U.S. GAAP

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

F-7

----

**LUXOTTICAGROUP S.p.A. and Subsidiaries**

**Statements OF CONSOLIDATED SHAREHOLDERS’ EQUITY FOR THE YEARS ENDEDdECEMBER 31, 2004, 2005 AND 2006 (*)**
| ** **                                                                          | ** ** | ** **            | ** **  | ** **  | ** ** | ** **     | ** ** | ** **      | ** ** | ** **             | ** ** | ** **               | ** ** | **Accumulated**          | ** ** | ** **             | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------|-------------|-------------|------------|----------------|------------|-----------------|------------|------------------------|------------|--------------------------|------------|--------------------------|------------|------------------------|------------|------------------|------------|
| ** **                                                                          | ** ** | ** **            | ** **  | ** **  | ** ** | ** **     | ** ** | ** **      | ** ** | ** **             | ** ** | **Other**                | ** ** | **Other**                | ** ** | ** **             | ** ** | ** **       | ** ** |
| ** **                                                                          | ** ** | ** **            | ** **  | ** **  | ** ** | **Additional** | ** ** | ** **      | ** ** | **Unearned**           | ** ** | **Comprehensive**        | ** ** | **Comprehensive**        | ** ** | **Treasury**           | ** ** | **Consolidated** | ** ** |
| ** **                                                                          | ** ** | **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**       | ** ** |
| ** **                                                                          | ** ** | **(Euro/000)**        | ** **  |
| BALANCES, JANUARY  1, 2004                                                          |       | 454,477,033           |        | 27,269      |       | 40,423         |       | 1,619,312       |       |                   |       |                     |       | (242,483                 | )          | (69,987                | )          | 1,374,534        |       |
|                                                                                |       |                  |        |        |       |           |       |            |       |                   |       |                     |       |                     |       |                   |       |             |       |
| Exercise of stock  options                                                          |       | 728,440               |        | 43          |       | 5,950          |       |            |       |                   |       |                     |       |                     |       |                   |       | 5,993            |       |
| Translation  adjustment                                                             |       |                  |        |        |       |           |       |            |       |                   |       | (79,897                  | )          | (79,897                  | )          |                   |       | (79,897          | )          |
| Minimum pension,  liability, net of taxes of Euro 0.2 million                       |       |                  |        |        |       |           |       |            |       |                   |       | 248                      |       | 248                      |       |                   |       | 248              |       |
| Tax benefit on  stock options                                                       |       |                  |        |        |       | 794            |       |            |       |                   |       |                     |       |                     |       |                   |       | 794              |       |
|                                                                                |       |                  |        |        |       |           |       |            |       |                   |       |                     |       |                     |       |                   |       |             |       |
| Change in fair  value of derivative                                                 |       |                  |        |        |       |           |       |            |       |                   |       |                     |       |                     |       |                   |       |             |       |
| instruments, net  of taxes of Euro 0.2 million                                      |       |                  |        |        |       |           |       |            |       |                   |       | 1,174                    |       | 1,174                    |       |                   |       | 1,174            |       |
| Dividends  declared (Euro 0.21 per share)                                           |       |                  |        |        |       |           |       | (94,113         | )          |                   |       |                     |       |                     |       |                   |       | (94,113          | )          |
| Income from  continuing operations                                                  |       |                  |        |        |       |           |       | 279,109         |       |                   |       | 279,109                  |       |                     |       |                   |       | 279,109          |       |
| Income from  discontinued operations                                                |       |                  |        |        |       |           |       | 7,765           |       |                   |       | 7,765                    |       |                     |       |                   |       | 7,765            |       |
| Comprehensive  income                                                               |       |                  |        |        |       |           |       |            |       |                   |       | 208,399                  |       |                     |       |                   |       |             |       |
|                                                                                |       |                  |        |        |       |           |       |            |       |                   |       |                     |       |                     |       |                   |       |             |       |
| BALANCES, DECEMBER  31, 2004                                                        |       | 455,205,473           |        | 27,312      |       | 47,167         |       | 1,812,073       |       |                   |       |                     |       | (320,958                 | )          | (69,987                | )          | 1,495,607        |       |
|                                                                                |       |                  |        |        |       |           |       |            |       |                   |       |                     |       |                     |       |                   |       |             |       |
| Exercise of stock  options                                                          |       | 2,770,250             |        | 167         |       | 28,062         |       |            |       |                   |       |                     |       |                     |       |                   |       | 28,229           |       |
| Translation  adjustment                                                             |       |                  |        |        |       |           |       |            |       |                   |       | 157,776                  |       | 157,776                  |       |                   |       | 157,776          |       |
| Aggregate stock-based  compensation                                                 |       |                  |        |        |       | 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         | )          |
| Income from  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         |       | 24,309         |       |            |       |                   |       |                     |       |                     |       |                   |       | 24,443           |       |
| Translation  adjustment                                                             |       |                  |        |        |       |           |       |            |       |                   |       | (126,853                 | )          | (126,853                 | )          |                   |       | (126,853         | )          |
| Effect of  adoption of SFAS 123(R)                                                  |       |                  |        |        |       | (48,567        | )          |            |       | 48,567                 |       |                     |       |                     |       |                   |       | —           |       |
|                                                                                |       |                  |        |        |       |           |       |            |       |                   |       |                     |       |                     |       |                   |       |             |       |
| 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           | )          |
| 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         | )          |
| Income from  continuing operations                                                  |       |                  |        |        |       |           |       | 430,705         |       |                   |       | 430,705                  |       |                     |       |                   |       | 430,705          |       |
| (Loss) on  discontinued operations                                                  |       |                  |        |        |       |           |       | (6,419          | )          |                   |       | (6,419                   | )          |                     |       |                   |       | (6,419           | )          |
| Comprehensive  income                                                               |       |                  |        |        |       |           |       |            |       |                   |       | 300,056                  |       |                     |       |                   |       |             |       |
|                                                                                |       |                  |        |        |       |           |       |            |       |                   |       |                     |       |                     |       |                   |       |             |       |
| BALANCES, DECEMBER  31, 2006                                                        |       | 460,216,248           |        | 27,613      |       | 203,016        |       | 2,343,800       |       | —                 |       |                     |       | (288,593                 | )          | (69,987                | )          | 2,215,849        |       |
|                                                                                |       |                  |        |        |       |           |       |            |       |                   |       |                     |       |                     |       |                   |       |             |       |
| Comprehensive  income (1)                                                           |       |                  |        |        |       |           |       |            |       |                   |       | $                        | 395,984    |                     |       |                   |       |             |       |   |
| BALANCES, DECEMBER 31, 2006  (U.S.$/000)(1)                                         |       | $                     | 460,216,248 |        | $          | 36,441         |       | $               | 267,920    |                   | $          | 3,093,113                |       | $                        | —     |                   |       |             | $          | (380,856 | ) | $ | (92,362 | ) | $ | 2,924,256 |   |
|                                                                                     |            |                       |             |             |            |                |            |                 |            |                        |            |                          |            |                          |            |                        |            |                  |            |  |  |  |  |  |  |  |  |  |

 

----

See notes toConsolidated Financial Statements

(*) In accordancewith U.S. GAAP

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

F-8

----

**LUXOTTICAGROUP S.p.A. and Subsidiaries**

**STATEMENTS OF CONSOLIDATED CASH FLOWSTHE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006 (*)**
| ** **                                                                               | ** ** | **2004**    | ** ** | **2005**       | ** ** | **2006**    | ** ** | **2006**           | ** **  |
|------------------------------------------------------------------------------------------|------------|-------------|------------|----------------|------------|-------------|------------|--------------------|-------------|
| ** **                                                                               | ** ** | ** **  | ** ** | **(Euro/000)** | ** ** | ** **  | ** ** | **(U.S.$/000)**(1) | ** **  |
|                                                                                     |       |        |       |           |       |        |       |               |        |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                |       |        |       |           |       |        |       |               |        |
|                                                                                     |       |        |       |           |       |        |       |               |        |
| **Net income from continuing operations**                                                |       | **279,109** |       | **330,790**    |       | **430,705** |       | **$**              | **568,401** |   |
|                                                                                     |       |        |       |           |       |        |       |               |        |
| **Adjustments to reconcile net income to net cash provided by operating  activities:**   |       |        |       |           |       |        |       |               |        |
|                                                                                     |       |        |       |           |       |        |       |               |        |
| Minority interest in income of consolidated subsidiaries                                 |       | 8,614       |       | 9,253          |       | 8,715       |       | 11,501             |        |
| Non-cash stock-based compensation                                                        |       | —      |       | 22,711         |       | 47,969      |       | 63,304             |        |
| Excess tax benefits from stock-based compensation                                        |       | —      |       | —         |       | (7,279      | )          | (9,606             | )           |
| Depreciation and amortization                                                            |       | 150,140     |       | 184,652        |       | 220,797     |       | 291,386            |        |
| Provision (benefit) for deferred income taxes                                            |       | 46,570      |       | (91,297        | )          | (72,509     | )          | (95,691            | )           |
| Loss on disposals of fixed assets - net                                                  |       | 7,641       |       | 6,559          |       | 4,930       |       | 6,506              |        |
| Unrealized foreign exchange gain                                                         |       | (13,445     | )          | —         |       | —      |       | —             |        |
| Termination indemnities matured during the year - net                                    |       | 6,768       |       | 3,723          |       | 4,369       |       | 5,766              |        |
|                                                                                     |       |        |       |           |       |        |       |               |        |
| **Changes in operating assets and liabilities,  net of acquisition of businesses:** |       |        |       |           |       |        |       |               |        |
| Accounts receivable                                                                      |       | (14,298     | )          | (33,634        | )          | (83,107     | )          | (109,676           | )           |
| Prepaid expenses and other                                                               |       | 19,963      |       | (56,767        | )          | 8,568       |       | 11,307             |        |
| Inventories                                                                              |       | 34,190      |       | 66,491         |       | (27,658     | )          | (36,501            | )           |
| Accounts payable                                                                         |       | 6,241       |       | 49,615         |       | 76,021      |       | 100,325            |        |
| Accrued expenses and other                                                               |       | (22,951     | )          | (18,549        | )          | (25,243     | )          | (33,313            | )           |
| Accrual for customers’ right of return                                              |       | 727         |       | 5,448          |       | 11,121      |       | 14,677             |        |
| Income taxes payable                                                                     |       | (950        | )          | 126,708        |       | 5,875       |       | 7,754              |        |
|                                                                                     |       |        |       |           |       |        |       |               |        |
| **Total adjustments**                                                                    |       | **229,210** |       | **274,914**    |       | **172,569** |       | **227,740**        |        |
|                                                                                     |       |        |       |           |       |        |       |               |        |
| **Cash  provided by operating activities from continuing operations**                    |       | **508,319** |       | **605,704**    |       | **603,274** |       | **$**              | **796,141** |   |

 

----

See notes toConsolidated Financial Statements

(*) In accordancewith U.S. GAAP

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

F-9

----

 

** **
| ** **                                                                                 | ** ** | **2004**   | ** ** | **2005**       | ** ** | **2006**   | ** ** | **2006**           | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|------------|------------|--------------------|------------|
| ** **                                                                                 | ** ** | ** ** | ** ** | **(Euro/000)** | ** ** | ** ** | ** ** | **(U.S.$/000)(1)** | ** ** |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                     |       |       |       |           |       |       |       |               |       |
| Property, plant  and equipment:                                                            |       |       |       |           |       |       |       |               |       |
| Additions                                                                                  |       | (116,626   | )          | (220,016       | )          | (272,180   | )          | (359,196           | )          |
| Disposals                                                                                  |       | 198        |       | 1,022          |       | 21,563     |       | 28,457             |       |
| Increase in  investments                                                                   |       | —     |       | —         |       | (5,872     | )          | (7,750             | )          |
| Purchases of  businesses net of cash acquired                                              |       | (362,978   | )          | (86,966        | )          | (134,114   | )          | (176,990           | )          |
| Sale of investment  in Pearle Europe                                                       |       | —     |       | 144,000        |       | —     |       | —             |       |
| Sale of Things  Remembered                                                                 |       | —     |       | —         |       | 128,007    |       | 168,931            |       |
| Additions of  intangible assets                                                            |       | (301       | )          | (4,479         | )          | (1,140     | )          | (1,505             | )          |
|                                                                                       |       |       |       |           |       |       |       |               |       |
| Cash used in  investing activities of continuing operations                                |       | (479,707   | )          | (166,439       | )          | (263,737   | )          | (348,053           | )          |
|                                                                                       |       |       |       |           |       |       |       |               |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                     |       |       |       |           |       |       |       |               |       |
| Long-term debt:                                                                            |       |       |       |           |       |       |       |               |       |
| Proceeds                                                                                   |       | 1,187,601  |       | 373,462        |       | 84,100     |       | 110,987            |       |
| Repayments                                                                                 |       | (918,564   | )          | (623,338       | )          | (233,378   | )          | (307,989           | )          |
| Swap termination  fees                                                                     |       | —     |       | (7,062         | )          | —     |       | —             |       |
| Decrease in  overdraft balances                                                            |       | (248,404   | )          | (17,813        | )          | (101,008   | )          | (133,300           | )          |
| Exercise of  stock options                                                                 |       | 5,993      |       | 28,229         |       | 24,443     |       | 32,257             |       |
| Excess tax  benefit from stock-based compensation                                          |       | —     |       | —         |       | 7,279      |       | 9,606              |       |
| Dividends                                                                                  |       | (94,113    | )          | (103,484       | )          | (131,369   | )          | (173,368           | )          |
|                                                                                       |       |       |       |           |       |       |       |               |       |
| Cash used in  financing activities of continuing operations                                |       | (67,487    | )          | (350,006       | )          | (349,933   | )          | (461,807           | )          |
|                                                                                       |       |       |       |           |       |       |       |               |       |
| (DECREASE)/INCREASE  IN CASH AND CASH EQUIVALENTS                                          |       | (38,875    | )          | 89,260         |       | (10,395    | )          | (13,719            | )          |
|                                                                                       |       |       |       |           |       |       |       |               |       |
| CASH AND  EQUIVALENTS, BEGINNING OF YEAR                                                   |       | 299,937    |       | 253,246        |       | 367,461    |       | 484,938            |       |
|                                                                                       |       |       |       |           |       |       |       |               |       |
| Effect of  exchange rate changes on cash and cash equivalents                              |       | (7,816     | )          | 24,955         |       | (17,944    | )          | (23,681            | )          |
|                                                                                       |       |       |       |           |       |       |       |               |       |
| CASH AND  EQUIVALENTS, END OF YEAR                                                         |       | 253,246    |       | 367,461        |       | 339,122    |       | $                  | 447,539    |   |
|                                                                                       |       |       |       |           |       |       |       |               |       |
| Cash provided by  (used in) operating activities of discontinued operations                |       | 20,359     |       | 17,756         |       | (5,688     | )          | (7,507             | )          |
| Cash provided by  (used in) investing activities of discontinued operations                |       | (794       | )          | (9,340         | )          | (9,186     | )          | (12,123            | )          |
| Cash provided by  (used in) financing activities of discontinued operations                |       | (15,155    | )          | (8,318         | )          | 16,209     |       | 21,391             |       |
|                                                                                       |       |       |       |           |       |       |       |               |       |
| (DECREASE)/INCREASE  IN CASH AND CASH EQUIVALENTS OF DISCONTINUED OPERATIONS               |       | 4,409      |       | 99             |       | 1,334      |       | 1,761              |       |
|                                                                                       |       |       |       | * *       |       |       |       |               |       |
| CASH  RECLASSIFIED AS ASSETS OF DISCONTINUED OPERATIONS AT BEGINNING OF YEAR               |       | —     |       | 4,103          |       | 4,795      |       | 6,328              |       |
|                                                                                       |       |       |       |           |       |       |       |               |       |
| EFFECT OF  TRANSLATION ADJUSTMENTS ON CASH AND CASH EQUIVALENTS OF DISCONTINUED OPERATIONS |       | (306       | )          | 593            |       | (557       | )          | (736               | )          |
|                                                                                       |       |       |       |           |       |       |       |               |       |
| CASH RETAINED BY  DISCONTINUED OPERATIONS UPON SALE                                        |       | —     |       | —         |       | (5,572     | )          | (7,353             | )          |
|                                                                                       |       |       |       |           |       |       |       |               |       |
| **CASH  INCLUDED IN ASSETS OF DISCONTINUED OPERATIONS AT END OF PERIOD**                   |       | **4,103**  | ** ** | **4,795**      |       | **—** | ** ** | **—**         |       |
| ** **                                                                                 |       |       |       |           |       |       |       |               |       |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                         | ** ** | ** ** | ** ** | ** **     |       | ** ** |       | ** **         |       |
| Cash paid during  the year for interest                                                    |       | 58,371     |       | 61,770         |       | 67,496     |       | 89,074             |       |
| Cash paid during  the year for income taxes                                                |       | 108,440    |       | 153,287        |       | 242,628    |       | 320,196            |       |
| Acquisition of  businesses:                                                                |       |       |       |           |       |       |       |               |       |
| Fair value of  assets acquired                                                             |       | 157,905    |       | 3,702          |       | 10,863     |       | 14,336             |       |
|                                                                                            |            |            |            |                |            |            |            |                    |            |  |

 

----

See notes to ConsolidatedFinancial Statements

(*) In accordance withU.S. GAAP

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

F-10

----

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

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.**                            **ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES**

**Organization**- Luxottica Group S.p.A. and its subsidiaries (collectively “Luxottica Group”or the “Company”) operate in two industry segments: (1) manufacturing andwholesale distribution and (2) retail distribution. Through its manufacturingand wholesale distribution operations, Luxottica Group is engaged in thedesign, manufacturing, wholesale distribution and marketing of house brand anddesigner lines of mid to premium-priced prescription frames and sunglasses.Through the Company’s retail operations the Company owns and operates 5,280retail locations worldwide and franchises an additional 454 locations undercertain of its owned trade names. At December 31, 2006 the Company’s retailoperations by geographic region and significant tradenames were as follows:
| ** **                  | ** ** | **North  America** | ** ** | **Europe/  Middle  East** | ** ** | **Australia /  New Zealand** | ** ** | **China /  Hong Kong** | ** ** | **Total** | ** ** |
|-----------------------------|------------|--------------------|------------|---------------------------|------------|----------------------------------------|------------|----------------------------------|------------|-----------|------------|
| LensCrafters                |       | 902                |       | —                    |       | —                                 |       | 75                               |       | 977       |       |
| Sunglass Hut                |       | 1,502              |       | 92                        |       | 224                                    |       | —                           |       | 1,818     |       |
| Pearle and Licensed  Brands |       | 1,781              |       | —                    |       | —                                 |       | —                           |       | 1,781     |       |
| Other                       |       | —             |       | —                    |       | 505                                    |       | 199                              |       | 704       |       |
|                        |       |               |       |                      |       |                                   |       |                             |       |      |       |
| Franchised locations        |       | 417                |       | 15                        |       | 22                                     |       | —                           |       | 454       |       |
|                        |       | 4,602              |       | 107                       |       | 751                                    |       | 274                              |       | 5,734     |       |

 

**Principlesof consolidation and basis of presentation** - The consolidatedfinancial statements of Luxottica Group include the financial statements of theparent company, all wholly or majority-owned subsidiaries and variable interestentities for which the Company is determined to be the primary beneficiary. Asubsidiary of the Company located in the United States holds a 44 percentinterest in an affiliated manufacturing and wholesale distributor, located andpublicly traded in India, and the Company owns a 50 percent interest in anaffiliated company located in Great Britain, which are both accounted for underthe equity method. The results of operations of these investments are notmaterial to the results of the operations of the Company. Investments in other companiesin which the Company has less than a 20 percent interest with no ability toexercise significant influence are carried at cost. All significantintercompany accounts and transactions are eliminated in consolidation.Luxottica Group prepares its consolidated financial statements in accordancewith accounting principles generally accepted in the United States of America(“U.S. GAAP”).

In accordance withFinancial Accounting Standard Board (“FASB”) Statement of Financial AccountingStandard (“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.

The comparativefigures include a variable interest entity (the “Trust”) consisting of asynthetic operating lease for Cole’s former Things Remembered Specialty GiftBusiness (“TR”) of Cole National Corporation (“Cole”) which was sold inSeptember 2006 (see Note 4). The Trust was included in these consolidatedfinancial statements since the Company was required to absorb any expectedlosses, received the majority of expected returns on the activities of theTrust, and was the primary beneficiary of the Trust. Assets of Euro 1.6 millionand liabilities of Euro 1.6 million were consolidated into the financialstatements as of December 31, 2005. In January 2006, the Company reachedan agreement with the Trust to allow for the acceleration of the purchaseoption and acquired the facility for a purchase price of approximately Euro 1.5million (the amount of the underlying liability plus transaction costs).Therefore, the liability related to the Trust was included as a currentliability (“liabilities of discontinued operations”) as of December 31, 2005.

The North Americaretail division’s fiscal year is a 52- or 53-week period ending on the Saturdaynearest December 31. The accompanying consolidated financial statements includethe operations of the North America retail division for the 52-week periodsended January 1, 2005, December 31, 2005, and December 30, 2006.

F-11

----

**Useof 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.

**ForeignCurrency Translation and Transactions** – Luxottica Groupaccounts for its foreign currency denominated transactions and foreign operationsin accordance with SFAS No. 52, *Foreign CurrencyTranslation*. The financial statements of foreign subsidiaries aretranslated into Euro, which is the functional currency of the parent companyand the reporting currency of the Company. Assets and liabilities of foreignsubsidiaries, which use the local currency as their functional currency, aretranslated at year-end exchange rates. Results of operations are translatedusing the average exchange rates prevailing throughout the year. The resultingcumulative translation adjustments have been recorded as a separate componentof “Accumulated Other Comprehensive Income (Loss).”

Transactions in foreigncurrencies are recorded at the exchange rate in effect at the transaction date.Gains or losses from foreign currency transactions, such as those resultingfrom the settlement of foreign receivables or payables during the year, arerecognized in consolidated income in such year. Aggregate transactiongain/(loss) for the years ended December 31, 2004, 2005 and 2006, were Euro12.5 million, Euro 9.5 million and Euro (19.9) million, respectively.

**Cashand Cash Equivalents** – Cash and cash equivalents includescash on hand, demand deposits, and highly liquid investments with an originalmaturity of three months or less, and amounts in-transit from banks forcustomer credit card, and debit card transactions. Substantially all amounts intransit from the banks are converted to cash within four business days from thetime of sale. Credit card and debit card transactions in transit wereapproximately Euro 14.1 million and Euro 23.4 million at December 31, 2005 and2006, respectively.

**BankOverdrafts**– Bank overdrafts represent negative cash balancesheld in banks and amounts borrowed under various unsecured short-term lines ofcredit (see “Credit Facilities” included in Note 14 for further discussion ofthe short-term lines of credit) that the Company has obtained through localfinancial institutions. These facilities are usually short-term in nature ormay contain provisions that allow them to renew automatically with acancellation notice period. Certain subsidiaries’ agreements require aguarantee from Luxottica Group S.p.A. Interest rates on these lines of creditvary and can be used to obtain various letters of credit when needed.

**Inventories**– Luxottica Group’s manufactured inventories, approximately 75.4 percent and66.7 percent of total frame inventory for 2005 and 2006, respectively, arestated at the lower of cost, as determined under the weighted-average method(which approximates the first-in, first-out method, or “FIFO”), or marketvalue. Retail inventory not manufactured by the Company or its subsidiaries arestated at the lower of cost, at FIFO or weighted-average cost, or market value.As of January 2, 2005, the Company changed its method of valuing certain of itsretail inventory from the last-in, first-out method (“LIFO”) to FIFO in orderto reduce the number of valuation methods among retail divisions. The effect ofthe change in the inventory valuation method had an immaterial effect on the2005 Statements of Consolidated Income. Inventories are recorded net ofallowances for estimated losses among other reserves. These reserves arecalculated using various factors including sales volume, historical shrinkresults and current trends.

**Property,Plant and Equipment** - Property, plant and equipment arestated at historical cost. Depreciation is computed on the straight-line methodover the estimated useful lives of the related assets as follows:

F-12

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| ** **                           | ** ** | **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 |

 

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

**CapitalizedLeased******Property** – Capitalized leasedassets are amortized using the straight-line method over the term of the lease,or in accordance with practices established for similar owned assets if ownershiptransfers to the Company at the end of the lease term.

**Goodwill** – Goodwill represents the excessof the purchase price (including acquisition-related expenses) over the valueassigned to the net tangible and identifiable intangible assets acquired. The Company’sgoodwill is tested annually for impairment as of December 31 of each year inaccordance with SFAS No. 142, *Goodwill andOther Intangible Assets*(“SFAS 142”). Additional impairment testsare performed if, for any reason, the Company believes that an event hasoccurred that may impair goodwill. Such tests are performed at the reportingunit level which consists of two units, Wholesale and Retail, as required bythe provisions of SFAS 142. For the years ended December 31, 2004, 2005 and2006, the result of this process was the determination that the carrying valueof each reporting unit of the Company was not impaired and, as a result, theCompany has not recorded a goodwill impairment charge in such years.

**TradeNames and Other Intangibles** – In connection with variousacquisitions, Luxottica Group has recorded as intangible assets certain tradenames and other intangibles which the Company believes have a finite life.Trade names are amortized on a straight-line basis over periods ranging from 20to 25 years (see Note 7).  Otherintangibles include, among other items, distributor networks, customer listsand contracts, franchise agreements and license agreements, and are amortizedover the respective useful lives. All intangibles are subject to test forimpairment in accordance with SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*(“SFAS 144”). Aggregate amortizationexpense of trade names and other intangibles for the years ended December 31,2004, 2005 and 2006 was Euro 50.7 million, Euro 61.9 million and Euro 68.8million, respectively.

**Impairmentof Long-Lived Assets** – Luxottica Group’s long-lived assets,other than goodwill, are tested for impairment whenever events or changes incircumstances indicate that the net carrying amount may not be recoverable.When such events occur, the Company measures impairment by comparing thecarrying value of the long-lived asset to the estimated undiscounted futurecash flows expected to result from the use of the long-lived assets and theireventual disposition. If the sum of the expected undiscounted future cash flowswere less than the carrying amount of the long-lived assets, the Company wouldrecord an impairment loss, if determined to be necessary. Such impairment lossis measured as the amount by which the carrying amount of the long-lived assetexceeds the fair value in accordance with SFAS 144. The aggregate impairmentloss on certain non-performing long-lived assets charged to the Statements ofConsolidated Income during fiscal 2005 and 2006 was not material and there wasno impairment loss charged in fiscal 2004.

**StoreOpening and Closing Costs** - Store opening costs are chargedto operations as incurred in accordance with Statement of Position No. 98-5, *Accounting for the Cost of Start-up Activities*.The costs associated with closing stores or facilities are recorded at fairvalue as such costs are incurred. Store closing costs charged to theconsolidated statements of income during fiscal 2004, 2005 and 2006 were notmaterial.

**SelfInsurance** – The Company is self insured for certain lossesrelating to workers’ compensation, general liability, auto liability, andemployee medical benefits for claims filed and for claims incurred but notreported.  The Company’s liability isestimated on an undiscounted basis using historical claims experience

F-13

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and industry averages;however, the final cost of the claims may not be known for over five years. Asof December 31, 2005 and 2006, self insurance accruals were Euro 46.8 millionand Euro 37.4 million, respectively.

**IncomeTaxes** – Income taxes are recorded in accordance with SFAS No.109, *Accounting for Income Taxes*,which requires recognition of deferred tax assets and liabilities for theexpected future tax consequences of events that have been included in theCompany’s consolidated financial statements or tax returns. Under this method,deferred tax liabilities and assets are determined based on the differencebetween the consolidated financial statement and tax basis of assets andliabilities using enacted tax rates in effect for the year in which thedifferences are expected to reverse. A valuation allowance is recorded fordeferred tax assets if it is determined that it is more likely than not thatthe asset will not be realized. Changes in valuation allowances from period toperiod are included in the tax provisions in the relevant period of change.

**Liability for TerminationIndemnities** – The reserve for employee termination indemnities of Italian companiesis considered a defined benefit plan and is accounted for accordingly.Termination indemnities in other countries are provided through payroll tax andother social contributions in accordance with local statutory requirements (seeNote 10).

**Revenue Recognition**– Revenues include sales of merchandise (both wholesale and retail), insuranceand administrative fees associated with the Company’s managed vision carebusiness, eye exams and related professional services, and sales of merchandiseto franchisees along with other revenues from franchisees such as royaltiesbased on sales and initial franchise fee revenues. Excluded from revenues andrecorded net in expenses when applicable are amounts collected from customersand remitted to governmental authorities for taxes directly related to therevenue-producing transaction.

Wholesale Division revenues are recognized from sales of products atthe time of shipment, as title and the risks and rewards of ownership of thegoods are assumed by the customer at such time. The products are not subject toformal customer acceptance provisions. In some countries, the customer has theright to return products for a limited period of time after the sale. However,such right of return does not impact the timing of revenue recognition as allconditions of SFAS No. 48, *Revenue Recognition WhenRight of Return Exists*, are satisfied at the date of sale.Accordingly, the Company has recorded an accrual for the estimated amounts tobe returned.  This estimate is based onthe Company’s right of return policies and practices along with historical dataand sales trends.  There are no otherpost-shipment obligations. Revenues received for the shipping and handling ofgoods are included in sales and the costs associated with shipments tocustomers are included in operating expenses. Total shipping costs in fiscal2004, 2005 and 2006 associated with the sale of goods in the Wholesale Divisionwere Euro 6.2 million, Euro 6.0 million and Euro 7.3 million, respectively.

# Retail Divisionrevenues, including internet and catalog sales, are recognized upon receipt bythe customer at the retail location, or when goods are shipped directly to thecustomer for internet and catalog sales. In some countries, the Company allowsretail customers to return goods for a period of time and as such the Companyhas recorded an accrual for the estimated amounts to be returned.  This accrual is based on the historicalreturn rate as a percentage of net sales and the timing of the returns from theoriginal transaction date.  There are noother post-shipment obligations. Additionally, the Retail Division enters intodiscount programs and similar relationships with third parties that have termsof twelve or more months. Revenues under these arrangements are likewiserecognized as transactions occur in the Company’s retail locations andcustomers take receipt of products and services. Advance payments and depositsfrom customers are not recorded as revenues until the product is delivered. AtDecember 31, 2005 and 2006 customer advances included in the consolidatedbalance sheet in “Accrued Expenses and Other” were Euro 22.3 million and Euro21.8 million, respectively. Also included in Retail Division revenues aremanaged vision care revenues consisting of (i) insurance revenues, which arerecognized when earned over the terms of the respective contractualrelationships, and (ii) administrative services revenues, which are recognizedwhen services are provided during the contract period. Accruals are establishedfor amounts due under these relationships determined to be uncollectible.

The Retail Division previously sold separately priced extended warrantycontracts with terms of coverage of 12 months (up to 24 months in 2005).Revenues from the sale of these warranty contracts are deferred and amortizedover the lives of the contracts, while costs to service the warranty claims areexpensed as incurred.

F-14

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# A reconciliation of the changes in deferred revenuefrom the sale of warranty contracts and other deferred items for the yearsended December 31, 2005 and 2006 is as follows: 

| **In thousands of Euro** | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
| Beginning  balance                      |       | 37,362   |       | 41,099   |       |
| Translation  difference                 |       | 5,247    |       | (3,643   | )          |
| Warranty  contracts sold                |       | 42,677   |       | 30,151   |       |
| Other deferred  revenues                |       | 540      |       | 70       |       |
| Amortization of  deferred revenues      |       | (44,727  | )          | (51,879  | )          |
| Total                                   |       |     | 41,099     |     | 15,798     |   |
| Current                                 |       |     | 35,353     |     | 15,798     |   |
| Non-current                             |       |     | 5,746      |     | —     |   |

 

# 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. Accruals are establishedfor amounts due under these relationships when they are determined to beuncollectible.

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

**Managed Vision Care Underwritingand Expenses** – The Company sells vision insurance plans whichgenerally have a duration of up to five years. Based on its experience, theCompany believes it can predict utilization and claims experience under theseplans, including claims incurred but not yet reported, with a high degree ofconfidence. Claims are recorded as they are incurred and certain other membershipcosts are amortized over the covered period.

**Advertisingand Direct Response Marketing** – Costs to develop and createnewspaper, television, 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 program coststhat do not meet the capitalization criteria are expensed the first time theadvertising occurs.  Advertising expensesincurred for the years ended December 31, 2004, 2005 and 2006 were Euro 189.6million, Euro 267.8 million and Euro 318.1 million, respectively, and nosignificant amount have been reported as assets.

The Companyreceives a reimbursement from its acquired franchisees for certain marketingcosts.  Operating expenses in theConsolidated Statements of Income are net of amounts reimbursed by thefranchisees calculated based on a percentage of their sales.  The amounts received in fiscal 2004, 2005 and2006 for such reimbursement were Euro 4.2 million, Euro 15.5 million and Euro19.2 million, respectively.

**EarningsPer Share** – Luxottica Group calculates basic and dilutedearnings per share in accordance with SFAS No. 128, *Earnings per Share*. Net income available to shareholders isthe same for the basic and diluted earnings per share calculations for theyears ended December 31, 2004, 2005 and 2006. Basic earnings per share are basedon the weighted average number of shares of common stock outstanding during theperiod. Diluted earnings per share are based on the weighted average number ofshares of common stock and common stock equivalents (options) outstandingduring the period, except when the common stock equivalents are anti-dilutive.The following is reconciliation from basic to diluted shares outstanding usedin the calculation of earnings per share:

F-15

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| **In thousands**                                                                                                                               | ** ** | **2004**  | ** ** | **2005**  | ** ** | **2006**  | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
|                                                                                                                                                |       |      |       |      |       |      |       |
| Weighted average  shares outstanding – basic                                                                                                   |       | 448,275.0 |       | 450,179.1 |       | 452,897.9 |       |
| Effect of  dilutive stock options                                                                                                                   |       | 2,085.9   |       | 3,124.3   |       | 3,287.8   |       |
| Weighted average  shares outstanding – dilutive                                                                                                |       | 450,360.9 |       | 453,303.4 |       | 456,185.7 |       |
| Options not  included in calculation of dilutive shares because the exercise price was  greater than the average price during the respective period |       | 2,169.6   |       | 569.1     |       | 6,885.9   |       |

 

**Fair Value of Financial Instruments** – Financial instruments consistprimarily of cash, cash equivalents and marketable securities, debt obligations,and derivative financial instruments which are either accounted for as fairvalue or cash flow hedges. In addition, as of December 31, 2006, financialinstruments include a note receivable from a third party for the sale of TR(“TR Note”). Luxottica Group estimates the fair value of cash, cash equivalentsand marketable securities based on interest rates available to the Company andby comparison to quoted market prices and its debt obligations, as there are noquoted market prices, based on interest rates available to the Company. Thefair value associated with financial guarantees has been accrued for whenapplicable and is disclosed in Note 15. The fair values of letters of creditare not disclosed as it is not practicable for the Company to do so and substantiallyall of these instruments are in place for operational purposes such as securityon leases and health benefits. The fair value of the TR Note was based ondiscounted projected cash flows utilizing an expected yield.

At December 31, 2005 and 2006, the fair value of the Company’sfinancial instruments approximated the carrying value.

**Stock-BasedCompensation** – Asof January 1, 2006 the Company adopted SFAS No. 123(R), *Share BasedPayments* (“SFAS 123(R)”) which requires the Company to measure and record compensation expensefor stock options and other share-based payments based on the fair value of theinstruments.  The adoption was madeutilizing the modified prospective application as defined in SFAS 123(R) and assuch will apply to awards modified, repurchased or cancelled after such dateand to any portion of awards for which the requisite service has not beenrendered and to every new granted award issued after December 31, 2005. Thecompensation costs to be recorded will be based on the option’s grant-date fairvalue.  As for the awards granted priorto the date of adoption the cost to be recorded over the future requisteservice period will be based on the fair value as calculated for the pro-formadisclosure below. Any unearned compensation cost related to earlier awards wereeliminated against the appropriate equity accounts.

Prior to January 1, 2006and its adoption of SFAS 123(R) the Company previously elected to follow theaccounting provisions of Accounting Principles Board (“APB”), Opinion No. 25, *Accounting for Stock Issued to Employees*(“APB 25”), for stock-based compensation and to provide the disclosuresrequired under SFAS No. 123, *Accounting forStock-Based Compensation*, as amended by SFAS No. 148, *Accounting for Stock-Based Compensation* – *Transition and Disclosure* (collectively,“SFAS 123”) (see Note 11). No stock-based employee compensation cost wasreflected in net income for 2004 and 2005 for options not included in theperformance plans (see Note 11), as all options granted under the these planshad an exercise price equal to the market value of the underlying stock on thedate of the grant. For options issued under the performance plans, stockcompensation expense was recorded based on the conditions of the plan. TheCompany utilizes a binomial lattice model to estimate the fair value of eachoption as the Company believes a binomial lattice valuation technique willresult in the best estimate of the fair value of the options. Prior to 2006,the Company applied APB 25 and the disclosure-only provisions of SFAS 123. Thefollowing table illustrates the effect on net income and earnings per share hadthe compensation costs of the plans been determined under a fair-value basedmethod as stated in SFAS 123 for 2004 and 2005. The estimated fair value foreach option was calculated using a binomial model.

F-16

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| ** **                                                                                                      | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                      | ** ** | **2004**                                   | ** ** | **2005** | ** ** |
| (In thousands of  Euro, except share data):                                                                     |       |                                       |       |   |   |
| Net income as reported                                                                                          |       | 286,874                                    |       | 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 |       | (9,964                                     | )          | (23,203 | ) |
|                                                                                                            |       |                                       |       |   |   |
| Pro forma                                                                                                       |       | 276,910                                    |       | 340,797 |   |
|                                                                                                            |       |                                       |       |   |   |
| Basic earnings  per share:                                                                                      |       |                                       |       |   |   |
| As reported                                                                                                     |       | 0.64                                       |       | 0.76 |   |
| Pro forma                                                                                                       |       | 0.62                                       |       | 0.76 |   |
| * *                                                                                                        | * *   | * *                                   | * *   | * * | * * |
| Diluted earnings  per share:                                                                                    | * *   | * *                                   | * *   | * * | * * |
| As reported                                                                                                     |       | 0.64                                       |       | 0.76 |   |
| Pro forma                                                                                                       |       | 0.61                                       |       | 0.75 |   |

 

As described above, the fairvalue of options granted was estimated on the date of grant using a binomiallattice model with the following assumptions:
| ** **                          | ** ** | **2004**   | ** ** | **2005**   | ** ** | **2006**                 | ** ** |
|-------------------------------------|------------|------------|------------|------------|------------|--------------------------|------------|
| ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | **Plan I (a)** | ** ** | **Plan II (b)** | ** ** | **Plan III (c)** | ** ** |
| Dividend yield                      |       | 1.71       | %          | 1.54       | %          | 1.33                     | %          | 1.33 | % | 1.33 | % |
| Risk-free  interest rate            |       | 2.92       | %          | 3.17       | %          | 3.11                     | %          | 3.88 | % | 3.89 | % |
| Expected option  life (years)       |       | 5.44       |       | 5.84       |       | 5.80                     |       | 5.36 |   | 5.53 |   |
| Expected  volatility                |       | 36.56      | %          | 25.92      | %          | 25.91                    | %          | 26.63 | % | 26.63 | % |
| Weighted average fair  value (Euro) |       | 5.10       |       | 4.27       |       | 5.72                     |       | 6.15 |   | 5.80 |   |

 

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(a)     Ordinary Plan issued in February 2006 for a total  of 1,725,000 options granted

(b)    Stock Performance Plan issued in July 2006 for a total of 9,500,000options granted

(c)     Stock Performance Plan issued in July 2006 fora total of 3,500,000 options granted

For Stock Option Plans,the Company has estimated a forfeiture rate of approximately six percent foreach year presented. For Stock Performance Plans, the Company has estimated azero percent forfeiture rate for each year presented.

**DerivativeFinancial Instruments** – Derivative financial instruments areaccounted for in accordance with SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities*(“SFAS 133”), asamended and interpreted.

SFAS 133 requiresthat all derivatives, whether or not designed in hedging relationships, berecorded on the balance sheet at fair value regardless of the purpose or intentfor holding them. If a derivative is designated as a fair-value hedge, changesin the fair value of the derivative and the related change in the hedge itemare recognized in operations. If a derivative is designated as a cash-flowhedge, changes in the fair value of the derivative are recorded in othercomprehensive income/(loss) (“OCI”) in the Statements of ConsolidatedShareholders’ Equity and are recognized in the Statements of ConsolidatedIncome when the hedged item affects operations. The effect of these derivativesin the Statements of Consolidated Operations depends on the item hedged (forexample, interest rate hedges are recorded in interest expense). For aderivative that does not qualify as a hedge, changes in fair value arerecognized in the Statements of Consolidated Operations, under the caption“Other – net”.

F-17

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Designated hedginginstruments and hedged items qualify for hedge accounting only if there is aformal documentation of the hedging relationship at the inception of the hedge,hedging relationship is expected to be highly effective and effectiveness istested 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)the expiration, termination or  sale ofthe derivative, or (iii) any other reason of which the Company becomes awarethat the derivative no longer qualifies as a cash flow hedge, would cause thebalance remaining in other comprehensive income to be realized immediately asearnings.  Based on current interestrates and market conditions, the estimated aggregate amount to be recognized asearnings from other comprehensive income relating to these cash flow hedges infiscal 2007 is approximately Euro 4.6 million, net of taxes.

Luxottica Groupuses derivative financial instruments, principally interest rate and currencyswap agreements, as part of its risk management policy to reduce its exposureto market risks from changes in interest and foreign exchange rates. Althoughit has not done so in the past, the Company may enter into other derivativefinancial instruments when it assesses that the risk can be hedged effectively.

**RecentAccounting Pronouncements** –

In February 2007, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 159, *The Fair Value Option for Financial Assets and Financial Liabilities —Including an amendment of FASB No. 115,*which allows the Company torecord at fair value financial assets and liabilities with the change beingrecorded in earnings.  This can be doneon an instrument by instrument basis in most circumstances, is irrevocableafter elected for that instrument and must be applied to the entireinstrument.  The adoption of suchstandard is for fiscal years beginning after November 15, 2007. The adoption isnot expected to have a material effect on the consolidated financialstatements.

In March 2006, FASBissued SFAS No. 156, *Accounting for ServicingFinancial Assets*—*an amendment of FASB No.140,* with respect to accounting for separately recognized servicingassets and servicing liabilities. The statement requires, among other things,that an entity use fair value to intially measure these assets and liabilities,if practicable. The adoption of such standard is for fiscal years beginningafter September 15, 2006. The adoption is not expected to have a materialeffect on the consolidated financial statements.

In September 2006, FASBissued 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 clarifies thedefinition, method and disclosure requirements of previous issued standardsthat address fair value measurements. The adoption of such standard is forfiscal years beginning after November 15, 2007. The Company is currentlyevaluating the accounting and disclosure requirements and their effect on theconsolidated financial statements.

In September 2006, FASBissued 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 it’s retirement plans and recognize changes in the funded status annuallythrough Other Comprehensive Income(Loss). Additionally the statement changesthe date in which the funded status can be measured (eliminates the 90 daywindow) with limited exceptions. The effective date of the recognition of thefunded status is for years ending after December 15, 2006, and as such, referto Note 10 for the effect on adoption. The effective date for the change inacceptable measurement date is for fiscal years ending after December 15, 2008.The Company is currently evaluating the impact of changing its measurement dateon the consolidated financial statements.

In July 2006 theFASB issued Financial Accounting Interpretation (“FIN”) No. 48, *Accounting for Uncertainty in Income Taxes—an interpretation of FASBStatement No. 109*. FIN 48 requires among other things a duelstep approach (Recognition and Measurement) in recognizing uncertain taxpositions taken or expect to be taken on tax returns. In addition, it providesadditional disclosure requirements, the classification of interest andpenalties and classification between current and long term portions. Therecognition requires the tax position must meet a threshold of“more-likely-than-not” based solely on its technical merits that it will besustained upon examination of the taxing authority. After this test is met theCompany can recognize a tax benefit equal to the largest amount of benefitgreater than 50 percent likely to be realized upon final 

F-18

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settlement withthe tax authority. FIN 48 must be applied to all existing tax positions for allopen tax periods as of the date of adoption. The cumulative effect of adoptionwill be recorded as an adjustment to opening retained earnings in the year ofadoption. The effective date of FIN 48 is for fiscal periods beginning afterDecember 15, 2006. The cumulative effect of adoption was an adjustment toretained earnings of Euro 8.2 million as of January 1, 2007, as 2007 is theyear of adoption. Such amount is subject to revision to include futureclarifications of the accounting pronouncements by the FASB or similaraccounting standard body.

**InformationExpressed in U.S. Dollars** - The Company’s consolidatedfinancial statements are stated in Euro, the currency of the country in whichthe parent company is incorporated and operates. The translation of Euroamounts into U.S. dollar amounts is included solely for the convenience ofinternational readers and has been made at the rate of Euro 1 to U.S. dollar1.3197. Such rate was determined by using the noon buying rate of the Euro to U.S.dollar as certified for customs purposes by the Federal Reserve Bank of NewYork as of December 31, 2006. Such translations should not be construed asrepresentations that Euro amounts could be converted into U.S. dollar at thator any other rate.

**Reclassifications** - The presentation of certain prior yearinformation has been reclassified to conform to the current yearpresentation.  On September 29, 2006, the Company sold its Things Remembered, Inc. (“TR”)specialty gifts retail business to a private equity consortium.  TheTR business operated solely in the United States and was included in the retailsegment of the Company’s operations as of December 31, 2005 and 2004. As such,for all periods for which a balance sheet is presented, the Company hasreclassified the assets and liabilities included in the sale as a single assetand liability line items on the balance sheet. In the Statements ofConsolidated Income, for all periods presented, the Company has reclassifiedsales, cost of sales and other expenses associated with the discontinuedoperations as a single line item after income from continuing operations butbefore net income. Amounts included in the statement of cash flows associatedwith the discontinued operations are separately disclosed as cash flows fromdiscontinued operations.

**2.      RELATED PARTY TRANSACTIONS**

**FixedAssets** - In 2002, a subsidiary of the Company entered into anagreement with the Company’s Chairman to lease to him a portion of a buildingfor Euro 0.5 million annually. The expiration date of this lease is 2010.

As of December 31, 2006 the receivable from the Company’s Chairmanamounts to Euro 0.2 million (Euro 0.1 million as of December 31, 2005).

**LicenseAgreement** – The Company has a worldwide exclusive licenseagreement to manufacture and distribute ophthalmic products under the name ofBrooks Brothers. The Brooks Brothers trade name is owned by Retail BrandAlliance, Inc. (“RBA”), which is owned and controlled by a Director of theCompany. The license agreement expires in 2009. Royalties paid to RBA for suchagreement were Euro 0.9 million, Euro 0.5 million and Euro 1.3 million in theyears ended December 31, 2004, 2005 and 2006, respectively.

In July 2004, the Companysigned a worldwide exclusive license agreement to manufacture and distributeophthalmic products under the name of Adrienne Vittadini. The AdrienneVittadini trade name was owned by RBA until November 2006 when the license wassold by RBA to a non-related party to the Company. The license agreement wasoriginally scheduled to expire on December 31, 2007. For the years endedDecember 31, 2004, 2005 and 2006, royalties paid to RBA for such agreement wereEuro 0.9 million, Euro 0.9 million, and Euro 1.0, respectively. On November 17,2006, Adrienne Vittadiniwas transferred out of RBA and as of such date transactions relating to thislicense agreement are no longer considered related party transactions.

As of December 31,2006 the balance of accounts receivable and payable related to RBA (includingservice revenues described in next paragraph) amount to Euro 0.1 million andEuro 0.7 million, respectively (Euro 0.1 million and Euro 0.4 million, as ofDecember 31, 2005).

**Service Revenues**- During the years ended December 31, 2004, 2005 and2006 subsidiaries of Luxottica U.S. Holdings Corp. (“US Holdings”) performedcertain services for RBA.  Amountsreceived for the services provided were Euro 0.7 million, Euro 0.6 million andEuro 0.7 million in fiscal 2004, 2005 and 2006, respectively.

F-19

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**StockIncentive Plan -**In September 2004, the Company’s Chairmanand majority shareholder, Mr. Leonardo Del Vecchio, allocated shares heldthrough La Leonardo Finanziaria S.r.l., an Italian holding company of the DelVecchio family (renamed Delfin S.a.r.l.), representing 2.11 percent (or 9.6million shares) of the Company’s currently authorized and issued share capital,to a stock option plan for top management of the Company at an exercise priceof Euro 13.67 per share (the closing stock price at December 31, 2005 on theMilan Stock Exchange was Euro 21.43 per share). The stock options to be issuedunder the stock option plan vest upon meeting certain economic objectives.Prior to 2006 compensation expense was recorded in accordance with variableaccounting under APB 25 for the options issued to management under theincentive plan based on the market value of the underlying ordinary shares onlywhen the number of shares to be vested and issued is known. During 2005, itbecame probable that the incentive targets would be met and, as such, theCompany recorded compensation expense of approximately Euro 19.9 million net oftaxes and recorded future unearned compensation expense in equity ofapproximately Euro 45.8 million net of taxes, with an offsetting increase inadditional paid-in capital for such amounts. The expense for 2005, ifcalculated under SFAS 123 would have been approximately Euro 16.9 million, netof taxes, and is included in pro forma net income and earnings per share inNote 1.

As of January 1, 2006,the Company has adopted SFAS 123(R) in accordance with the transitionalguidance as prescribed in the statement. As such, the previous unearnedcompensation as of December 31, 2005 of Euro 48.6 million has been chargedagainst the appropriate equity accounts. Approximately Euro 48.0 million ofadditional compensation expense associated with the annual stock option plansand with the Company’s October 2004 performance plan grants, September 2004shareholder grant and July 2006 performance plans grants was included ingeneral and administrative expense for the fiscal year ended December 2006.

Total receivables andpayables from/to other related parties not considered in the above reportedparagraphs amount to Euro 1.3 million and Euro 0.2 million, respectively (Euro0.5 million and Euro 0.1 million as of December 31, 2005). This amouts mainlyrefer to commercial transaction with the company Ray Ban Sun Optics India Ltdheld by the Group at 44 percent as of December 31, 2006.

**3.****                            INVENTORIES**

Inventoriesconsisted of the following (in thousands of Euro):
| ** **                             | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2005**              | ** ** | **2006** | ** ** |
|                                   |       |                  |       |   |   |
| Raw materials  and packaging           |       | 53,414                |       | 76,352 |   |
| Work in process                        |       | 26,932                |       | 49,650 |   |
| Finished goods                         |       | 349,048               |       | 317,253 |   |
| Less: Inventory  obsolescence reserves |       | (59,105               | )          | (42,360 | ) |
| Total                                  |       | 370,289               |       | 400,895 |   |

 

**4.****                            SALEOF THINGS REMEMBERED**

On September 29, 2006, the Company sold its TRspecialty gifts retail business to a private equity consortium for netcash consideration of Euro 128.0 million (U.S.$162.1 including costs of U.S.$5.3million) and a promissory note with a principal amount of Euro 20.6 million (U.S.$26.1million). The TR business operatedsolely in the United States and was included in the retail segment of theCompany’s operations as of December 31, 2004 and 2005. As such, for all periodsfor which a balance sheet is presented, the Company has reclassified the assetsand liabilities included in the sale for previous periods as single asset andliability line items on the balance sheet. In the Statements of ConsolidatedIncome, for all periods presented, the Company has reclassified sales, cost ofsales and other expenses associated with the discontinued operations as asingle line item after income from continuing operations but before net income.Revenues, income from operations, income before provision for income taxes andincome tax provision reclassified under discontinued operations for thetwelve-month periods ended December 31, 2004, 2005 and  2006, are as follows (amounts in thousands ofEuro):

F-20

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** **

 
| ** **                                | ** ** | **2004 (1)** | ** ** | **2005** | ** ** | **2006 (2)** | ** ** |
|-------------------------------------------|------------|-------------------|------------|----------|------------|-------------------|------------|
| Revenues                                  |       | 75,687            |       | 236,478  |       | 157,110           |       |
| Income from  operations                   |       | 13,315            |       | 21,153   |       | 3,250             |       |
| Income before  provision for income taxes |       | 12,578            |       | 18,260   |       | 761               |       |
| Income tax  provision                     |       | (4,813            | )          | (6,756   | )          | (45               | )          |
|                                      |       |              |       |     |       |              |       |
| Gain/loss on  sale                        |       | N/A               |       | N/A      |       | 13,278            |       |
| Income taxes on  sale                     |       | N/A               |       | N/A      |       | (20,413           | )          |
| (Loss)/gain from discontinued  operations |       | 7,765             |       | 11,504   |       | (6,419            | )          |

 

----

(1)          Since theacquisition date, October 4, 2004

(2)          From January 1, 2006 through September 29,2006

Listed below are the major classes of assets andliabilities as of December 31, 2005 that were included as part of the assetsand liabilities held for sale (thousands of Euro):
| ASSETS                                                    |   |    |   |
|-----------------------------------------------------------|--------|---------|--------|
| Cash and cash  equivalents                                |   | 4,795   |   |
| Inventory                                                 |   | 34,042  |   |
| Prepaid expenses                                          |   | 5,559   |   |
| Deferred tax  assets                                      |   | 3,819   |   |
| Property and  equipment, including leasehold improvements |   | 29,949  |   |
| Goodwill                                                  |   | 53,711  |   |
| Intangible  assets, net                                   |   | 39,006  |   |
| Other assets                                              |   | 568     |   |
| TOTAL ASSETS                                              |   | 171,449 |   |
|                                                      |   |    |   |
| LIABILITIES                                               |   |    |   |
| Financial  liabilities                                    |   | 165     |   |
| Accounts payable                                          |   | 10,386  |   |
| Accrued expenses                                          |   | 6,254   |   |
| Deferred taxes  payable                                   |   | 10,481  |   |
| Other  non-current liabilities                            |   | 19,806  |   |
| TOTAL  LIABILITIES                                        |   | 47,092  |   |

 

The promissory note has astated interest rate of 15.0%. Interest is “paid-in-kind” annually in the form ofan additional principal amount added to the outstanding principal balance. Allunpaid interest 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 valuewill be included in accumulated other comprehensive income and reclassified toearnings when realized. For fiscal 2006 there were no amounts reclassified fromother comprehensive income into earnings.

F-21

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**5.****                            ACQUISITIONSAND INVESTMENTS**

**a)****              OPSM**

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

On February 7,2005, on the close of the offer, the Company acquired 15.5 percent for anaggregate total of 98.5 percent of OPSM’s shares, which is in excess of thecompulsory acquisition threshold. Subsequently, the Company announced the startof the compulsory acquisition process for all remaining shares in OPSM notalready owned by the Company. The compulsory acquisition process was completedon March 23, 2005 and as of that date the Company held 100 percent of OPSM’sshares. The acquisition of the remaining OPSM shares was accounted for inaccordance with SFAS 141, *Business Combinations*,and accordingly, the purchase price of Euro 61.9 million or Australian dollar102.9 million in cash (including approximately Australian dollar 3.5 million ofdirect acquisition-related expenses and dividends to receive) was allocated tothe assets acquired and liabilities assumed based on their fair value at thedate of the acquisition. Since there was no additional fair value of assetsacquired and liabilities assumed, the difference between the purchase price andthe value of the minority interest in OPSM has been allocated entirely togoodwill for an amount of Euro 46.3 million (Australian dollar 77.7 million).

**b)****              COLE NATIONAL**

On July 23, 2003, the Company formed an indirectwholly owned subsidiary Colorado Acquisition Corp. for the purpose of acquiringall the outstanding common stock of Cole, a publicly traded company on the NewYork Stock Exchange. On January 23, 2004, as amended as of June 2, 2004 andJuly 15, 2004, the Company and Cole entered into a definitive merger agreementwith the unanimous approval of the Boards of Directors of both companies. OnOctober 4, 2004, Cole became an indirect wholly owned subsidiary of theCompany. The aggregate consideration paid by the Company to former shareholders,option holders and holders of restricted stock of Cole was approximately Euro407.9 million (U.S.$500.6 million). In connection with the merger, the Companyassumed outstanding indebtedness with an approximate aggregate fair value ofthe principal balance of Euro 253.2 million (U.S.$310.8 million). Theacquisition was accounted for using the purchase method and, accordingly, thepurchase price of Euro 423.7 million (U.S.$520.1 million), includingapproximately Euro 15.8 million (U.S.$19.5 million) of directacquisition-related expenses was allocated to the assets acquired andliabilities assumed based on their fair value at the date of the acquisition.The Company used various methods to calculate the fair value of the assets andliabilities and all valuations have been completed. The excess of purchaseprice over net assets acquired (“goodwill”) has been recorded in theaccompanying Consolidated Balance Sheet. The acquisition of Cole National wasmade as a result of the Company’s strategy to continue expansion of its retailbusiness in North America.

The purchase price (including acquisition-relatedexpenses) has been allocated based upon the fair value of the Company’sacquired assets and liabilities assumed as follows (in thousands of Euro):
| Assets purchased:                                                            |   |    |   |
|------------------------------------------------------------------------------|--------|---------|--------|
| Cash and cash  equivalents                                                   |   | 60,762  |   |
| Inventories                                                                  |   | 95,601  |   |
| Accounts  receivable                                                         |   | 45,446  |   |
| Prepaid expenses  and other current assets                                   |   | 12,456  |   |
| Property and  equipment                                                      |   | 109,174 |   |
| Trade names  (useful lives of 25 years, no residual value)                   |   | 72,909  |   |
| Distributor  network (useful life of 23 years, no residual value)            |   | 98,322  |   |
| Customer list  and contracts (useful life of 21-23 years, no residual value) |   | 68,385  |   |
| Franchise  agreements (useful life of 20 years, no residual value)           |   | 18,413  |   |
| Other  intangibles                                                           |   | 17,214  |   |
| Asset held for  sale – Pearle Europe                                    |   | 143,617 |   |
| Deferred tax  assets                                                         |   | 74,949  |   |
| Other assets                                                                 |   | 11,252  |   |

 

F-22

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| Liabilities  assumed:                           |   |     |   |
|-------------------------------------------------|--------|----------|--------|
| Accounts payable                                |   | (49,190  | )      |
| Accrued expenses  and other current liabilities |   | (164,205 | )      |
| Deferred tax  liabilities                       |   | (94,910  | )      |
| Long-term debt                                  |   | (253,284 | )      |
| Bank overdraft                                  |   | (22,668  | )      |
| Other non-current  liabilities                  |   | (78,425  | )      |
|                                            |   |     |   |
| Fair value of  net assets                       |   | 165,818  |   |
| Goodwill                                        |   | 257,922  |   |
| Total purchase price                            |   | 423,740  |   |

 

As part of theacquisition of Cole, the Company acquired approximately 21 percent of theoutstanding shares of Pearle Europe B.V. (“PE”). A change of control provisionincluded in the Articles of Association of PE required Cole to make an offer tosell these shares to the shareholders of PE within 30 days of the change ofcontrol, which deadline was extended by agreement of the parties. In December2004, substantially all the terms of the sale were established at a final cashselling price of Euro 144.0 million, subject to customary closing conditions.The sale transaction closed in January 2005. As the asset is denominated inEuro, which is not the functional currency of the subsidiary that held theinvestment, the Company has recorded an unrealized foreign exchange gain ofapproximately Euro 13.4 million (U.S.$18.4 million) as of December 31, 2004,relating to the changes in the U.S. dollar/Euro exchange rate between October4, 2004 (the date of acquisition) and December 31, 2004.

The followingunaudited pro forma information for the year ended December 31, 2004 summarizesthe results of operations as if the acquisition of Cole had been completed onJanuary 1, 2004 and includes certain pro forma adjustments such as additionalamortization expense attributable to identifiable intangibles:
| **(Thousands of Euro, except per share data- Unaudited)** | ** ** | **2004**  | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------|------------|
|                                                                                         |       |      |       |
| Net sales                                                                                    |       | 4,027,057 |       |
| Income from operations                                                                       |       | 488,223   |       |
| Net income                                                                                   |       | 276,212   |       |
| No. of shares  (Thousands) – Basic                                                      |       | 448,275   |       |
| No. of shares  (Thousands) – Diluted                                                    |       | 450,361   |       |
| Earnings per share  (Euro) – Basic                                                      |       | 0.62      |       |
| Earnings per Share  (Euro) – Diluted                                                    |       | 0.61      |       |

 

This pro formafinancial information is presented for informational purposes only and is notnecessarily indicative of the results of operations that would have beenachieved had the acquisition taken place on January 1, 2004.

On October 17,2004, Cole caused its subsidiary to purchase Euro 122.2 million (U.S.$150million) of its outstanding 8 7/8% Senior Subordinated Notes due 2012 in atender offer and consent solicitation for Euro 143 million (U.S.$175.5million), which amount represented all of the issued and outstanding notes ofsuch series.  On November 30, 2004, Coleredeemed all of its outstanding 8 5/8% Senior Subordinated Notes due 2007 forEuro 103.0 million (U.S.$126.4 million).

**c)****              Other acquisitionsand establishments:**

The following is a description of other acquisitions and establishments. Nopro forma financial information is presented, as these acquisitionsindividually or in aggregate were not material to the Company’s consolidatedfinancial statements.

F-23

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· In April 2005, the Company purchased 26 storesfrom SunShade Holding Corporation and Hao’s International.  The acquisition was accounted for inaccordance with SFAS 141 and, accordingly, the purchase price of Euro 11.1million has been allocated to the fair market value of the assets andliabilities of the company as defined by the asset purchase agreement. Allvaluations of net assets including but not limited to fixed assets andinventory were completed during 2006 and goodwill for an amount of Euro 7.8million in excess of the net assets acquired has been recorded in theaccompanying Consolidated Balance Sheets. No pro forma financial information is presented, as the acquisition wasnot material to the Company’s consolidated financial statements. The acquisitionwas made as result of the Company’s strategy to continue expansion of itsretail business in North America.

· In September 2005, the Company purchased 27stores in Canada from Symbol of Sight, LTD known as Precision Optical. Theacquisition was accounted for in accordance with SFAS 141 and, accordingly, thepurchase price of Euro 13.8 million has been allocated to the fair market valueof the assets and liabilities of the company as defined by the asset purchaseagreement. All valuations of net assets including but not limited to fixedassets and inventory were completed during 2006, and goodwill for an amount ofEuro 11.9 million in excess of the net assets acquired has been recorded in theaccompanying Consolidated Balance Sheets. No pro forma financial information ispresented, as the acquisition was not material to the Company’s consolidatedfinancial statements. The acquisition was made as result of the Company’s strategy tocontinue expansion of its retail business in Canada.

****·************In July 2005, the Company announced that SPV Zeta S.r.l., a new wholly ownedItalian subsidiary, will 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 liabilities of the company as defined by thepurchase agreement. All valuations of net assets including but not limited tofixed assets and inventory have not been completed and are subject to changeduring 2007. The Company uses many different valuation techniques to determinethe fair value of the net assets acquired including but not limited todiscounted cash flow and present value projections. Intangible assets arerecognized separate from goodwill if they arise from contractual or other legalrights or if they do not meet the definition of separable as noted in SFAS 141.Estimated preliminary goodwill in the amount of Euro 20.6 million in excess ofthe net assets acquired has been recorded in the accompanying ConsolidatedBalance Sheets. The acquisition was made as a result of the Company’s strategyto enter the retail business in China. No pro forma financial information ispresented, as the acquisition was not material to the Company’s ConsolidatedFinancial Statements.

· On July 1, 2006, the Company acquired certainassets and assumed certain liabilities from King Optical Group Inc. consistingof its 74 Canadian optical store chain known as Shoppers Optical (“SO”). Theaggregate consideration paid by the Company to the former owners of SO wasapproximately Canadian dollar (“CDN$”) 68.8 million (Euro 48.3 millionconverted using the June 30, 2006 Federal Reserve Bank of New York’s NoonBuying Rates (“NBR”) of 1 U.S.$ = 1.115 CDN and 1 U.S.$ = 1.2779 Euro) in cash.In connection with the acquisition, the Company assumed no indebtedness. Thepurchase price of CDN$ 69.3 million (Euro 48.7 million converted at the NBR)including approximately CDN$ 573 thousand (Euro 402.1 thousand converted at theNBR) of direct acquisition-related expenses was allocated to the assetsacquired and liabilities assumed based on their fair value at the date of theacquisition. The Company used various methods to calculate the fair value ofthe assets and liabilities and not all valuations have been completed. Theexcess of purchase price over net assets acquired (“goodwill”) has beenrecorded in the accompanying consolidated balance sheet. Approximately CDN$44.5 million (Euro 31.3 million converted at the NBR) of goodwill will bedeductible for tax purposes. The acquisition of SO was made as a result of theCompany’s strategy to continue expansion of its retail business in Canada. TheCompany believes that the preliminary allocation of the purchase price isreasonable, but it is subject to revisions upon completion of the finalvaluation of certain assets and liabilities, which is expected to occur duringthe first half of 2007. As such, the preliminary allocation set forth above maychange during 2007 to reflect final amounts. No pro forma financial informationis presented, as the acquisition was not material to the Company’s ConsolidatedFinancial Statements.

F-24

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· In October 2005, the Company announced that itsnew wholly owned Italian subsidiary, SPV Eta S.r.l., will acquire 100 percentof the equity interests in Ming Long Optical, the largest premium optical chainin the province of Guangdong, China, for a purchase price of RMB 290 million(approximately Euro 29 million). In July 2006 the Company completed thetransaction after receiving the customary approvals by the relevant Chinesegovernmental authorities. Ming Long Optical operates a total of 278 locationsin two of the top premium optical markets in mainland China, as well as in HongKong. The acquisition was accounted for in accordance with SFAS 141 and,accordingly, the total consideration of Euro 30.3 million has been allocated tothe fair market value of the assets and liabilities of the company as definedby the purchase agreement. All valuations of net assets including but notlimited to fixed assets and inventory have not been completed and are subjectto change during 2007. The Company uses many different valuation techniques todetermine the fair value of the net assets acquired including but not limitedto discounted cash flow and present value projections. Intangible assets arerecognized separate from goodwill if they arise from contractual or other legalrights or if they do not meet the definition of separable as noted in SFAS 141.Estimated preliminary goodwill in an amount of Euro 29.1 million in excess ofthe net assets acquired has been recorded in the accompanying ConsolidatedBalance Sheets. The acquisition was made as a result of the Company’s strategy to continueexpansion of its retail business in China. No pro forma financialinformation is presented, as the acquisition was not material to the Company’sConsolidated Financial Statements.

· In May2006, the Company completed the purchase of the remaining 49% stake of theTurkish-based distributor Luxottica Gozluk Ticaret A.S. (“Luxottica Turchia”)for an amount of Euro 15 million. Goodwill of Euro 7.0 millionrepresenting the excess of the net assets acquired has been recorded in theaccompanying Consolidated Balance Sheets. In November 2006 Standard GozlukIndustri Ve Tircaret A.S. (“Standard”), a Turkish wholesaler fully owned by theformer minority shareholders of Luxottica Turchia, merged with LuxotticaTurchia. Before the merger, Luxottica Turchia mainly operated in the sunglassbusiness, substantially through the distribution of products under the RayBantrademark, while standard operated in the ophthalmic frames business. The totalnumber of shares issued after the merger increased from 13,500,000 fully-ownedby Luxottica to 1,039,045,989, with a par value of 0.01 Turkish Lira (“YTL”).Consequently, the share capital became YTL 10,390,459.89. As a result of themerger the former shareholders of Standard received a minority stake ofLuxottica Turchia of 35.16% (equal to 365,328,570 shares of the new company) anda put option to sell the shares to the Company, while the Company was granted acall option on the minority stake. The Company’s ownership equals 64.84% of themerged company, representing 673,717,419 shares. No cash was exchanged as partof the merger agreement. The acquisition was made as a result of the Company’sstrategy to continue expansion of its wholesale business in Turkey, inparticular in the prescription frames segment of the market. The acquisitionwas accounted for in accordance with SFAS 141 and, accordingly, the totalconsideration of Euro 46.7 million has been allocated to the fair market valueof the assets and liabilities of the company as defined by the purchaseagreement. The final valuations of net assets have not been completed and aresubject to change during 2007. The Company uses many different valuationtechniques to determine the fair value of the net assets acquired including butnot limited to discounted cash flow and present value projections. Intangibleassets are recognized separately from goodwill if they arise from contractualor other legal rights or if they meet the definition of separable as noted inSFAS 141. Estimated goodwill in an amount of Euro 35.5 million has beenrecorded in the accompanying Consolidated Balance Sheets. No pro formafinancial information is presented, as the acquisition was not material to theCompany’s Consolidated Financial Statements.

· In November 2006, the Company completed theacquisition, which was announced in June2006, of Modern Sight Optics, aleading premium optical chain that operates a total of 28 stores in Shanghai,China. Modern Sight Optics has an existing position in the premium segment ofthe optical market and brings to the Company 28 high-end stores in Shanghai.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 acquired100 percent of the equity interest in Modern Sight Optics for totalconsideration of RMB 140 million (approximately Euro 14 million). Theacquisition was accounted for in accordance with SFAS 141 and, accordingly, thetotal consideration of Euro 16.3 million has been allocated to the fair marketvalue of the assets and liabilities of the company as defined by the purchaseagreement. All valuations of net assets including but not limited to fixedassets and inventory have not been completed and are subject to change during2007. The Company uses many different valuation techniques to determine thefair value of the net assets acquired including but not limited to discountedcash flow and present value projections. Intangible assets are recognizedseparate from goodwill if they arise from contractual or other legal rights orif they do not meet the definition of separable as noted in SFAS 141. Estimatedpreliminary goodwill for an amount of Euro 15.6 million representing the excessof the net assets acquired has been recorded in the accompanying ConsolidatedBalance Sheets. The acquisition was made as a result of the Company’s strategy tocontinue expansion of its retail business in China. No pro formafinancial information is presented, as the acquisition was not material to theCompany’s Consolidated Financial Statements.

F-25

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**d)****              Pendingacquisitions:**

· InFebruary 2007, the Company completed the acquisition of the retail opticalbusiness of D.O.C Optics, comprising approximately 100 stores located primarilyin the midwest United States, for approximately U.S.$110 million in cash (Euro83.4 million converted at the December 31, 2006 Noon Buying Rate as discussedin Note 1). The Company expects to rebrand the acquired stores as “LensCrafters”and “Pearle.” The acquisition will be accounted for in accordance with SFAS141, and accordingly, the purchase price including direct acquisition-relatedexpenses will be allocated to the assets acquired and liabilities assumed basedon their fair value at the date of the acquisition. The acquisition was made asa result of the Company’s strategy to continue expansion of its retail businessin the United States.

· On April 25, 2007, incompliance with the decision of the Supreme Court of India, the Companylaunched a public offer to acquire 7,545,240 shares or approximately 31 percentof the equity shares of RayBan Sun Optics India Ltd. through the Company’ssubsidiary, Ray Ban Indian Holdings, Inc. 6,454,280 shares were tendered in theoffer, which closed on May 14, 2007. Effective upon the share transfersentry in the share register on June 26, 2007, the Company’s stake inRayBan Sun Optics India Ltd. increased to 70.5 percent. The Company paidtotal consideration of approximately Euro 13.0 million for the tendered shares.RayBan Sun Optics India Ltd. is a company listed on the Bombay Stock Exchange.The Company acquired its interest in RayBan Sun Optics India Ltd. in connectionwith the purchase of the RayBan eyewear business from Bausch & Lomb in1999.

· In the second quarter of 2007, the Company completedits acquisitions of two prominent specialty sun chains in South Africa, with atotal of 65 stores, for total consideration of approximately Euro 10 million.The two acquisitions represent an important step in the expansion of  the Company’s sun retail presence worldwide.

· On June 20, 2007, the Company announcedthat it had entered into a definitive merger agreement with Oakley, Inc, aworldwide specialist in sport performance optics with brands including Dragon,Eye Safety Systems, Fox Racing, Mosley Tribes, Oliver Peoples and Paul SmithSpectacles, and retail chains including Bright Eyes, Oakley Stores, SunglassIcon and The Optical Shop of Aspen. As part of the merger, the Company willacquire all of the outstanding shares of Oakley for a cash purchase price ofU.S.$29.30 per share, together with the purchase of all outstanding options andother equity rights at the same price per share less exercise price. The totalpurchase price will be approximately U.S.$2.1 billion (approximately Euro 1.6billion). The transaction is expected to close in the second half of 2007.

**6.****                            PROPERTY,PLANT AND EQUIPMENT – NET**

Property, plantand equipment-net consisted of the following (in thousands of Euro):
| ** **                                            | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **2005**              | ** ** | **2006** | ** ** |
|                                                  |       |                  |       |   |   |
| Land and  buildings, including leasehold improvements |       | 538,604               |       | 568,584 |   |
| Machinery and  equipment                              |       | 551,668               |       | 618,237 |   |
| Aircraft                                              |       | 39,107                |       | 40,385 |   |
| Other equipment                                       |       | 395,921               |       | 374,542 |   |
|                                                  |       | 1,525,300             |       | 1,601,748 |   |
|                                                  |       |                  |       |   |   |
| Less:  accumulated depreciation and amortization      |       | 820,134               |       | 814,547 |   |
| Total                                                 |       | 705,166               |       | 787,201 |   |

 

Depreciation andamortization expense relating to property, plant and equipment for the yearsended December 31, 2004, 2005 and 2006 was Euro 99.3 million, Euro 122.8million and Euro 151.9 million, respectively. Included in other equipment isapproximately Euro 68.9 million and Euro 32.3 million of construction inprogress as of December 31, 2005 and 2006, respectively. Constructionin-progress consists mainly of the opening, remodeling and relocation of storesand in 2006 of manufacturing facilities in Italy. The decrease compared to 2005is due to the completion in 2005 of the corporate headquarters of the NorthAmerican retail division and the expansion of the distribution center inAtlanta.

F-26

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

For the year endedDecember 31, 2005, included “Asset held for sale” in December 2005, there wasalso the carrying value of an aircraft of Euro 10.8 million which becameobsolete. The Company had stopped recording depreciation expense on such assetbeginning on the date that the asset was determined to be “held for sale “ Thesale of the aircraft occurred in October 2006, for a net price of Euro 15.6million. The gain on the sale is included in the General and Administrativeexpenses in the Statement of Consolidated Income.

**7.**                            **GOODWILL AND INTANGIBLE****ASSETS**- **NET**

The changes in thecarrying amount of goodwill for the years ended December 31, 2005 and 2006, areas follows:
| **(Thousands of Euro)**            | ** ** | **Retail  Segment** | ** ** | **Wholesale  Segment** | ** ** | **Total** | ** ** |
|----------------------------------------------|------------|---------------------|------------|------------------------|------------|-----------|------------|
|                                         |       |                |       |                   |       |      |       |
| Balance as of  January 1, 2005               |       | 1,158,043           |       | 295,937                |       | 1,453,980 |       |
|                                         |       |                |       |                   |       |      |       |
| Acquisitions (a)                             |       | 71,897              |       | —                 |       | 71,897    |       |
|                                         |       |                |       |                   |       |      |       |
| Cole’s final  purchase price allocation |       | (8,165              | )          | —                 |       | (8,165    | )          |
|                                         |       |                |       |                   |       |      |       |
| Change in  exchange rates (b)                |       | 129,001             |       | (40                    | )          | 128,961   |       |
|                                         |       |                |       |                   |       |      |       |
| Balance as of  December 31, 2005             |       | 1,350,776           |       | 295,897                |       | 1,646,673 |       |
|                                         |       |                |       |                   |       |      |       |
| Acquisitions (a)                             |       | 111,186             |       | 44,738                 |       | 155,924   |       |
|                                         |       |                |       |                   |       |      |       |
| Adjusments on  previous acquisitions         |       | (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 |       |

 

----

(a)     Goodwill acquired in 2005 consisted primarilyof the OPSM minority interest acquisition and some other minor retailacquisitions. Goodwill acquired in 2006 consisted primarily of the acquisitionof Xueliang, Ming Long and Modern Sight in China, and of Shopper Optical inNorth America in the Retail Segment, and of the acquisition in Turkey in the WholesaleSegment (See Note 4).

(b)    Certain goodwill balances are denominated incurrencies other than Euro (the reporting currency) and, as such, balances mayfluctuate due to changes in exchange rates.

F-27

----

Intangibleassets-net consisted of the following (thousands of Euro):
| ** **                                                                                                                                                  | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                  | ** ** | **2005**              | ** ** | **2006** | ** ** |
|                                                                                                                                                        |       |                  |       |   |   |
| LensCrafters  trade name, net of accumulated amortization of Euro 78,956 and Euro 77,518 as  of December 31, 2005 and 2006, respectively (a)                |       | 106,823               |       | 89,187 |   |
|                                                                                                                                                        |       |                  |       |   |   |
| Ray-Ban acquired  trade names, net of accumulated amortization of Euro 90,806 and Euro 104,776 as  of December 31, 2005 and 2006, respectively (a)          |       | 188,394               |       | 174,424 |   |
|                                                                                                                                                        |       |                  |       |   |   |
| Sunglass Hut  International trade name, net of accumulated amortization of Euro 48,455 and  Euro 52,633 as of December 31, 2005 and 2006, respectively (a)  |       | 206,570               |       | 176,207 |   |
|                                                                                                                                                        |       |                  |       |   |   |
| OPSM trade  names, net of accumulated amortization of Euro 14,786 and Euro 24,466 as of  December 31, 2005 and 2006, respectively (see Note 5) (a)          |       | 138,172               |       | 123,158 |   |
|                                                                                                                                                        |       |                  |       |   |   |
| Various trade  names of Cole, net of accumulated amortization of Euro 2,519 and Euro 4,070 as  of December 31, 2005 and 2006, respectively (see Note 5) (a) |       | 47,876                |       | 36,605 |   |
|                                                                                                                                                        |       |                  |       |   |   |
| Distributor  network, net of accumulated amortization of Euro 4,791 and Euro 8,946 as of  December 31, 2005 and 2006, respectively (see Note 5) (b)         |       | 96,370                |       | 82,499 |   |
|                                                                                                                                                        |       |                  |       |   |   |
| Customer list  and contracts, net of accumulated amortization of Euro 4,006 and Euro 5,263 as  of December 31, 2005 and 2006, respectively (see Note 5) (b) |       | 56,275                |       | 47,070 |   |
|                                                                                                                                                        |       |                  |       |   |   |
| Franchise  agreements, net of accumulated amortization of Euro 1,195 and Euro 1,927 of  December 31, 2005 and 2006, respectively (see Note 5) (b)           |       | 17,890                |       | 15,199 |   |
|                                                                                                                                                        |       |                  |       |   |   |
| Other  intangibles, net of accumulated amortization of Euro 58,572 and Euro 52,635 as  of December 31, 2005 and 2006, respectively (see Note 5) (c)         |       | 97,426                |       | 86,013 |   |
|                                                                                                                                                        |       |                  |       |   |   |
| Total                                                                                                                                                       |       | 955,796               |       | 830,362 |   |

 

----

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

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

(c)              Otheridentifiable intangibles have finite lives ranging between 3 and 17 years andare amortized on a straight line basis. The weighted average amortizationperiod is 11.3 years. Most of these lives were determined based on the terms ofthe license agreements and non-compete agreements. During 2005, approximatelyEuro 7.1 million of intangibles became fully amortized and were written off.  During 2006, approximately Euro 11.4 millionof intangibles related to a non compete agreement of Sunglass HutInternational, became fully amortized and were written off.

Certain intangible assetsare maintained in currencies other than Euro (the reporting currency) and, assuch, balances may fluctuate due to changes in exchange rates.

Estimated annualamortization expense relating to identifiable assets, including theidentifiable intangibles attributable to recent acquisitions for which thepurchase price allocation is not final, is shown below (in thousands of Euro):
| **Years ending December 31,** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|------------|
| 2007                                         |       | 60,869     |       |       |
| 2008                                         |       | 51,431     |       |       |
| 2009                                         |       | 51,429     |       |       |
| 2010                                         |       | 51,362     |       |       |
| 2011                                         |       | 51,243     |       |       |
|                                         |       |       |       |       |

 

F-28

----

**8.**                            **INCOME TAXES**

Income before provision for income taxes and theprovision for income taxes consisted of the following (thousands of Euro):
| ** **                                  | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                  | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
|                                        |       |                                       |       |   |   |   |   |
| Income before  provision for income taxes - |       |                                       |       |   |   |   |   |
| Italian  companies                          |       | 149,479                                    |       | 216,438 |   | 251,343 |   |
| U.S. companies                              |       | 222,973                                    |       | 244,050 |   | 331,035 |   |
| Foreign  companies                          |       | 72,123                                     |       | 78,821 |   | 95,799 |   |
|                                        |       |                                       |       |   |   |   |   |
| Total                                       |       | 444,575                                    |       | 539,309 |   | 678,177 |   |
|                                        |       |                                       |       |   |   |   |   |
| Provision for  income taxes:                |       |                                       |       |   |   |   |   |
| Current -                                   |       |                                       |       |   |   |   |   |
| Italian  companies                          |       | 23,194                                     |       | 127,730 |   | 157,343 |   |
| U.S. companies                              |       | 60,543                                     |       | 120,784 |   | 120,681 |   |
| Foreign  companies                          |       | 27,701                                     |       | 40,855 |   | 33,206 |   |
|                                        |       |                                       |       |   |   |   |   |
|                                        |       | 111,348                                    |       | 289,369 |   | 311,229 |   |
| Deferred -                                  |       |                                       |       |   |   |   |   |
| Italian  companies                          |       | 9,017                                      |       | (74,874 | ) | (23,016 | ) |
| U.S. companies                              |       | 39,377                                     |       | (14,295 | ) | (3,392 | ) |
| Foreign  companies                          |       | (2,980                                     | )          | (934 | ) | (46,065 | ) |
|                                        |       |                                       |       |   |   |   |   |
|                                        |       | 45,414                                     |       | (90,103 | ) | (72,473 | ) |
|                                        |       |                                       |       |   |   |   |   |
| Total                                       |       | 156,852                                    |       | 199,266 |   | 238,757 |   |

 

The Italianstatutory tax rate is the result of two components: national (“IRES”) andregional (“IRAP”) tax. IRAP could have a substantially different base for itscomputation than IRES.

Reconciliationbetween the Italian statutory tax rate and the effective tax rate is asfollows:
| ** **                                                                                                                               | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                               | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
|                                                                                                                                     |       |                                       |       |   |   |   |   |
| Italian  statutory tax rate                                                                                                              |       | 37.3                                       | %          | 37.3 | % | 37.3 | % |
| Aggregate effect  of different rates in foreign jurisdictions                                                                            |       | 0.5                                        | %          | 1.7 | % | (1.5 | )% |
| Aggregate  Italian tax benefit - net                                                                                                     |       | —                                     |       | (4.1 | )% | — |   |
| Aggregate effect  of asset revaluation in Australia                                                                                      |       | —                                     |       | — |   | (6.8 | )% |
| Permanent  differences, principally losses in subsidiary companies funded through  capital contributions, net of non-deductible goodwill |       | (2.4                                       | %)         | — |   | — |   |
| Effect on stock-based compensation                                                                                                       |       | —                                     |       | 3.0 | % | 5.5 | % |
| Aggregate other  effects                                                                                                                 |       | —                                     |       | (0.9 | )% | 0.7 | % |
|                                                                                                                                     |       |                                       |       |   |   |   |   |
| Effective rate                                                                                                                           |       | 35.4                                       | %          | 37.0 | % | 35.2 | % |

 

F-29

----

The 2005 aggregateItalian tax benefit is caused by the Company complying with an Italian law thatallows for the step up in tax basis of certain intangible assets.

The 2006 taxbenefit results from the adoption of a change in the tax law in Australia,which introduced a tax consolidation regime for wholly owned group entities.The tax consolidation rules effectively pushed down the cost of acquiring anentity (or group of entities) to the assets that the entity (or group) owns.This results in resetting of asset cost basis for tax purposes, and in therelevant uplifts in fixed assets and intangibles as at the date of taxconsolidation which occurred in December 2006 when OPSM lodged the consolidated 2005 taxreturn.

Beginning withfiscal year 2004, for income tax purposes, the Company and its Italiansubsidiaries file tax returns on a consolidated basis.

The deferred taxassets and liabilities as of December 31, 2005 and 2006, respectively, werecomprised of (thousands of Euro):
| ** **                                                          | ** ** | **December 31,**                    | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                          | ** ** | **2005**                                 | ** ** | **2006** | ** ** |
| ** **                                                          | ** ** | **Deferred Tax  Asset/(Liability)** | ** ** | **Deferred Tax  Asset/(Liability)** | ** ** |
| Current deferred  income tax assets:                                |       |                                     |       |   |   |
| Inventory                                                           |       | 67,053                                   |       | 65,192 |   |
| Insurance and  other reserves                                       |       | 20,589                                   |       | 29,000 |   |
| Net operating  loss carryforwards                                   |       | 1,674                                    |       | 1,525 |   |
| Loss on  investments                                                |       | 2,513                                    |       | 1,094 |   |
| Right of return  reserve                                            |       | 8,039                                    |       | 8,934 |   |
| Deferred revenue  – extended warranty contracts                |       | 5,336                                    |       | 7,192 |   |
| Other, net                                                          |       | 3,171                                    |       | 1,899 |   |
|                                                                |       |                                     |       |   |   |
| Current deferred tax assets                                         |       | 108,375                                  |       | 114,836 |   |
|                                                                |       |                                     |       |   |   |
| Current deferred  income tax liabilities:                           |       |                                     |       |   |   |
|                                                                |       |                                     |       |   |   |
| Dividends                                                           |       | (8,766                                   | )          | (13,308 | ) |
| Trade name                                                          |       | (5,597                                   | )          | (4,816 | ) |
| Other                                                               |       | (4,231                                   | )          | (8,765 | ) |
|                                                                |       |                                     |       |   |   |
| Current deferred tax asset – net                               |       | 89,781                                   |       | 87,947 |   |
|                                                                |       |                                     |       |   |   |
| Non current  deferred income tax assets:                            |       |                                     |       |   |   |
| Net operating  loss carryforwards                                   |       | 52,659                                   |       | 42,924 |   |
| Recorded  reserves                                                  |       | 11,248                                   |       | 10,074 |   |
| Occupancy  reserves                                                 |       | 13,042                                   |       | 11,616 |   |
| Employee-related  reserves (including minimum pension liability)    |       | 22,585                                   |       | 25,321 |   |
| Trade name                                                          |       | 78,746                                   |       | 84,013 |   |
| Other, net                                                          |       | 12,861                                   |       | (1,752 | ) |
| Valuation  allowance                                                |       | (15,038                                  | )          | (26,682 | ) |
| Non current  deferred tax assets – net of valuation allowances |       | 176,103                                  |       | 145,514 |   |
|                                                                |       |                                     |       |   |   |
| Non current  deferred income tax liabilities:                       |       |                                     |       |   |   |
| Difference in  basis of fixed assets                                |       | (116,614                                 | )          | (66,282 | ) |
| Trade name                                                          |       | (116,551                                 | )          | (62,639 | ) |
| Equity  revaluation step-up                                         |       | (40,950                                  | )          | (40,950 | ) |
| Other  intangibles                                                  |       | (18,627                                  | )          | (16,914 | ) |
|                                                                |       |                                     |       |   |   |
| Non current deferred  tax liability - net                           |       | (116,639                                 | )          | (41,270 | ) |

 

F-30

----

In 2004, theItalian statutory tax rate was reduced to 37.25 percent. As a consequence,deferred tax assets and liabilities have been recomputed in line with the newtax rate. The result of the change in the Italian tax rate was immaterial andhas been included in deferred tax expense.

Italian companies’taxes are subject to review pursuant to Italian law. As of December 31, 2006,tax years from 2001 through the most recent year were open for such review.Certain Luxottica Group subsidiaries are subject to tax reviews for previousyears and during 2005 a wholly owned Italian subsidiary was subjected to a taxinspection. As a result of this, some insignificant recorded losses were reversedand an immaterial amount was accrued for as a liability. Management believes nosignificant unaccrued liabilities will arise from the related tax reviews.

The Companygenerally does not provide for an accrual for income taxes on undistributedearnings of its foreign operations to the related Italian parent company thatare intended to be permanently invested. It is not practicable to determine theamount of income tax liability that would result had such earnings actuallybeen repatriated. In connection with the 2006 earnings of certain subsidiaries,the Company has provided for an accrual for Italian income taxes related todeclared dividends of earnings.

At December 31,2006, the Company had restricted Federal net operating loss carryforwards inthe United States of America of approximately Euro 102.3 million which may beused against income generated by certain of its U.S.subsidiaries. Such netoperating losses begin expiring in 2019. With the acquisition of Cole, theCompany acquired approximately Euro 26.5 million of restricted Federal netoperating loss carryforwards, of which approximately Euro 22.0 million and Euro0.3 million were utilized in 2005 and 2006, respectively. The utilization of aportion of the Cole loss carryforwards is limited due to restrictions imposedby U.S. tax rules governing utilization of loss carryforwards following changesin ownership. A portion of the Cole net operating loss carryforwards may expireeach year going forward. No net operating loss carryforwards expired in 2005 or2006.

As of December 31, 2005and 2006, the Company has recorded an aggregate valuation allowance of Euro15.0 million and Euro 26.7 million, respectively, against deferred tax assetsas it is more likely than not that the above deferred income tax assets willnot be fully utilized in future periods.

**9.****                            LONG-TERMDEBT**

Long-term debtconsisted of the following (thousands of Euro):
| ** **                                                                                                                                                                                                                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                      | ** ** | **2005**              | ** ** | **2006** | ** ** |
|                                                                                                                                                                                                                                            |       |                  |       |   |   |
| Credit agreement  with various Italian financial institutions (a)                                                                                                                                                                               |       | 275,000               |       | 245,000 |   |
| UniCredito  Italiano credit facility (b)                                                                                                                                                                                                        |       | —                |       | — |   |
| Senior unsecured  guaranteed notes (c)                                                                                                                                                                                                          |       | 246,273               |       | 165,022 |   |
| Credit agreement  with various financial institutions (d)                                                                                                                                                                                       |       | 974,338               |       | 895,240 |   |
|                                                                                                                                                                                                                                            |       |                  |       |   |   |
| Capital lease  obligations, payable in installments through 2007                                                                                                                                                                                |       | 3,372                 |       | 2,766 |   |
|                                                                                                                                                                                                                                            |       |                  |       |   |   |
| Other loans with  banks and other third parties, interest at various rates (from 0.25 to 14.62  percent per annum), payable in installments through 2014. Certain  subsidiaries’ fixed assets are pledged as collateral for such loans (e) |       | 29,926                |       | 11,234 |   |
|                                                                                                                                                                                                                                            |       |                  |       |   |   |
| Total                                                                                                                                                                                                                                           |       | 1,528,909             |       | 1,319,262 |   |
|                                                                                                                                                                                                                                            |       |                  |       |   |   |
| Current maturities                                                                                                                                                                                                                              |       | 110,978               |       | 359,527 |   |

 

F-31

----

----

(a)     In December 2002, the Company entered intoan unsecured credit facility with Banca Intesa S.p.A. The unsecured creditfacility provided borrowing availability of up to Euro 650 million. Thisfacility included a term portion of Euro 500 million which required a balloonpayment of Euro 200 million in June 2004 and equal quarterly instalments ofprincipal of Euro 50 million subsequent to that date. Interest accrued on theterm portion based on Euribor as defined in the agreement plus 0.45 percent.The revolving portion provided borrowing availability of up to Euro 150million. Amounts borrowed under the revolving loan could be borrowed and repaiduntil final maturity. The final maturity of all outstanding principal amountsand interest was December 27, 2005. In December 2005, the Company repaid infull all the outstanding amounts (Euro 50 million outstanding on the termportion and Euro 75 million outstanding on the revolving portion) under thiscredit facility.

In December 2002, the Company entered into twointerest rate swap transactions (the “Intesa Swaps”) beginning with anaggregate maximum notional amount of Euro 250 million, which decreased by Euro100 million on June 27, 2004 and by Euro 25 million in each subsequentthree-month period. The Intesa Swaps expired on December 27, 2005. The IntesaSwaps were entered into as a cash flow hedge on a portion of the Banca IntesaEuro 650 million unsecured credit facility discussed above. As such changes inthe fair value of the Intesa Swaps were included in OCI until they wererecorded in the financial statements. The Intesa Swaps exchanged the floatingrate based on Euribor for a fixed rate of 2.985 percent per annum.

In September 2003, the Company acquired its ownershipinterest of OPSM and more than 90 percent of the performance rights and optionsof OPSM for an aggregate of Australian dollar 442.7 million (Euro 253.7million), including acquisition expenses. The purchase price was paid for withthe proceeds of a credit facility with Banca Intesa S.p.A. of Euro 200 million,in addition to other short-term lines available. The credit facility includes aEuro 150 million term loan, which will require repayment of equal semi-annualinstalments of principal of Euro 30 million starting on September 30, 2006 untilthe final maturity date. Interest accrues on the term loan at Euribor (asdefined in the agreement) plus 0.55 percent (4.272 percent on December 31,2006). 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, 2006, Euro 25 million had beendrawn from the revolving portion. Interest accrues on the revolving loan atEuribor (as defined in the agreement) plus 0.55 percent (4.098 percent onDecember 31, 2006). The final maturity of the credit facility is September 30,2008. The Company can select interest periods of one, two or three months. Thecredit facility contains certain financial and operating covenants. The Companywas in compliance with those covenants as of December 31, 2006. Under thiscredit facility Euro 175 million and Euro 145 million were outstanding as ofDecember 31, 2005 and 2006, respectively.

In June 2005, the Company entered into four interestrate swap transactions with various banks with an aggregate initial notionalamount of Euro 120 million which will decrease by Euro 30 million every sixmonths starting on March 30, 2007 (“Intesa OPSM Swaps”). These swaps willexpire on September 30, 2008. The Intesa OPSM Swaps were entered into as a cashflow hedge on a portion of the Banca Intesa Euro 200 million unsecured creditfacility discussed above. The Intesa OPSM Swaps exchange the floating rate ofEuribor for an average fixed rate of 2.38 percent per annum. Theineffectiveness of cash flow hedges was tested both at the inception date andat each year end. The results of the tests indicated that the cash flow hedgesare highly effective and the amounts of ineffectiveness, if any, on each dateof testing were immaterial. As a consequence approximately Euro 1.2 million,net of taxes, is included in Other Comprehensive Income as of December 31,2006. 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 2007 is approximately Euro 0.95 million,net of taxes.

In December 2005, the Company entered into a newunsecured credit facility with Banco Popolare di Verona e Novara. The 18-monthcredit 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, 2006,Euro 100 million had been drawn from the revolving portion. Interest accrues onthe revolving loan at Euribor (as defined in the agreement) plus 0.25 percent(3.89 percent on December 31, 2006). The final maturity of the credit facilityis June 1, 2007. The Company can select interest periods of one, three or sixmonths. Under this credit facility, Euro 100 million was outstanding as ofDecember 31, 2006.

F-32

----

(b)    In June 2002, US Holdings entered into a U.S.$350million credit facility with a group of four Italian banks led by UniCreditoItaliano S.p.A. which was paid in full upon its maturity in June 2005. Thecredit facility was guaranteed by Luxottica Group. The term loan portion of thecredit facility provided U.S.$200 million of borrowing and required repaymentof equal quarterly principal instalments beginning in March 2003. The revolvingloan portion of the credit facility allowed for a maximum borrowing of U.S.$150million. Interest accrued at LIBOR as defined in the agreement plus 0.5 percentand the credit facility allowed the Company to select interest periods of one,two or three months. The credit facility contained certain financial andoperating covenants.

(c)  OnSeptember 3, 2003, US Holdings closed a private placement of U.S.$300 million (Euro253.3 million) of senior unsecured guaranteed notes (the “Notes”), issued inthree series (Series A, Series B and Series C). Interest on the Series A Notesaccrues at 3.94 percent per annum and interest on Series B and Series C Notesaccrues at 4.45 percent per annum. The Series A and Series B Notes mature onSeptember 3, 2008 and the Series C Notes mature on September 3, 2010. TheSeries A and Series C Notes require annual prepayments beginning on September3, 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, 2006. InDecember 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 C Notesfor their remaining lives are 5.64 percent, 5.99 percent, and 5.44 percent,respectively. Under this credit facility Euro 246.3 million and Euro 165.0million were outstanding as of December 31, 2005 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 0.73 percentfor the Series B and Series C Notes. These swaps were treated as fair valuehedges of the related debt and qualified for the shortcut method of hedgeaccounting (assuming no ineffectiveness in a hedge in an interest rate swap).Thus the interest income/expense on the swaps was recorded as an adjustment tothe interest expense on the debt, effectively changing the debt from a fixedrate of interest to the swap rate. In December 2005, the Company terminated theDB Swaps. The Company paid the bank an aggregate of Euro 7.0 million (U.S.$8.4million), excluding accrued interest, for the final settlement of the DB Swaps.

(d)  On June 3, 2004, as amended on March 10,2006, the Company and US Holdings entered into a credit facility with a groupof banks providing for loans in the aggregate principal amount of Euro 1,130million and U.S.$325 million. The five-year facility consists of three Tranches(Tranche A, Tranche B, 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. 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 used forgeneral corporate purposes, including the refinancing of existing LuxotticaGroup S.p.A. debt as it matures. TrancheB is a term loan of U.S.$325million which was drawn upon on October 1, 2004 by US Holdings tofinance the purchase price of the acquisition of Cole.  Amounts borrowed under Tranche B will maturein March 2011. Tranche C is a RevolvingCredit Facility of Euro 725 million-equivalent multi-currency (Euro/U.S. dollar).Amounts borrowed under Tranche C may be repaid and reborrowed with alloutstanding balances maturing in March 2011. The Company can select interestperiods of one, two, three or six months with interest accruing onEuro-denominated loans based on the corresponding Euribor rate and US Dollardenominated loans based on the corresponding LIBOR rate, both plus a marginbetween 0.20 percent and 0.40 percent based on the “Net Debt/EBITDA” ratio, asdefined in the agreement. The interest rate on December 31, 2006 was 3.972percent for Tranche A, 5.620 percent for Tranche B, 5.60 percent on Tranche Camounts borrowed in U.S. dollars and 3.957 percent on Tranche C amountsborrowed in Euro. The credit facility contains certain financial and operatingcovenants. The Company was in compliance with those covenants as of December31, 2005 and 2006. Under this credit facility, Euro 974.3 million and Euro895.2 million was outstanding as of December 31, 2005 and 2006, respectively.

In June 2005, the Companyentered into nine interest rate swap transactions with an aggregate initialnotional amount of Euro 405 million with various banks which will decrease byEuro 45 million every three months 

F-33

----

starting on June 3, 2007(the “Club Deal Swaps”). These swaps will expire on June 3, 2009. The Club DealSwaps 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 2.40 percent per annum. Theineffectiveness of cash flow hedges was tested both at the inception date andat each year end. The results of the tests indicated that the cash flow hedgesare highly effective and the amounts of ineffectiveness, if any, on each dateof testing were immaterial. As a consequence approximately Euro 5.2 million,net of taxes, is included in Other Comprehensive Income as of December 31,2006. 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 2007 is approximately Euro 3.6 million,net of taxes.

(e)Other loans consist of several small credit agreements and a promissory note,the most significant of which is OPSM’s renegotiated multicurrency loanfacility with Westpac Banking Corporation. This credit facility had a maximumavailable line of Euro 29.96 million (Australian dollar 50 million), which wasreduced to Euro 17.97 million (Australian dollar 30 million) in August 2006.The base rate for the interest charged varies depending on the currencyborrowed; for borrowings denominated in Australian dollars the interest accrueson the basis of BBR (Bank Bill Rate) and for borrowings denominated in HongKong dollars the rate is based on HIBOR (HK Interbank Offered Rate) plus anoverall 0.275 percent margin (at December 31 2006, the  HIBOR was 4.11 percent, ). At December 31,2006, the facility was utilized for an amount of Euro 12.11 million (Australiandollar 20.219 million). The final maturity of all outstanding principal amountsand interest is August 31, 2007. OPSM has the option to choose weekly ormonthly interest periods. The credit facility contains certain financial andoperating covenants. OPSM was in compliance with these covenants as of December31, 2006.

Long-term debt, including capital lease obligations,matures in the years subsequent to December 31, 2006 as follows (thousands ofEuro):
| **Year ended December 31,** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------|------------|
| 2007                                       |       | 359,527    |       |
| 2008                                       |       | 358,988    |       |
| 2009                                       |       | 99,927     |       |
| 2010                                       |       | 9,087      |       |
| 2011                                       |       | 490,967    |       |
| Thereafter                                 |       | 766        |       |
| Total                                      |       | 1,319,262  |       |

 

**10.       EMPLOYEE BENEFITS**

# **Liability for Termination Indemnities**—Asrequired by Italian labor legislation, the benefit accrued by an employee forservice to date is payable immediately upon separation. Accordingly, theundiscounted value of that benefit payable exceeds the actuarial present valueof that benefit because payment is estimated to occur at the employee’sexpected termination date. The Company measures the vested benefit obligationat the actuarial present value of the vested benefits to which the employeewould be entitled if all employees were to resign or be terminated as of thebalance sheet date.  Each year, the Company adjusts its accrual based uponheadcount, changes in compensation level and inflation. This liability is notfunded. There are also some termination indemnities in other countries whichare provided through payroll tax and other social contributions in accordancewith local statutory requirements. The related charge to earnings for theyears ended December 31, 2004, 2005 and 2006 aggregated Euro 10.4 million, Euro12.0 million and Euro 12.9 million, respectively.

**Qualified Pension Plans**—Duringfiscal years 2006 and 2005, the Company continued to sponsor a qualifiednoncontributory defined benefit pension plan, which provides for the payment ofbenefits to eligible past and present employees of the Company upon retirement.Pension benefits are accrued based on length of service and annual compensationunder a cash balance formula.

Thispension plan was amended effective January 1, 2006, granting eligibility toassociates who work in the certain Cole stores, field management, and therelated labs and distribution centers. Additionally, the Company amended thepension accrual formula for the Cole associates, as well as all new hires forthe 

F-34

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Company.The new formula has a more gradual benefit accrual pattern. However, thePension Plan Protection Act of 2006 will require a change to the Plan’s vestingschedule effective January 1, 2008.

Asof the effective date of the Cole acquisition, the Company assumed sponsorshipof the Cole National Group, Inc. Retirement Plan (“Cole Plan”). This is aqualified noncontributory defined benefit pension plan that covers Cole employeeswho have met eligibility service requirements and are not members of certaincollective bargaining units. The pension plan provides for benefits to be paidto eligible past and present employees at retirement based primarily upon yearsof service and the employees’ compensation levels near retirement.

InJanuary 2002, the Cole Plan was frozen for all participants. The average payfor all participants was frozen as of March 31, 2002, and covered compensationwas frozen as of December 31, 2001. Benefit service was also frozen as ofMarch 31, 2002, except for those who were age 50 with 10 years of benefitservice as of that same date, whose service will continue to increase as longas they remain employed by the Company.

**Nonqualified Pension Plans and Agreements**—The Company also maintains anonqualified, unfunded supplemental executive retirement plan (“SERP”) forparticipants of its qualified pension plan to provide benefits in excess ofamounts permitted under the provisions of prevailing tax law. The pensionliability and expense associated with this plan are accrued using the sameactuarial methods and assumptions as those used for the qualified pension plan.

Starting January 1, 2006, this plan’s benefit provisions wereamended to mirror the changes made to the Company’s qualified pension plan.

A subsidiary of the Company sponsors the Cole National Group, Inc.Supplemental Pension Plan. This plan is a nonqualified unfunded supplementalexecutive retirement plan for certain participants of the Cole pension plan whowere designated by the Board of Directors of Cole on the recommendation of Cole’sChief Executive Officer at such time. This plan provides benefits in excess ofamounts permitted under the provisions of the prevailing tax law. The pensionliability and expense associated with this plan are accrued using the sameactuarial methods and assumptions as those used for the qualified pension plan.

The following tablesprovide key information pertaining to the Company’s pension plans and SERP. TheCompany uses a September 30 measurement date for these plans.

**Obligations and Funded Status(Amounts in thousands of Euro)**
| ** **                                    | ** ** | **Pension Plans** | ** ** | **SERP** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|----------|------------|
| ** **                                    | ** ** | **2005**               | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** |
|                                          |       |                   |       |     |       |   |   |   |   |
| Change in benefit obligations:                |       |                   |       |     |       |   |   |   |   |
| Benefit obligations—beginning  of period |       | 225,028                |       | 278,947  |       | 4,814 |   | 6,530 |   |
|                                          |       |                   |       |     |       |   |   |   |   |
| Translation Difference                        |       | 33,278                 |       | (29,766  | )          | 738 |   | (796 | ) |
| Service cost                                  |       | 12,352                 |       | 13,326   |       | 218 |   | 335 |   |
| Interest cost                                 |       | 13,859                 |       | 15,090   |       | 318 |   | 441 |   |
| Actuarial loss (gain)                         |       | 2,272                  |       | 3,195    |       | 497 |   | 1,831 |   |
| Plan amendments                               |       | —                 |       | 297      |       | — |   | — |   |
| Benefits paid                                 |       | (7,842                 | )          | (8,841   | )          | (55 | ) | (22 | ) |
|                                          |       |                   |       |     |       |   |   |   |   |
| Benefit obligations—end of period        |       | 278,947                |       | 272,248  |       | 6,530 |   | 8,319 |   |

 

F-35

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| ** **                                          | ** ** | **Pension Plans** | ** ** | **SERP** | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|----------|------------|
| ** **                                          | ** ** | **2005**               | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** |
|                                                |       |                   |       |     |       |   |   |   |   |
| Change in plan assets:                              |       |                   |       |     |       |   |   |   |   |
| Fair value of plan assets—beginning  of period |       | 149,644                |       | 206,316  |       | — |   | — |   |
| Translation Difference                              |       | 23,137                 |       | (22,807  | )          | — |   | — |   |
| Actual return on plan assets                        |       | 17,928                 |       | 14,514   |       | — |   | — |   |
| Employer contribution                               |       | 23,449                 |       | 27,610   |       | 55 |   | 22 |   |
| Benefits paid                                       |       | (7,842                 | )          | (8,841   | )          | (55 | ) | (22 | ) |
|                                                |       |                   |       |     |       |   |   |   |   |
| Fair value of plan assets—end of period        |       | 206,316                |       | 216,792  |       | — |   | — |   |
|                                                |       |                   |       |     |       |   |   |   |   |
| Funded status                                       |       | (72,631                | )          | (55,455  | )          | (6,530 | ) | (8,319 | ) |
| Unrecognized net actuarial loss                     |       | 47,372                 |       |     |       | 1,494 |   |   |   |
| Unrecognized prior service cost                     |       | 1,262                  |       |     |       | 43 |   |   |   |
| Other adjustments                                   |       |                   |       |     |       | 3 |   |   |   |
| Accrued pension cost                                |       | (23,997                | )          | (55,455  | )          | (4,990 | ) | (8,319 | ) |

 

Amounts recognized in theconsolidated balance sheets as of December 31, 2006 and 2005, consist of thefollowing (amounts in thousands of Euro):
| ** **                             | ** ** | **Pension Plans** | ** ** | **SERP** | ** ** |
|----------------------------------------|------------|------------------------|------------|----------|------------|
| ** **                             | ** ** | **2005**               | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** |
| Liabilities:                           |       |                   |       |     |       |   |   |   |   |
| Current liabilities                    |       | —                 |       | —   |       | — |   | 232 |   |
| Non-current liabilities                |       | 23,997                 |       | 55,455   |       | 4,990 |   | 8,087 |   |
| Additional minimum liability           |       | 31,372                 |       | —   |       | 833 |   | — |   |
|                                   |       |                   |       |     |       |   |   |   |   |
| Total accrued pension liability        |       | 55,369                 |       | 55,455   |       | 5,823 |   | 8,319 |   |
|                                   |       |                   |       |     |       |   |   |   |   |
| Assets - intangible assets             |       | 1,262                  |       |     |       | 43 |   |   |   |
|                                   |       |                   |       |     |       |   |   |   |   |
| Other comprehensive income:            |       |                   |       |     |       |   |   |   |   |
| Net loss                               |       |                   |       | 43,690   |       |   |   | 2,799 |   |
| Prior service cost                     |       |                   |       | 881      |       |   |   | 29 |   |
| Contributions after  measurement date  |       |                   |       | —   |       |   |   | 3 |   |
| Accumulated other comprehensive income |       | 30,111                 |       | 44,571   |       | 790 |   | 2,831 |   |

 

The accumulated benefitobligations for the pension plans and SERP as of September 30, 2006 and2005, were as follows (amounts in thousands of Euro):
| ** **                            | ** ** | **Pension Plans** | ** ** | **SERP** | ** ** |
|---------------------------------------|------------|------------------------|------------|----------|------------|
| ** **                            | ** ** | **2005**               | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** |
|                                  |       |                   |       |     |       |   |   |   |   |
|  Accumulated benefit obligations |       | 248,771                |       | 268,323  |       | 5,545 |   | 6,877 |   |

 

**Components of Net PeriodicBenefit Cost and Other****Amounts Recognized in Other Comprehensive Income**

**Net Periodic Benefit Cost**
| Service cost                                                                                                   |   | 12,352  |   | 13,326  |   | 218    |   | 335    |   |
|----------------------------------------------------------------------------------------------------------------|--------|---------|--------|---------|--------|--------|--------|--------|--------|
| Interest cost                                                                                                  |   | 13,859  |   | 15,090  |   | 318    |   | 441    |   |
|                                                                                                           |   |    |   |    |   |   |   |   |   |
| Expected return on plan  assets                                                                                |   | (14,954 | )      | (15,837 | )      | — |   | — |   |
| Amortization of actuarial  loss                                                                                |   | 1,564   |   | 3,277   |   | 125    |   | 299    |   |
| Amortization of prior  service cost                                                                            |   | 566     |   | 561     |   | 10     |   | 10     |   |
|                                                                                                           |   |    |   |    |   |   |   |   |   |
| Net periodic pension expense                                                                                   |   | 13,386  |   | 16,417  |   | 671    |   | 1,086  |   |
|                                                                                                           |   |    |   |    |   |   |   |   |   |
| Additional Information — (Decrease) Increase in minimum liability included  in other comprehensive income |   | (4,055  | )      |    |   | (7     | )      |   |   |

 

F-36

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**Other Changes in Plan Assets and Benefit**

**Obligations Recognized in Other Comprehensive Income**

 
| Net loss (gain)                                 |   | (740   | )      | 4,518  |   | 497    |   | 1,831  |   |
|-------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Prior service cost                              |   | — |   | 297    |   | — |   | — |   |
| Amortization of actuarial  loss                 |   | (1,564 | )      | (3,277 | )      | (125   | )      | (299   | )      |
| Amortization of prior  service cost             |   | (566   | )      | (561   | )      | (10    | )      | (10    | )      |
|                                            |   |   |   |   |   |   |   |   |   |
| Total recognized in other comprehensive  income |   | (2,870 | )      | 977    |   | 362    |   | 1,522  |   |
|                                            |   |   |   |   |   |   |   |   |   |
| TOTAL                                           |   | 10,517 |   | 17,394 |   | 1,033  |   | 2,608  |   |

 

The estimated net lossand prior service cost for the defined benefit pension plans that will beamortized from accumulated other comprehensive income into net periodic benefitcost over the next fiscal year are Euro 2.8 million  and Euro 0.6 million, respectively. Theestimated net loss and prior service cost for the SERP plans that will beamortized from accumulated other comprehensive income into net periodic benefitcost over the next fiscal year are Euro 0.3 million and Euro 0.01 million,respectively.
| ** **                                                                                                            | ** ** | **Pension Plan** | ** ** | **SERP** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|----------|------------|
| **Assumptions**                                                                                                       | ** ** | **2005**              | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** |
| Weighted-average  assumption used to  determine benefit  obligations:                                            |       |                  |       |     |       |   |   |   |   |
| Discount rate                                                                                                         |       | 5.75                  | %          | 6.00     | %          | 5.75 | % | 6.00 | % |
| Rate of compensation increase                                                                                         |       | 4.25                  | %          | 4.50     | %          | 4.25 | % | 4.50 | % |
|                                                                                                                  |       |                  |       |     |       |   |   |   |   |
| Weighted-average  assumption used to determine net periodic benefit cost for years ended  December 31, 2006 and 2005: |       |                  |       |     |       |   |   |   |   |
| Discount rate                                                                                                         |       | 5.75                  | %          | 5.75     | %          | 5.75 | % | 5.75 | % |
| Expected long-term return on plan assets                                                                              |       | 8.50                  | %          | 8.25     | %          | N/A |   | N/A |   |
| Rate of compensation increase                                                                                         |       | 4.25                  | %          | 4.25     | %          | 4.25 | % | 4.25 | % |
| Mortality table                                                                                                       |       | RP-2000               |       | RP-2000  |       | RP-2000 |   | RP-2000 |   |

 

For 2006, the Company’s long-term rate of return assumption on thepension plans’ assets was 8.25%. In developing this assumption, the Companyconsidered input from its third-party pension asset managers, investmentconsultants and plan actuaries, including their review of asset class returnexpectations and long-term inflation assumptions. The Company also consideredthe pension plans’ historical average return over various periods of time(through December 31, 2005). The resulting assumption was also benchmarkedagainst the assumptions used by other U.S. corporations as reflected in severalsurveys to determine consensus thinking at that time on this assumption.

***Plan Assets***—The Pension Plan’s target and actualasset allocations at September 30, 2006 and 2005, by asset category are asfollows:

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| ** **              | ** ** | ** **     | ** ** | **Luxottica Pension** | ** ** | **Cole Pension**  | ** ** |
|-------------------------|------------|----------------|------------|----------------------------|------------|------------------------|------------|
| ** **              | ** ** | **Asset**      | ** ** | **Plan Assets**       | ** ** | **Plan Assets**   | ** ** |
| ** **              | ** ** | **Allocation** | ** ** | **September 30,**     | ** ** | **September 30,** | ** ** |
| **Asset Category** | ** ** | **Target**     | ** ** | **2005**                   | ** ** | **2006**               | ** ** | **2005** | ** ** | **2006** | ** ** |
|                    |       |           |       |                       |       |                   |       |   |   |   |   |
| Equity  securities      |       | 65             | %          | 60                         | %          | 64                     | %          | 66 | % | 67 | % |
| Debt securities         |       | 35             | %          | 36                         | %          | 34                     | %          | 32 | % | 29 | % |
| Other                   |       | —         |       | 4                          | %          | 2                      | %          | 2 | % | 4 | % |
|                    |       |           |       |                       |       |                   |       |   |   |   |   |
| Total                   |       | 100            | %          | 100                        | %          | 100                    | %          | 100 | % | 100 | % |

 

The actual allocation percentages at any given time may vary from thetargeted amounts due to changes in stock and bond valuations as well as timingof contributions to and benefit payments from the pension plan trusts.

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 ADR’s or common stock of theCompany. Risk is further controlled both at the asset class and manager levelby assigning benchmarks and excess return targets. The investment managers aremonitored on an ongoing basis to evaluate performance against the establishedmarket benchmarks and return targets.

Each of the defined benefit pension plans has an investment policy thatwas developed to serve as a management tool to provide the framework withinwhich the fiduciary’s investment decisions are made; establish standards tomeasure investment managers’ performance; outline the roles andresponsibilities of the various parties involved; and describe the ongoingreview process.

**Benefit Payments**—The following estimated future benefit payments,which reflect expected future service, are expected to be paid in the yearsindicated for both the Company and Cole plans (amounts in thousands of Euro):
| ** ** | ** ** | **Pension Plans** | ** ** | **Supplemental Plans** | ** ** |
|------------|------------|------------------------|------------|-----------------------------|------------|
|       |       |                   |       |                        |       |
| 2007       |       | 9,849                  |       | 232                         |       |
| 2008       |       | 11,178                 |       | 1,138                       |       |
| 2009       |       | 11,406                 |       | 352                         |       |
| 2010       |       | 12,194                 |       | 360                         |       |
| 2011       |       | 13,458                 |       | 787                         |       |
| 2012-2016  |       | 83,218                 |       | 5,191                       |       |

 

**Contributions**—The Company expects to contribute Euro15.9 million to its pension plan and Euro 0.2 million to the SERP in 2007.

**OtherBenefits**—TheCompany provides certain postemployment medical, disability, and life insurancebenefits. The Company’s accrued liability related to this obligation as ofDecember 31, 2005 and 2006, was Euro 0.7 million and Euro 1.3 million,respectively, and is included in accrued employee benefits on the consolidatedbalance sheets.

The Company sponsors a tax incentive savings plan covering allfull-time employees. The Company makes quarterly contributions in cash to theplan based on a percentage of employees’ contributions. Additionally, theCompany may make an annual discretionary contribution to the plan, which may bemade in the Parent’s ADR’s or cash.

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Aggregate contributions made to the tax incentive savings plan by theCompany were Euro 7.7 million and Euro 9.2 million, for fiscal 2005 and 2006,respectively. For fiscal 2005 and 2006 these contributions include an accrualfor a discretionary match of Euro 1.7 million and Euro 0.8 million,respectively.

With the acquisition of Cole, the Company, through a newly acquiredsubsidiary, now sponsors the following additional other benefit plans, whichcover certain present and past employees of the Cole companies acquired:

·             Coleprovides, under individual agreements, postemployment benefits for continuationof health care benefits and life insurance coverage to former employees afteremployment. As of December 31, 2005 and 2006, the accrued liabilityrelated to these benefits were Euro 1.8 million and Euro 1.2 millionrespectively, and is included in the accrued employee benefits on theconsolidated balance sheet. The decrease in the liability in 2006 is largelyattributable to a change in the benefit plans offered which provided for anincrease in the cost sharing by participants and the actuarial rating of theclaims cost related to the benefit structure. There was also a decrease related to the drop in plan participants.

·             EffectiveJanuary 1, 2006, the Cole defined contribution plan was merged into the Company’stax incentive savings plan.  For the Colequalified defined contribution plans offered through December 31, 2005,covering all full time employees of the U.S., the Company’s matchingcontribution in 2006 for fiscal 2005 was approximately Euro 0.8 million.

·             Colealso maintains a defined contribution plan covering all full-time employees inPuerto Rico. The employees in Puerto Rico who have in the past participated inthe Company’s tax incentive savings plan were transferred into the Cole planeffective January 1, 2006. Additionally, effective January 1, 2006, the planwas amended to provide for a match of 100 percent of the first three percent ofemployee contributions. In 2006, the Company made quarterly contributions incash to the plan based on a percentage of employees’ contributions.  During 2005, this plan provided for amandatory match of 50% of the employees first 6% of employeecontributions.  The matchingcontributions to such plan for the year ended 2006 and 2005 were immaterial.

·             Coleestablished and maintains the Cole National Group, Inc. Supplemental RetirementBenefit Plan, which provides supplemental retirement benefits for certainhighly compensated and management employees who were previously designated bythe former Board of Directors of Cole as participants. This is an unfundednoncontributory defined contribution plan. Each participant’s account iscredited with interest earned on the average balance during the year. This planwas frozen as to future salary credits on the effective date of the Coleacquisition in 2004. The plan liability of Euro 1.7 million and Euro 1.3million at December 31, 2005 and 2006, respectively, is included in accruedemployee benefits on the consolidated balance sheets.

**DefinedContribution Plan**—TheCompany sponsors a noncontributory profit-sharing plan for employees of itsformer women’s apparel business. Contributions to this plan were discontinuedfor plan years subsequent to January 28, 1995. This plan is in terminationstatus as the Company attempts to locate the few remaining participants withaccount balances.

The Company continues to participate in superannuation plans inAustralia and Hong Kong. The plans provide benefits on a defined contributionbasis for employees on retirement, resignation, disablement or death.Contributions to defined contribution superannuation plans are recognized as anexpense as the contributions are paid or become payable to the fund.Contributions are accrued based on legislated rates and annual compensation.

**HealthBenefit Plans**—TheCompany partially subsidizes health care benefits for eligible retirees ofcertain subsidiaries in the United States of America. Employees generallybecome eligible for retiree health care benefits when they retire from activeservice between the ages of 55 and 65. Benefits are discontinued at age 65.

As of the Cole acquisition date, the Company assumed a liability for apostretirement benefit plan maintained by Cole in connection with itsacquisition of Pearle in 1996. This plan was closed to new participants at thetime of Cole’s acquisition of Pearle. Under this plan, the eligible formeremployees are provided life insurance and certain health care benefits whichare partially subsidized by Cole. Medical benefits under this plan can bemaintained past age 65.

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The following table sets forth the obligation andfunded status of the postretirement benefit plans (amounts in thousands ofEuro):
| ** **                                        | ** ** | **2005** | ** ** | **2006** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
|                                              |       |     |       |     |       |
| Change in benefit obligations:                    |       |     |       |     |       |
| Benefit  obligations—beginning of year       |       | 3,468    |       | 4,651    |       |
| Translation Difference                            |       | 531      |       | (460     | )          |
| Service cost                                      |       | 137      |       | 134      |       |
| Interest cost                                     |       | 211      |       | 222      |       |
| Plan participants’  contributions            |       | 55       |       | 49       |       |
| Actuarial gain (loss)                             |       | 628      |       | (511     | )          |
| Change in plan provisions                         |       | (67      | )          | (96      | )          |
| Benefits paid                                     |       | (312     | )          | (153     | )          |
|                                              |       |     |       |     |       |
| Benefit obligations—end of  year             |       | 4,651    |       | 3,835    |       |
|                                              |       |     |       |     |       |
| Change in plan assets:                            |       |     |       |     |       |
| Fair value of plan  assets—beginning of year |       | —   |       | —   |       |
| Company contribution                              |       | 269      |       | 99       |       |
| Plan participants’  contributions            |       | 58       |       | 46       |       |
| Benefits paid                                     |       | (327     | )          | (145     | )          |
|                                              |       |     |       |     |       |
| Fair value of plan  assets—end of year       |       | —   |       | —   |       |
|                                              |       |     |       |     |       |
| Funded status                                     |       | (4,651   | )          | (3,835   | )          |
| Unrecognized net gain and prior service costs     |       | 364      |       |     |       |
| Other                                             |       | 73       |       |     |       |
| Accrued postretirement benefit costs              |       | (4,214   | )          | (3,835   | )          |

 

Amountsrecognized in the consolidated balance sheets as of December 31, 2006 and 2005,consist of the following (amounts in thousands of Euro):
| ** **                | ** ** | **2005** | ** ** | **2006** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|
| Liabilities:              |       |     |       |     |       |
| Current liabilities       |       | —   |       | 185      |       |
| Non-current liabilities   |       | 4,214    |       | 3,650    |       |
|                      |       |     |       |     |       |
| Total pension liabilities |       | 4,214    |       | 3,835    |       |

 

Amounts recognized in accumulated other comprehensiveincome consist of as of December 31, 2006 and 2005 (amounts in thousands ofEuro):
| ** **                             | ** ** | **2005** | ** ** | **2006** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
|                                   |       |     |       |     |       |
| Other comprehensive income:            |       |     |       |     |       |
| Net loss (gain)                        |       | 528      |       | (19      | )          |
| Prior service cost (credit)            |       | (164     | )          | (215     | )          |
| Contributions after measurement date   |       | 73       |       | 14       |       |
|                                   |       |     |       |     |       |
| Accumulated other comprehensive income |       | 437      |       | (220     | )          |

 

 

F-40

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Components of net periodic benefit cost and otheramounts recognized in other comprehensive Income (amounts in thousands of Euro):
| ** **                                                                                      | ** ** | **2005** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                            |       |     |       |     |       |
| Net periodic benefit cost:                                                                      |       |     |       |     |       |
| Service cost                                                                                    |       | 144      |       | 127      |       |
| Interest cost                                                                                   |       | 222      |       | 211      |       |
| Expected return on plan  assets                                                                 |       | —   |       | —   |       |
| Amortization of net loss  (gain)                                                                |       | —   |       | 6        |       |
| Amortization of prior  service cost                                                             |       | (24      | )          | (23      | )          |
|                                                                                            |       |     |       |     |       |
| Net periodic benefit cost                                                                       |       | 342      |       | 321      |       |
|                                                                                            |       |     |       |     |       |
| Other changes in plan assets and benefit obligations recognized in other  comprehensive income: |       |     |       |     |       |
| Net loss (gain)                                                                                 |       | 660      |       | (486     | )          |
| Prior service cost (credit)                                                                     |       | (70      | )          | (92      | )          |
| Amortization of prior  service cost                                                             |       | 24       |       | 23       |       |
| Amortization of net loss  (gain)                                                                |       | —   |       | (6       | )          |
|                                                                                            |       |     |       |     |       |
| Total recognized in other  comprehensive income                                                 |       | 614      |       | (561     | )          |
|                                                                                            |       |     |       |     |       |
| Total recognized in net periodic benefit cost and other comprehensive  income                   |       | 956      |       | (240     | )          |

 

The estimated net loss and prior service cost for the health benefitplans that will be amortized from accumulated other comprehensive income intonet periodic benefit cost over the next fiscal year are Euro 0.01 million andEuro 0.02 million, respectively.

**Benefit Payments**—The following estimated future benefit payments forthe health benefit plans, which reflect expected future service, are estimatedto be paid in the years indicated for both the Company and Cole plans (amountsin thousands of Euro):
| **Years Ending December 31,** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|
|                                         |       |       |       |
| 2007                                         |       | 185        |       |
| 2008                                         |       | 191        |       |
| 2009                                         |       | 218        |       |
| 2010                                         |       | 231        |       |
| 2011                                         |       | 249        |       |
| 2012–2016                               |       | 1,503      |       |

 

**Contributions**—The expected contributions for 2007 are Euro 0.2million for the Company and Euro 0.08 million for the employee participants.

For 2006, a 12% (10% for 2005) increase in the cost of covered healthcare benefits was assumed. This rate was assumed to decrease gradually to 5%for 2020 and remain at that level thereafter. The health care cost trend rateassumption could have a significant effect on the amounts reported. A 1%increase or decrease in the health care trend rate would not have a materialimpact on the consolidated financial statements. The weighted-average discountrate used in determining the accumulated postretirement benefit obligation was6.0% at September 30, 2006 and 5.75% at September 30, 2005.

The weighted-average discount rate used in determining the net periodicbenefit cost for 2005 and 2006 was 5.75%, respectively.

**New Accounting Pronouncement**—In the fourth quarter of 2006, theCompany adopted SFAS No. 158, which requires employers to recognize on thebalance sheet the projected benefit obligation of pension plans and theaccumulated postretirement benefit obligation for any other postretirementplan. This requirement replaces the requirement of SFAS No. 87 to report aminimum pension liability measured as the excess of the accumulated benefitobligation over the fair value of plan assets and any recorded pension accrual.SFAS No. 158 also requires employers to recognize in other comprehensive incomegains or losses and prior service costs or credits that occur during the periodbut would not be recognized as net periodic benefit cost as

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required by SFASNo. 87, 88, and 106. There is no change in the requirements related to theincome statement recognition of net periodic benefit costs. The incrementaleffect of applying SFAS No. 158 on the consolidated balance sheet at December31, 2006 is as follows:

**Incremental Effect of Applying SFAS No. 158**

**On Individual Line Items in the Consolidated Balance Sheet**

**As of December 31, 2006**

**(amounts in thousands of Euro)**

 
| ** **                            | ** ** | **Before**              | ** ** | ** **      | ** ** | **After**               | ** ** |
|---------------------------------------|------------|-------------------------|------------|-----------------|------------|-------------------------|------------|
| ** **                            | ** ** | **Application of** | ** ** | ** **      | ** ** | **Application of** | ** ** |
| ** **                            | ** ** | **SFAS**                | ** ** | ** **      | ** ** | **SFAS**                | ** ** |
| ** **                            | ** ** | **No. 158**        | ** ** | **Adjustments** | ** ** | **No. 158**        | ** ** |
|                                  |       |                    |       |            |       |                    |       |
| Prepaid pension  (intangible asset)   |       | (304                    | )          | 2,254           |       | 1,950                   |       |
|                                  |       |                    |       |            |       |                    |       |
| Total assets                          |       | 4,912,771               |       | 2,254           |       | 4,915,025               |       |
|                                  |       |                    |       |            |       |                    |       |
| 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           |       | 1,263,653               |       | 10,246          |       | 1,273,899               |       |
|                                  |       |                    |       |            |       |                    |       |
| Accumulated other  comprehensive loss |       | (280,184                | )          | (8,409          | )          | (288,593                | )          |
|                                  |       |                    |       |            |       |                    |       |
| Total stockholders’ equity       |       | 2,224,258               |       | (8,409          | )          | 2,215,849               |       |

 

**11.   STOCK OPTION AND INCENTIVE PLANS**

**StockOption Plan**

Beginning in April 1998,certain officers and other key employees of the Company and its subsidiarieswere granted stock options of Luxottica Group S.p.A. under the Company’s stockoption plans (the “plans”). The aggregate number of shares permitted to begranted under these plans to the employees is 21,299,300.  The Company believes that the granting ofoptions to these key employees better aligns the interest of such employeeswith those of the shareholders. Prior to 2006 under the older plans, stockoptions were granted at a price that was equal to or greater than market valueof the shares at the date of grant. Under the 2006 plan, options were granted at the greater of either theprevious 30 day average stock price immediately before the date of grant or theprice on the grant date depending on certain regulatory requirements of thecountry that the employee is receiving the option. These options becomeexercisable in either three equal annual installments beginning on January 31,  one year after the date of grant for grantsprior to 2005 or for the 2005 and after grants two annual equal installmentsbeginning on January 31 two years after the date of grant and expire on orbefore January 31, 2015. Certain vested options may contain acceleratedexercising terms if there is a change in ownership (as defined in the Plans).

Prior to the adoption ofSFAS 123(R) on January 1, 2006, the Company applied APB 25 to these Annualplans, and as such no compensation expense was recognized because the exerciseprice of the options was equal to the fair market value on the date of grant.Accounting for the performance plans are discussed below. However, as some ofthose individuals were U.S. citizens/taxpayers and as the exercise of suchoptions created taxable income, the Company was afforded a tax benefit in itsUS Federal tax return equal to the income declared by the individuals. U.S.GAAP does not permit the aforementioned tax benefit to be recorded in thestatement of income. Therefore, such amount is recorded as a reduction of taxespayable and an increase to additional paid-in capital. For the years endedDecember 31, 2004 and 2005, the benefit recorded approximated Euro 0.8million and Euro 4.7 million, respectively.

The Company adopted SFAS123R as of January 1, 2006, and at such point began expensing stockoptions on a straight-line basis over the requisite service period, based ontheir fair value as of the date of grant. For the year ended December 31, 2006Euro 7.0 million of compensation expense has been recorded for these 

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plans.  Pro forma net income and earnings per sharecalculated as if the compensation costs of the plans had been determined undera fair-value based method for the previous periods are reported in Note 1.

Asummary of option activity under the Plans as of December 31, 2006, 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)(1)**      | ** ** | **Terms**                 | ** ** | **(Euro/000s)**          | ** ** |
| Outstanding as  of December 31, 2005 |       | 10,044,310          |       | 12.68                     |       |                      |       |                     |       |
| Granted                                   |       | 1,725,000           |       | 22.19                     |       |                      |       |                     |       |
| Forfeitures                               |       | (228,100            | )          | 15.86                     |       |                      |       |                     |       |
| Exercised                                 |       | (2,240,525          | )          | 10.59                     |       |                      |       |                     |       |
| Outstanding as  of December 31, 2006 |       | 9,300,685           |       | 14.15                     |       | 5.33                      |       | 84,899                   |       |
| Exercisable at December  31, 2006         |       | 5,555,285           |       | 11.05                     |       | 3.95                      |       | 67,917                   |       |

 

The weighted-average fairvalue of grant-date fair value options granted during the years 2004, 2005, and2006 was Euro 4.10, Euro 4.27 and Euro 5.72, respectively.

**StockPerformance Plans**

In October 2004, under aCompany performance plan, the Company granted options to acquire an aggregateof 1,000,000 shares of the Company to certain employees of North AmericanLuxottica Retail Division which vested and became exercisable on January 31,2007 as certain financial performance measures were met over the period endingDecember 2006. At December 31, 2005, there were options to acquire1,000,000 shares (the closing ADR price at December 31, 2005 on the New YorkStock Exchange was U.S.$25.31 per share) at an exercise price of U.S.$18.59 pershare. Prior to the adoption of SFAS 123(R) compensation expense was recordedin accordance with variable accounting under APB 25 for the options issuedunder the incentive plan based on the market value of the underlying ordinaryshares when 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 U.S.$2.2million) of compensation expense net of taxes during fiscal 2005 and recordedfuture unearned compensation expense in equity of approximately Euro 2.7million (U.S.$3.2 million) with an offsetting increase in additional paid-incapital for such amounts.  Pro forma netincome and earnings per share calculated as if the compensation costs of theplans had been determined under a fair-value based method are reported in Note1.

In September 2004,the Company’s Chairman and majority shareholder, Mr. Leonardo Del Vecchio,allocated shares held through La Leonardo Finanziaria S.r.l., a holding companyof the Del Vecchio family (renamed Delfin S.a.r.l), representing 2.11 percent(or 9.6 million shares) of the Company’s currently authorized and issued sharecapital, to a stock option plan for top management of the Company at anexercise 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 vest upon meeting certain economicobjectives. As such, compensation expense is recorded in accordance withvariable accounting under APB 25 for the options issued to management under theincentive plan based on the market value of the underlying ordinary shares onlywhen the number of shares to be vested and issued is known. During 2005, itbecame probable that the incentive targets would be met and, as such, theCompany has recorded compensation expense of approximately Euro 19.9 million,net of taxes and recorded future unearned compensation expense in equity ofapproximately Euro 45.8 million, net of taxes, with an offsetting increase inadditional paid-in capital for such amounts. The expense if calculated underSFAS 123(R) would have been approximately Euro 16.9 million, net of taxes, andis included in pro forma net income and earnings per share (see Note 1).

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In July 2006, under a Company performance plan, theCompany granted options to acquire an aggregate of 13,000,000 shares of theCompany to certain top management positions through out the Company which vestand became exercisable as certain financial performance measures will be met.Upon vesting the associate will be able to exercise such options until theyexpire in 2016. Currently it is expected that these performance conditions willbe met. If these performance measures are not expected to be met no additionalcompensation costs will be recognized and previous compensation costsrecognized will be reversed.

For the year ended December 31, 2006, Euro 40.9million of compensation expense has been recorded for these plans.

A summary of option activity under the performanceplans as of December 31, 2006, and changes during the year then ended are asfollows:
| ** **                                | ** ** | ** **          | ** ** | **Weighted Average** | ** ** | **Weighted Average** | ** ** | ** **               | ** ** |
|-------------------------------------------|------------|---------------------|------------|---------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                                | ** ** | **Number**          | ** ** | **Exercise Price**   | ** ** | **Remaining**             | ** ** | **Aggregate**            | ** ** |
| ** **                                | ** ** | **of Options** | ** ** | **(Denominated**          | ** ** | **Contractual**           | ** ** | **Intrinsic Value** | ** ** |
| **Performance Plans**                | ** ** | **Outstanding**     | ** ** | **in Euro)(1)**      | ** ** | **Terms**                 | ** ** | **(Euro/000s)**          | ** ** |
| Outstanding as  of December 31, 2005 |       | 10,600,000          |       | 13.79                     |       |                      |       |                     |       |
| Granted                                   |       | 13,000,000          |       | 21.27                     |       |                      |       |                     |       |
| Forfeitures                               |       | —              |       | —                    |       |                      |       |                     |       |
| Exercised                                 |       | —              |       | —                    |       |                      |       |                     |       |
| Outstanding as  of December 31, 2006 |       | 23,600,000          |       | 17.91                     |       | 8.61                      |       | 126,696                  |       |
| Exercisable at December  31, 2006         |       | 9,600,000           |       | 13.67                     |       | 7.67                      |       | 92,256                   |       |

 

Theweighted-average fair value of grant-date fair value options granted during theyears 2004 and 2006 was Euro 3.99 and Euro 5.13, respectively.  There were no performance grants issued in2005.

Cash received fromoption exercises under all share-based arrangements and actual tax benefitsrealized for the tax deductions from option exercises are disclosed in theConsolidated Statement of Shareholders’ Equity.

**12.       SHAREHOLDERS’ EQUITY**

In June 2005 andJune 2006, the Company’s Annual Shareholders Meetings approved cash dividendsof Euro 103.5 million and Euro 131.4 million, respectively. These amountsbecame payable in June 2005 and June 2006, respectively. Italian law requiresthat five percent of net income be retained as a legal reserve until thisreserve is equal to one-fifth of the issued share capital. As such, this legalreserve is not available for dividends to the shareholders. Legal reserves ofthe Italian entities included in retained earnings were Euro 8.6 million atDecember 31, 2005 and 2006, respectively. In addition Euro 5.3 million of otherlegal reserves of foreign entities is not available for dividends to theshareholders.

Luxottica Group’slegal reserve rollforward for fiscal period 2004-2006 is detailed as follows(in thousand of Euro):
| January 1, 2004               |   | 5,451 |   |
|-------------------------------|--------|-------|--------|
| Increase in  fiscal year 2004 |   | 3     |   |
| December 31,  2004            |   | 5,454 |   |
| Increase in  fiscal year 2005 |   | 23    |   |
| December 31,  2005            |   | 5,477 |   |
| Increase in  fiscal year 2006 |   | 36    |   |
| December 31, 2006             |   | 5,513 |   |

 

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In accordance with SFASNo. 87, *Employers’ Accounting for Pensions*,Luxottica Group has recorded minimum pension liabilities for the underfundedU.S. defined benefit pension plans of Euro 32.2 million and Euro 29.6 millionas of December 31, 2005 and 2006, respectively, representing the excess ofunfunded accumulated benefit obligations over previously accrued pensionliabilities.  An intangible asset equalto the amount of unrecognized prior service cost was also recorded. The amountby which the unfunded accumulated benefit obligations exceeded the intangibleasset and accrued pension liability was charged directly to shareholders’equity net of income taxes.  Theprincipal cause of the increase in minimum liability in 2006 is due to theaccumulated benefit obligations increasing more than the pension assetsincreased as a result of investment performance net of benefit payments andplan expenses.  As of December 31, 2006,the increase in the minimum liability plus the decrease in the intangible assetresulted in a decrease of Euro 0.6 million in shareholders’ equity. Theliability recognition provision of SFAS No. 158*Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans* was adopted for the year ended December 31, 2006.  As a result, there was an additional aftertax charge to shareholders’ equity of Euro 8.4 million. This charge is becauseSFAS No. 158 requires the use of the higher projected benefit obligationamount, as compared to the accumulated benefit obligation, in determining theamount of pension liability that is required to be recognized on Luxottica’sbalance sheet.

Previously the Board ofDirectors authorized US Holdings to repurchase through the open market up to21,500,000 ADRs of Luxottica Group S.p.A., representing at that timeapproximately 4.7 percent of the authorized and issue share capital. As ofDecember 31, 2004, both repurchase programs expired and US Holdings haspurchased 6,434,786 (1,911,700 in 2002 and 4,523,786 in 2003) ADRs at anaggregate purchase price of Euro 70.0 million (U.S.$73.8 million translated atthe exchange rate at the time of the transactions). In connection with therepurchase, an amount of Euro 70.0 million is classified as treasury shares inthe Company’s consolidated financial statements. The market value of the stockbased on the ADR price as listed on the New York Stock Exchange atDecember 31, 2006, is approximately Euro 149.7 million (U.S.$197.6 million).

**13. SEGMENTS AND RELATEDINFORMATION**

In accordance withSFAS No. 131, *Disclosures About Segments ofan Enterprise and Related Information*, the Company operates in twoindustry segments: (1) manufacturing and wholesale distribution and (2) retaildistribution. Through its manufacturing and wholesale distribution operations,the Company is engaged in the design, manufacture, wholesale distribution andmarketing of house brand and designer lines of mid- to premium-pricedprescription frames and sunglasses. The Company operates in the retail segmentthrough its Retail Division, consisting of LensCrafters, Sunglass HutInternational, OPSM, Cole National, Xueliang, Ming Long and Modern Sight.

The followingtables summarize the segmental and geographic information deemed essential bythe 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 assetsused in operations in each segment. Corporate identifiable assets areprincipally cash, goodwill and trade names.

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| **(Thousands of Euro)  Year Ended December 31,** | ** ** | **Manufacturing  and Wholesale** | ** ** | **Retail** | ** ** | **Inter-Segment  Transactions and  Corporate  Adjustments** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------------|------------|---------------------------------------|------------|------------|------------|------------------------------------------------------------------|------------|------------------|------------|
| 2004                                                                      |       |                                  |       |       |       |                                                             |       |             |       |
| Net sales                                                                 |       | 1,094,802                             |       | 2,270,996  |       | (186,185                                                         | )(1)       | 3,179,613        |       |
| Income from  operations                                                   |       | 233,129                               |       | 296,538    |       | (50,168                                                          | )(2)       | 479,499          |       |
| Capital  expenditures                                                     |       | 31,367                                |       | 85,259     |       | —                                                           |       | 116,626          |       |
| Depreciation and  amortization                                            |       | 47,656                                |       | 77,439     |       | 25,045                                                           | (3)        | 150,140          |       |
| Identifiable  assets                                                      |       | 1,566,086                             |       | 1,114,680  |       | 1,875,292                                                        | (4)        | 4,556,058        |       |
|                                                                      |       |                                  |       |       |       |                                                             |       |             |       |
| 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  expenditures                                                     |       | 81,070                                |       | 138,946    |       | —                                                           |       | 220,016          |       |
| Depreciation and  amortization                                            |       | 48,720                                |       | 103,596    |       | 32,337                                                           | (3)        | 184,652          |       |
| Identifiable  assets                                                      |       | 1,590,091                             |       | 1,308,174  |       | 2,075,257                                                        | (4)        | 4,973,522        |       |
|                                                                      |       |                                  |       |       |       |                                                             |       |             |       |
| 2006                                                                      |       |                                  |       |       |       |                                                             |       |             |       |
| Net sales                                                                 |       | 1,715,369                             |       | 3,294,160  |       | (333,374                                                         | )(1)       | 4,676,156        |       |
| Income from  operations                                                   |       | 445,843                               |       | 431,546    |       | (121,403                                                         | )(2)       | 755,987          |       |
| Capital  expenditures                                                     |       | 108,117                               |       | 164,063    |       | —                                                           |       | 272,180          |       |
| Depreciation and  amortization                                            |       | 57,331                                |       | 122,403    |       | 41,063                                                           | (3)        | 220,797          |       |
| Identifiable assets                                                       |       | 1,799,292                             |       | 1,343,481  |       | 1,772,252                                                        | (4)        | 4,915,025        |       |

 

----

(1)   Inter-segment elimination ofnet revenues relates to intercompany sales from the manufacturing and wholesalesegment to the retail segment.

(2)  Inter-segment elimination ofoperating income mainly relates to depreciation and amortization of corporateidentifiable assets and profit-in-stock elimination for frames manufactured bythe wholesale business and included in the retail segment inventory.

(3)  Inter-segment elimination ofdepreciation and amortization relates to depreciation and amortization ofcorporate identifiable assets.

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

The geographicsegments include Italy, the main manufacturing and distribution base, UnitedStates and Canada (which includes the United States of America, Canada andCaribbean islands), Asia Pacific (which includes Australia, New Zealand, China,Hong Kong, Japan) and Other (which includes all other geographic locationsincluding Europe (excluding Italy), South and Central America and the MiddleEast). Sales are attributed to geographic segments based on the legal entitydomicile where the sale is originated. Intercompany sales included ininter-segment elimination are accounted for on a cost plus mark-up basis.

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| **(Thousands of Euro)  Year Ended December 31,** | ** ** | **Italy**(6) | ** ** | **United States  and Canada**(6)   | ** ** | **Asia Pacific (6)** | ** ** | **Other(6)** | ** ** | **Adjustments  and  Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------------|------------|--------------|------------|--------------------------------------------------------|------------|---------------------------|------------|--------------|------------|------------------------------------|------------|------------------|------------|
| 2004                                                                      |       |         |       |                                                   |       |                      |       |         |       |                               |       |             |       |
| Net sales (5)                                                             |       | 832,813      |       | 2,007,873                                              |       | 464,905                   |       | 486,630      |       | (612,608                           | )          | 3,179,613        |       |
| Income from  operations                                                   |       | 189,944      |       | 244,582                                                |       | 40,717                    |       | 44,690       |       | (40,434                            | )          | 479,499          |       |
| Long-lived  assets, net                                                   |       | 196,088      |       | 302,557                                                |       | 67,973                    |       | 8,228        |       | —                             |       | 574,846          |       |
| Identifiable assets                                                       |       | 1,086,274    |       | 2,584,916                                              |       | 549,096                   |       | 239,965      |       | 95,807                             |       | 4,556,058        |       |
|                                                                      |       |         |       |                                                   |       |                      |       |         |       |                               |       |             |       |
| 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          |       |
| Identifiable  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      |       | 292,902                                                |       | 13,420                    |       | 79,397       |       | (19,007                            | )          | 755,987          |       |
| Long-lived  assets, net                                                   |       | 280,692      |       | 387,861                                                |       | 110,099                   |       | 8,549        |       | —                             |       | 787,201          |       |
| Identifiable assets                                                       |       | 1,380,758    |       | 2,725,910                                              |       | 752,196                   |       | 388,594      |       | (332,433                           | )          | 4,915,025        |       |

 

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(5)    No single customerrepresents five percent or more of sales in any year presented.

(6)   Sales, income fromoperations and identifiable assets are the result of combination of legalentities located in the same geographic area.

**14.   FINANCIAL INSTRUMENTS**

**Concentration of Credit Risk —**Financialinstruments which potentially expose the Company to concentration of creditrisk consist primarily of cash investments, accounts receivable and a Euro 19.8million note received in connection with the sale of its Things Rememberedspecialty gift business (See Note 4). The Company attempts to limitits credit risk associated with cash equivalents by placing the Company’sinvestments with highly rated banks and financial institutions. With respect toaccounts receivable, the Company limits its credit risk by performing ongoingcredit evaluations. As of December 31, 2005 and 2006, no single customerbalances comprised 10 percent or more of the overall accounts receivablebalance. However, included in accounts receivable as of December 31, 2006, isapproximately Euro 14.0 million 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 Sales under License Agreement —**In the second half of 2003, a license agreement was signed for the productionand distribution of products with the Prada and Miu Miu trade names. The Pradalicense agreement expires in 2013. The sales realized through the Prada and MiuMiu trade names represented approximately 4.4 percent and 5.5 percent of totalsales in 2005 and 2006, respectively.

**Concentration of Supplier Risk —** OakleyInc. is one of the largest suppliers of products to the Company’s RetailDivision. For the 2004, 2005 and 2006 fiscal years, Oakley accounted forapproximately 6.8 percent, 4.9 percent and 5.7 percent of the total merchandisepurchases from suppliers, respectively. In 2006, Oakley Inc. and the Companysigned a 

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new agreement, asthe previous one expired in 2005, establishing commercial terms retroactive toJanuary 1, 2006 through December 31, 2008, substantially consistent with theprevious contract. Management believes that the loss of this vendor would nothave a significant impact on the future operations of the Company as it couldreplace this vendor quickly with others.

As a result of theOPSM and Cole acquisitions, Essilor S.A. has become one of the largest suppliersto the Company’s Retail Division. For the 2004, 2005 and 2006 fiscal years,Essilor S.A. accounted for approximately 9.9 percent, 10.0 percent, and 15.0percent of the Company’s total merchandise purchases, respectively. The Companyhas not signed any specific purchase contract with Essilor. Management believesthat the loss of this vendor would not have a significant impact on the futureoperations of the Company as it could replace this vendor quickly with otherthird-party suppliers.

**15.       COMMITMENTS AND CONTINGENCIES**

**Royalty Agreements —**The Companyis obligated under non-cancellable distribution agreements with designers,which expire at various dates through 2015. In accordance with the provisionsof such agreements, the Company is required to pay royalties and advertisingfees based on a percentage of sales (as defined) with, in certain agreements,minimum guaranteed payments in each year of the agreements. In June 2004, theCompany signed a new licensing agreement for the design, production and worldwidedistribution of Donna Karan and DKNY prescription frames and sunglasses. Theinitial term of the agreement is five years, which began on January 1, 2005 andis renewable for an additional five years. In October 2004, the Company signeda new licensing agreement for the design, production and worldwide distributionof Dolce & Gabbana and D&G prescription frames and sunglasses. Theinitial term of the agreement is five years, which began on January 1, 2006,with an automatically renewable extension for an additional five years uponmeeting certain targets. On October 7, 2005, the Company announced the signingof 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 announcedthat it 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 commences on January 1, 2007. Based on theagreement, the Company provided for an advance payment on royalties to RalphLauren on January 2007 for a total amount of U.S.$199 million. In December 2006, the Company announced thesigning of a 10-year license agreement for the design, manufacturing andworldwide distribution of exclusive ophthalmic and sun collections under theTiffany & Co. name. The launch of the first collection is expected forearly 2008. The distribution of Tiffany’s collections will start with Tiffany’sown stores as well as in North America, Japan, Hong Kong, South Korea, keyMiddle East markets and Mexico and will extend over time to additional marketsand through new distribution channels.

Minimum paymentsrequired in each of the years subsequent to December 31, 2006 are detailed asfollows (thousands of Euro):
| **Year Ending December 31,** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
| 2007                                        |       | 73,002     |       |
| 2008                                        |       | 81,291     |       |
| 2009                                        |       | 75,643     |       |
| 2010                                        |       | 66,561     |       |
| 2011                                        |       | 46,308     |       |
| Thereafter                                  |       | 216,513    |       |
| Total                                       |       | 559,318    |       |

 

Total royaltiesand related advertising expenses for the years ended December 31, 2004, 2005and 2006 aggregated Euro 83.0 million, Euro 121.2 million and Euro 184.1million, respectively.

Total payments forroyalties and related advertising expenses for the years ended December 31,2004, 2005 and 2006 aggregated Euro 68.5 million, Euro 119.8 million and Euro225.1 million, respectively.

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**Leases and Licenses —**The Companyleases 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 and license arrangementsfor the 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.

Total rentalexpense under operating leases for each year ended December 31 is as follows(thousands of Euro):
| **Thousands of Euro** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                            |       |     |       |     |       |     |       |
| Minimum rent                    |       | 208,134  |       | 224,913  |       | 236,546  |       |
| Contingent rent                 |       | 15,051   |       | 57,776   |       | 64,091   |       |
| Sublease income                 |       | (49,247  | )          | (27,645  | )          | (35,955  | )          |
|                            |       |     |       |     |       |     |       |
|                            |       | 173,938  |       | 255,044  |       | 264,682  |       |

 

Future minimumannual rental commitments for operating leases are as follows (thousands ofEuro):
| **Years Ending December 31,** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2007                                         |       | 195,490    |       |
| 2008                                         |       | 172,421    |       |
| 2009                                         |       | 139,002    |       |
| 2010                                         |       | 107,300    |       |
| 2011                                         |       | 80,559     |       |
| Thereafter                                   |       | 220,664    |       |
| Total                                        |       | 915,436    |       |

 

**Guarantees—**The UnitedStates Shoe Corporation, a wholly owned subsidiary of the Company, remainscontingently liable on seven store leases in the United Kingdom. These leaseswere previously transferred to third parties. The third parties have assumedall future 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, 2006, the maximum amountfor which the Company’s subsidiary is contingently liable is Euro 9.6 million.

Cole hasguaranteed future minimum lease payments for certain store locations leaseddirectly by franchisees.  Theseguarantees aggregated approximately Euro 4.3 million at December 31, 2006.  Performance under a guarantee by the Companyis triggered by default of a franchisee on its lease commitment. Generally,these guarantees also extend to payments of taxes and other expenses payableunder the leases, the amounts of which are not readily quantifiable.  The terms of these guarantees range from oneto ten years. Many are limited to periods less than the full term of the leaseinvolved.  Under the terms of theguarantees, Cole has the right to assume the primary obligation and beginoperating the store.  In addition, aspart of the franchise agreements, Cole may recover any amounts paid under theguarantee from the defaulting franchisee. The Company has accrued a liability at December 31, 2005 for theestimates of the fair value of the Company’s obligations from guaranteesentered into or modified after December 31, 2002, using an expected presentvalue calculation. Such amount, determined according to FIN 45, is immaterialto the consolidated financial statements as of December 31, 2005 and 2006.

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**Credit Facilities —**As ofDecember 31, 2005 and 2006 Luxottica Group had unused short-term lines ofcredit of approximately Euro 457.2 million and Euro 581.1 million,respectively.

The Company andits wholly-owned Italian subsidiary Luxottica S.r.l. maintain unsecured linesof credit with primary banks for an aggregate maximum credit of Euro 543.2million. These lines of credit are renewable annually, can be cancelled atshort notice and have no commitment fees. At December 31, 2006, these creditlines were utilized for Euro 68.0 million.

US Holdingsmaintains four unsecured lines of credit with four separate banks for anaggregate maximum credit of Euro 98.5 million (U.S.$130.0 million). These linesof credit are renewable annually, can be cancelled at short notice and have nocommitment fees. At December 31, 2006, there were no borrowings outstanding andthere were Euro 29.0 million in aggregate face amount of standby letters ofcredit outstanding under these lines of credit (see below).

The blendedaverage interest rate on these lines of credit is approximately LIBOR plus 0.25percent.

**OutstandingStandby Letters of Credit —**A U.S. subsidiary has obtainedvarious standby letters of credit from banks that aggregated Euro 48.0 millionand Euro 36.1 million as of December 31, 2005 and 2006, respectively. Most ofthese letters of credit are used for security in risk management contracts oras security on store leases. Most contain evergreen clauses under which theletter is automatically renewed unless the bank is notified not to renew.Substantially all the fees associated with maintaining the letters of creditfall within the range of 60 to 80 basis points annually.

**Litigation -**

*Sunglass Hut Shareholder Lawsuit*

In May and June 2001, certain former stockholders of Sunglass HutInternational, Inc. (“SGHI”) commenced actions in the U.S. District Court forthe Eastern District of New York against the Company and its acquisitionsubsidiary formed to acquire SGHI on behalf of a purported class of former SGHIstockholders.  These actions weresubsequently consolidated into a single amended consolidated class actioncomplaint, which alleged, among other claims, that the defendants violatedcertain provisions of U.S. securities laws and the rules thereunder, inconnection with the acquisition of SGHI in a tender offer and second-stepmerger.  The plaintiffs’ principal claimwas that certain payments to James Hauslein, the former Chairman of SGHI, undera consulting, non-disclosure and non-competition agreement (the “Agreement”)violated the “Best Price Rule” promulgated by the U.S. Securities and ExchangeCommission by resulting in a payment for Mr. Hauslein’s SGHI shares and hissupport of the tender offer that was higher than the price paid to SGHI’sshareholders in the tender offer.  Theplaintiffs also alleged that the Company and Mr. Leonardo Del Vecchio, theCompany’s Chairman, violated Section 10(b) of the Securities Exchange Act of1934 and Rule 10b-5 promulgated thereunder. The plaintiffs sought, among other remedies, the payment of such higherconsideration to all tendering shareholders, other than Luxottica Group S.p.A.and its affiliates.

The Company and the other defendants filed a motion to dismiss thecomplaint in its entirety, which, on November 26, 2003, the Court granted inpart and denied in part.  The Courtgranted the Company’s motion to dismiss plaintiffs’ claims under Section 10(b)and Rule 10b-5, but denied the Company’s motion to dismiss plaintiffs’ BestPrice Rule claim, as well as the claim that the Company aided and abetted Mr.Hauslein’s breach of his fiduciary duties. In so ruling, the Court noted that it was obligated, for the purpose ofrendering its decision on the motion to dismiss, to treat all of the plaintiffs’allegations in the complaint as true.  OnJune 8, 2004, the consolidated complaint was further amended to add Mr.Leonardo Del Vecchio, the Company’s Chairman, as a defendant to the aiding andabetting claim.  Plaintiffs also added anew claim against Mr. Del Vecchio under Section 20(a) of the SecuritiesExchange Act.

On August 31, 2005, the Company agreed with the plaintiffs, withoutacknowledging any wrongdoing, to a full and final settlement and release (the “Settlement”)of all claims against the Company, its acquisition subsidiary and Mr. DelVecchio. The Settlement, which called for a payment of Euro 11.6 million (or U.S.$14.5million), was included in 2005 operations on our consolidated financialstatements and has been 

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approved by the Court and fully implemented by the parties, with finaljudgment entered dismissing the case with prejudice. Costs associated with theSGHI litigation incurred for the years ended December 31, 2004 and 2005 wereapproximately Euro 3.2 million and Euro 5.8 million, respectively.

*California Vision Health Care Service Plan Lawsuit*

In March 2002, in *Snow v. LensCrafters, Inc.et al.* (Case. No. CGC-02-405544), an individual commenced an actionin the California Superior Court for the County of San Francisco againstLuxottica Group S.p.A. and certain of its subsidiaries, including LensCrafters,Inc. and EYEXAM of California, Inc.  Theplaintiff, along with a second plaintiff named in an amended complaint, seeksto certify this case as a class action. The claims have been partiallydismissed. The remaining claims, against LensCrafters and EYEXAM, allegevarious statutory violations relating to the confidentiality of medicalinformation and the operation of LensCrafters’ stores in California, includingviolations of California laws governing relationships among opticians, opticalretailers, manufacturers of frames and lenses and optometrists, and otherunlawful or unfair business practices. The action seeks unspecified damages,statutory damages of U.S.$1,000 per class member, disgorgement, restitution ofallegedly unjustly obtained sums, punitive damages and injunctive relief,including an injunction that would prohibit defendants from providing eyeexaminations or other optometric services at LensCrafters stores in California.

The ultimate outcomes of two other disputes pending inother California courts are expected to have an impact on the outcome of the *Snow* case. First, on June 12, 2006, the California SupremeCourt decided *People v. Cole*, a case involvingCole and its subsidiaries (discussed below). The Supreme Court held that optical stores must comply with variousbusiness practice restrictions on their relationships with optometrists, includingoptometrists employed by Knox-Keene plans, such as EYEXAM and PearleVisionCare.  The matter has been sentback to the trial court for further proceedings to determine if, in fact,Pearle Vision’s operations in California comply with those restrictions.

Second, on December 6, 2006, the United States District Court for theEastern District of California decided *NAOO v. Lockyer*.  In that case, LensCrafters had challenged theCalifornia regulatory scheme governing relationships between optical retailersand optometrists under which LensCrafters and EYEXAM had been sued.  The district court found that statutoryscheme to be unconstitutional under the “commerce clause” of the United StatesConstitution. The Attorney General of the State of California has sinceappealed that decision, which, if ultimately upheld, should increase thelikelihood of favorable outcomes for the Company in both the *Snow* case and *People v. Cole*litigation.

Although we believe that our operational practices and advertising inCalifornia comply with California law, an adverse decision in *Snow* or in the suit against Cole might cause LensCraftersand EYEXAM to modify or cease their activities in California. In addition,LensCrafters and EYEXAM might be required to pay damages and/or restitution,the amount of which might have a material adverse effect on the Company’sconsolidated financial statements.  Costsassociated with the *Snow* litigationincurred for the years ended December 31, 2004, 2005 and 2006, wereapproximately Euro 0.7 million, Euro 0.3 million, and Euro 0.7 million,respectively.

Therewere no related amounts recorded as liabilities reflected in the consolidatedbalance sheets as of December 31, 2005 and 2006, as the liability was notreasonably estimable and probable.

*People v. Cole*

In February 2002, the State of California commenced anaction in the California Superior Court for the County of San Diego againstCole and certain of its subsidiaries, including Pearle Vision, Inc. and PearleVision Care, Inc. The claims allege various statutory violations related to theoperation of Pearle Vision Centers in California, including violations ofCalifornia laws governing relationships among opticians, optical retailers,manufacturers of frames and lenses and optometrists, false advertising andother unlawful or unfair business practices. The action seeks unspecifiedrestitution of allegedly unjustly obtained sums, civil penalties and injunctiverelief, including an injunction that would prohibit defendants from providingeye examinations or other optometric services at Pearle Vision Centers inCalifornia. In July 2002, the trial court entered a preliminary injunction toenjoin defendants from certain business and advertising practices. Both Coleand the State of California appealed that decision. On November 26, 2003,the appellate court issued an opinion in which it stated that, becauseCalifornia law prohibited defendants from providing eye examinations and otheroptometric services at Pearle Vision Centers, the trial court should haveenjoined 

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defendants from advertising the availability of eye examinations atPearle Vision Centers. However, the appellate court ruled in Cole’s favor withrespect to charging dilation fees, which ruling partially lifted thepreliminary injunction with respect to these fees that had been imposed in July2002. On March 3, 2004, the California Supreme Court granted Cole’s petitionfor review of the portion of the appellate court’s decision stating thatCalifornia law prohibited defendants from providing eye examinations and otheroptometric services at Pearle Vision Centers. The appellate court’s decisiondirecting the trial court to enjoin defendants from advertising theseactivities was stayed pending the Court’s resolution of the issue. A finaldecision was rendered on June 12, 2006, which upheld the appellate court’sNovember 26, 2003 decision and remanded the case to the lower court for furtherproceedings. Although we believe that Cole’s operational practices andadvertising in California comply with California law, Cole and its subsidiariesmay be compelled to modify or cease their activities in California. Inaddition, Cole and its subsidiaries might be required to pay civil penalties,and/or restitution, the amount of which might have a material adverse effect onthe Company’s consolidated financial statements. As with the other Californialitigation, the ultimate outcome of this case may depend upon whether thefederal district court’s ruling on the unconstitutionality of the Californialaw itself in *NAOO v. Lockyer* is upheld onappeal. Costs associated with the *People v.Cole* litigation incurred for the years ended December 31, 2004, 2005and 2006, were approximately Euro 0.2 million, Euro 0.3 million and Euro 0.5million, respectively. There were norelated amounts recorded as liabilities reflected in the consolidated balancesheets as of December 31, 2005 and 2006, as the liability was not reasonablyestimable and probable.

*Cole Consumer Class Action Lawsuit*

In June 2006, in *Seiken v. Pearle Vision,Inc. et al. (Case No. GIC 867529*), Cole and its subsidiaries weresued by a consumer in a purported class action which alleges various statutoryviolations related to the operation of Pearle Vision and its affiliated HMO,Pearle VisionCare in California. The claims and remedies sought are similar tothose asserted in the LensCrafters and EYEXAM case. In December 2006, the courtgranted defendants’ motion to dismiss the complaint but allowed plaintiff anopportunity to replead.  Defendants movedto dismiss the amended complaint in February 2007, and a hearing on the motionwas held in March 2007. Such motion to dismiss was denied. Although we believethat our operational practices in California comply with California law, anadverse decision in this action might cause Pearle Vision or Pearle VisionCareto modify or cease their activities in California. In addition, the Colesubsidiaries might be required to pay damages and/or restitution, the amount ofwhich might have a material adverse effect on the Company’s consolidatedfinancial statements.  Costs associatedwith this Cole class action litigation incurred for the year ended December 31,2006 were approximately Euro 0.1 million. There were no related amounts recorded as liabilities reflected in theconsolidated balance sheet as of December 31, 2006, as the liability was notreasonably estimable and probable.

*Cole SEC Investigation*

Following Cole’s announcement in November 2002 of the restatement ofCole’s financial statements, the Securities and Exchange Commission (“SEC”)began an investigation into Cole’s previous accounting.  The SEC subpoenaed various documents fromCole and deposed numerous former officers, directors and employees ofCole.  During the course of thisinvestigation, the SEC staff had indicated that it intended to recommend that acivil enforcement action be commenced against certain former officers anddirectors of Cole but not against Cole. Cole was obligated to advance reasonable attorneys’ fees incurred bycurrent and former officers and directors who were involved in the SECinvestigation subject to undertakings provided by such individuals.  Cole had insurance available with respect toa portion of these indemnification obligations. In March 2006, the SEC staff indicated that it had concluded itsinvestigation and that, contrary to its earlier indication, it would not berecommending that an enforcement action be commenced against anyone inconnection with the investigation. Costs associated with the Cole SECinvestigation incurred for the years ended December 31, 2004, 2005 and 2006,were approximately Euro 0.1 million, Euro 1.2 million and Euro 0.3 million,respectively.  There were no related amounts recorded asliabilities reflected in the consolidated balance sheets as of December 31,2004 and 2005, as the liability was not reasonably estimable and probable.

*Ray Ban Indian Holdings Review by Supreme Court ofIndia*

On August 29,2003, the Securities Appellate Tribunal (“SAT”) in India upheld the decision torequire a subsidiary of the Company to make a public offering to acquire up toan additional 20% of the outstanding shares of RayBan Sun Optics India Ltd. OnOctober 30, 2003, the Company announced that it intended to comply with the SAT’sdecision and that the Company, through its subsidiary, Ray Ban Indian Holdings,Inc., 

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would launch apublic offer to purchase an additional 20% of the outstanding shares of RayBanSun Optics India Ltd. In accordance with applicable Indian regulation, theCompany placed in escrow with the manager of the offer Rs. 226 million(Euro 3.8 million). On November 17, 2003, the Supreme Court of Indiastayed the SAT’s order and directed that the matter be further reviewed at theend of January 2004, provided that the Company issue a letter of credit infavor of the Indian securities regulatory agency within the following four weekperiod of Rs. 630.6 million (Euro 10.8 million). The Supreme Court ofIndia finally disposed of the appeal by an order dated December 12, 2006, directingthe Company and Ray Ban Indian Holdings, Inc. to make a public offer within 45days of the order, using April 28, 1999 as the reference date for calculatingthe offer price. The Supreme Court also directed that interest be paid at therate of 10% per annum for the period between August 27, 1999 and the closingdate to all persons who were shareholders of RayBan Sun Optics India Ltd.throughout such period.  On April 25,2007, pursuant to the December 12, 2006 Supreme Court order, and in compliancewith Regulations 10 and 12 of Chapter III of the SEBI Regulations 1997, we launcheda public offer through our subsidiary, Ray Ban Indian Holdings, Inc., toacquire up to 4,895,900 shares, representing approximately 20 percent of theequity share capital of RayBan Sun Optics India Ltd., which we subsequentlyincreased to up to 7,545,200 shares, representing approximately 31 percent ofequity share capital. 6,454,280 shares were tendered in the offer, which closedon May 14, 2007. Effective upon the share transfers entry in the share registeron June 26, 2007, our stake in Ray Ban Sun Optics India Ltd. increased to 70.5percent. We paid total consideration of approximately Euro 13.0 million for thetendered shares. Costs associated with the Supreme Court of India reviewincurred for the years ended December 31, 2006 and 2005 were immaterial.

*ColeShareholder Class Action Lawsuit*

On July 14, 2004, in *Pfeiffer vs. Cole NationalCorp., et al.*, Civil Action No. 569-N, a shareholder of Colefiled a shareholders’ class action complaint against Cole, its directors andthe Company in the Delaware Chancery Court. The complaint alleged, among otherthings, that the individual defendants breached their fiduciary duties asdirectors and/or officers of Cole by causing Cole to enter into an agreement tobe acquired by the Company for U.S.$22.50 per share “without having exposed thecompany to the marketplace through fair and open negotiations with allpotential bidders and/or an active market check or open auction for sale of thecompany.” The complaint sought preliminary and permanent injunctive reliefagainst the merger, rescission of the merger if it were consummated, and/ordamages and other associated relief. This action was voluntarily dismissed bythe plaintiff on January 18, 2006 and is no longer pending.  Costs associated with this Cole class actionlitigation incurred for the years ended December 31, 2004 and 2005 wereapproximately Euro 0.1 million and Euro 27,000, respectively, and there were nosuch costs incurred for the year ended December 31, 2006. There were no related amounts recorded asliabilities reflected in the consolidated balance sheets as of December 31,2004 and 2005, as the liability was not reasonably estimable and probable.

With respect to the matters specifically disclosed above whichmanagement has indicated could result in a material adverse impact on theCompany’s consolidated financial statements, management believes, based in parton advice from counsel, that no estimate of the range of possible losses can bemade at this time.

The Company is adefendant in various other lawsuits arising in the ordinary course of business.It is the opinion of the management of the Company that it has meritoriousdefenses against all such outstanding claims, which the Company will vigorouslypursue, and that the outcome of such claims, individually or in the aggregate,will not have a material adverse effect on the Company’s consolidated financialposition or results of operations.

**16.    SUBSEQUENT EVENTS**

In February 2007,the Company exercised an option included in the amendment to the term andrevolving credit facility disclosed in Note 8 (d) to extend the maturity dateof Tranches B and C to March 2012.

*  * *  *  *

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**Luxottica Group S.p.A. and Subsidiaries****Schedule II****VALUATION AND QUALIFYING ACCOUNTS**

**ALLOWANCE FOR DOUBTFUL ACCOUNTS****(Amounts expressed in thousands of Euro)**
| **Year ended  December 31,** | ** ** | ** ** | ** ** | **Balance at  beginning of  period** | ** ** | **Charged  to costs  and expenses** | ** ** | **Other(1)** | ** ** | **Deductions** | ** ** | **Balance  at end  of period** | ** ** |
|----------------------------------------|------------|------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|--------------|------------|----------------|------------|------------------------------------------|------------|
| 2004                                   |       | 21,492     |       | 4,851                                          |       | 5,598                                         |       | (8,534       | )          | 23,407         |       |
| 2005                                   |       | 23,407     |       | 7,027                                          |       | 2,215                                         |       | (5,095       | )          | 27,554         |       |
| 2006                                   |       | 27,554     |       | 2,198                                          |       | 99                                            |       | (7,160       | )          | 22,691         |       |

 

**ALLOWANCE FOR INVENTORY RESERVE ACCOUNTS****(Amounts expressed in  thousands of Euro)**
| **Year ended  December 31,** | ** ** | ** ** | ** ** | **Balance at  beginning of  period** | ** ** | **Charged  to costs  and expenses** | ** ** | **Other(2)** | ** ** | **Deductions** | ** ** | **Balance  at end  of period** | ** ** |
|----------------------------------------|------------|------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|--------------|------------|----------------|------------|------------------------------------------|------------|
| 2004                                   |       | 37,943     |       | 34,766                                         |       | (1,021                                        | )          | (27,913      | )          | 43,775         |       |
| 2005                                   |       | 43,775     |       | 40,000                                         |       | 2,500                                         |       | (27,170      | )          | 59,105         |       |
| 2006                                   |       | 59,105     |       | 24,357                                         |       | 1,335                                         |       | (42,437      | )          | 42,360         |       |

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(1)             Otherincludes the beginning amount relating to the acquired balances of ColeNational in 2004 as well as translation differences of the period.

(2)             Otherincludes translation differences of the period.

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**ITEM 19.EXHIBITS**

*Exhibits.*The following documents are filed as exhibits herewith,unless otherwise specified and incorporated herein by reference:
| Exhibit  Number | ** ** | **Exhibits**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.1             |       | Articles of Association of Luxottica  Group S.p.A. (incorporated 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 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             |       | Agreement and Plan of Merger, dated as of  February 22, 2001, by and among Luxottica Group S.p.A., Shade  Acquisition Corp. and Sunglass Hut International, Inc. (incorporated  herein by reference to our Report on Form 6-K, dated  March 23, 2001, as filed with the Commission on April 18, 2001).                                                                                                                                                                                                                                                                                                        |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.2             |       | Agreement and Plan of Merger, dated as of  January 23, 2004, by and between Luxottica Group S.p.A., Colorado  Acquisition Corp. and Cole National Corporation (incorporated herein by  reference to our Report on Form 6-K, dated January 23, 2004,  as filed with the Commission on January 30, 2004).                                                                                                                                                                                                                                                                                                            |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.3             |       | Amendment No. 1 to Agreement and Plan of  Merger, dated as of June 2, 2004, by and between Luxottica  Group S.p.A., Colorado Acquisition Corp. and Cole National Corporation  (incorporated herein by reference to our Report on Form 6-K for  the quarter ended March 31, 2004, as filed with the Commission on  June 14, 2004).                                                                                                                                                                                                                                                                             |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.4             |       | Luxottica Group S.p.A. 1998 Stock Option Plan  (incorporated herein by reference to our Form S-8, dated  October 20, 1998, as filed with the Commission on October 23,  1998).                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.5             |       | Luxottica Group S.p.A. 2001 Stock Option Plan  (incorporated herein by reference to our Form S-8 (file  no. 333-14006), as filed with the Commission on October 15, 2001).                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

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| Exhibit  Number | ** ** | **Exhibits**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.6             |       | Credit Agreement, dated June 13, 2002, among  Luxottica U.S. Holdings Corp., Luxottica Group S.p.A.,  UBM-Unicredit Banca Mobiliare S.p.A., UniCredito Italiano S.p.A.,  Banca Monte Dei Paschi Di Siena S.p.A., Banca Nazionale del  Lavoro S.p.A. and San Paolo IMI S.p.A. (incorporated herein by  reference to our Report on Form 6-K for the quarter ended  March 31, 2002, as filed with the Commission on July 15, 2002)  (Unofficial English translation filed therewith).                                                                                                                                                                                                                                                                       |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.7             |       | Credit Agreement, dated as of December 11,  2002, between Luxottica Group S.p.A. and Banca Intesa S.p.A., as  arranger for other financial institutions (Unofficial English summary  incorporated herein by reference to our Report on Form 20-F for  the year ended December 31, 2002, as filed with the Commission on  June 30, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.8             |       | Form of Note Purchase Agreement, dated as of  September 3, 2003, by and between Luxottica U.S. Holdings Corp. and  each of the Purchasers listed in Schedule A attached thereto  (incorporated 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).                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.9             |       | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.10            |       | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.11            |       | Amended and Restated Facilities Agreement, dated  June 3, 2004, for Luxottica Group S.p.A. and Luxottica  U.S. Holdings Corp. arranged by ABN AMRO Bank N.V., Banca  Intesa S.p.A., Banc of America Securities Limited, Citigroup Global  Markets Limited, HSBC Bank plc, Mediobanca—Banca di Credito Finanziario S.p.A.,  The Royal Bank of Scotland plc, Calyon S.A., Succursale di Milano, Calyon New  York Branch, Capitalia S.p.A. and UniCredit Banca Mobiliare S.p.A. with  UniCredito Italiano S.p.A., New York branch, and Unicredit Banca  d’Impresa S.p.A., acting as Agents (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). |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.12            |       | Amendment Agreement, dated March 10, 2006, for  Luxottica Group S.p.A. and Luxottica U.S. Holdings Corp. arranged  by ABN AMRO Bank N.V., Banca Intesa S.p.A., Banc of America  Securities Limited, Citigroup Global Markets Limited, HSBC Bank plc,  Mediobanca—Banca di Credito Finanziario S.p.A., The Royal Bank of  Scotland plc, Calyon S.A., Succursale di Milano, Calyon New York Branch,  Capitalia S.p.A. and UniCredit Banca Mobiliare S.p.A. with UniCredito  Italiano S.p.A., New York branch, and Unicredit Banca  d’Impresa S.p.A., acting as Agents (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).                     |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.13            |       | Amendment No. 2 to Agreement and Plan of  Merger, dated as of July 14, 2004, by and between Luxottica Group  S.p.A., Colorado Acquisition Corp. and Cole National Corporation (incorporated  herein by reference to our report on Form 6-K, dated July 14,  2004, as filed with the Commission on July 16, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.14            |       | Luxottica Group S.p.A. 2006 Stock Option Plan  (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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.15            |       | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.16            |       | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 8.1             |       | List of Subsidiaries (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

 

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| 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).                                                       |

 

 

----

**SIGNATURES**

Theregistrant hereby certifies that it meets all of the requirements for filing onForm 20-F and that it has duly caused and authorized the undersignedto sign this annual report on its behalf.
|        | LUXOTTICA GROUP S.p.A.  (Registrant) |
|--------|--------------------------------------|
|   |                                 |   |   |
|   | By:                                  | /s/ Andrea  Guerra |
|   |                                 | Andrea Guerra  Chief Executive Officer |

 

Dated: June 29,2007

----

**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             |       | Agreement and Plan of Merger, dated as of  February 22, 2001, by and among Luxottica Group S.p.A., Shade  Acquisition Corp. and Sunglass Hut International, Inc. (incorporated herein  by reference to our Report on Form 6-K, dated March 23, 2001,  as filed with the Commission on April 18, 2001).                                                                                                                                                                                                                                                                                                        |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.2             |       | Agreement and Plan of Merger, dated as of  January 23, 2004, by and between Luxottica Group S.p.A., Colorado  Acquisition Corp. and Cole National Corporation (incorporated herein by  reference to our Report on Form 6-K, dated January 23, 2004,  as filed with the Commission on January 30, 2004).                                                                                                                                                                                                                                                                                                            |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.3             |       | Amendment No. 1 to Agreement and Plan of  Merger, dated as of June 2, 2004, by and between Luxottica  Group S.p.A., Colorado Acquisition Corp. and Cole National Corporation  (incorporated herein by reference to our Report on Form 6-K for  the quarter ended March 31, 2004, as filed with the Commission on  June 14, 2004).                                                                                                                                                                                                                                                                             |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.4             |       | Luxottica Group S.p.A. 1998 Stock Option Plan  (incorporated herein by reference to our Form S-8, dated  October 20, 1998, as filed with the Commission on October 23,  1998).                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.5             |       | Luxottica Group S.p.A. 2001 Stock Option Plan  (incorporated herein by reference to our Form S-8 (file  no. 333-14006), as filed with the Commission on October 15,  2001).                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.6             |       | Credit Agreement, dated June 13, 2002, among  Luxottica U.S. Holdings Corp., Luxottica Group S.p.A.,  UBM-Unicredit Banca Mobiliare S.p.A., UniCredito Italiano S.p.A.,  Banca Monte Dei Paschi Di Siena S.p.A., Banca Nazionale del  Lavoro S.p.A. and San Paolo IMI S.p.A. (incorporated by reference  to our Report on Form 6-K for the quarter ended March 31,  2002, as filed with the Commission on July 15, 2002) (Unofficial English  translation filed therewith).                                                                                                     |

 

----

 
| Exhibit Number | ** ** | **Exhibits**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.7            |       | Credit Agreement, dated as of December 11,  2002, between Luxottica Group S.p.A. and Banca Intesa S.p.A., as  arranger for other financial institutions (Unofficial English summary  incorporated herein by reference to our Report on Form 20-F for  the year ended December 31, 2002, as filed with the Commission on  June 30, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.8            |       | Form of Note Purchase Agreement, dated as of  September 3, 2003, by and between Luxottica U.S. Holdings Corp. and  each of the Purchasers listed in Schedule A attached thereto  (incorporated 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).                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.9            |       | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.10           |       | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.11           |       | Amended and Restated Facilities Agreement, dated  June 3, 2004, for Luxottica Group S.p.A. and Luxottica  U.S. Holdings Corp. arranged by ABN AMRO Bank N.V., Banca  Intesa S.p.A., Banc of America Securities Limited, Citigroup Global  Markets Limited, HSBC Bank plc, Mediobanca—Banca di Credito  Finanziario S.p.A., The Royal Bank of Scotland plc, Calyon S.A.,  Succursale di Milano, Calyon New York Branch, Capitalia S.p.A. and UniCredit  Banca Mobiliare S.p.A. with UniCredito Italiano S.p.A.,  New York branch, and Unicredit Banca D’Impresa S.p.A., acting as  Agents (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). |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.12           |       | Amendment Agreement, dated March 10, 2006, for  Luxottica Group S.p.A. and Luxottica U.S. Holdings Corp. arranged  by ABN AMRO Bank N.V., Banca Intesa S.p.A., Banc of America  Securities Limited, Citigroup Global Markets Limited, HSBC Bank plc,  Mediobanca—Banca di Credito Finanziario S.p.A., The Royal Bank of  Scotland plc, Calyon S.A., Succursale di Milano, Calyon New York Branch,  Capitalia S.p.A. and UniCredit Banca Mobiliare S.p.A. with UniCredito  Italiano S.p.A., New York branch, and Unicredit Banca  D’Impresa S.p.A., acting as Agents (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).                      |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.13           |       | Amendment No. 2 to Agreement and Plan of  Merger, dated as of July 14, 2004, by and between Luxottica Group  S.p.A., Colorado Acquisition Corp. and Cole National Corporation  (incorporated herein by reference to our report on Form 6-K, dated  July 14, 2004, as filed with the Commission on July 16, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.14           |       | Luxottica Group S.p.A. 2006 Stock Option Plan  (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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.15           |       | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.16           |       | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

 

----