Luxottica Group, S.p.A. (LUX)

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

Net Sales. Net sales decreased 10.9 percent to Euro 2,852.2 million during 2003 as compared to Euro 3,201.8 million for 2002. This net decrease was primarily due to the weakening of the U.S. dollar against the Euro.

Net sales in the retail segment, through LensCrafters, Sunglass Hut and OPSM, decreased 9.0  percent to Euro 2,028.2 million for 2003 from Euro 2,227.7 million for 2002. This decrease was primarily due to the weakening of the U.S. dollar against the Euro.

Net sales to third parties in the manufacturing and wholesale segment decreased 15.4 percent to Euro 824.0 million in 2003 as compared to Euro 974.1 million in 2002. Net sales in this segment is affected by exchange rates, but not the 53rd week or the acquisition of OPSM, which apply only to our retail segment. Assuming constant exchange rates, wholesale sales to third parties in 2003 would have decreased by 10.4 percent as compared to 2002. This decline was primarily attributable to the reduction by almost 80 percent of Armani sales during the year following the termination of our license agreements with Armani.

On a geographic basis, our operations in North America had net sales, as adjusted to eliminate intercompany sales, of Euro 1,949.7 million during 2003, comprising 68.4 percent of total net sales, a decrease of Euro 396.1 million from 2002. This decrease was substantially due to the weakening of the U.S. dollar against the Euro. In U.S. dollars, net sales from our operations in North America decreased by U.S. $12.3 million as compared to 2002. Net sales for the remaining markets, as adjusted to eliminate intercompany sales, accounted for the remaining Euro 902.5 million of net sales during 2003, which represented a 5.4 percent increase as compared to 2002. This increase was due to the inclusion of OPSM sales for the five-month period following the acquisition in 2003, partially offset by the decrease in Armani sales following the termination of our license agreements with Armani.

Cost of Sales. Cost of sales decreased 4.5 percent to Euro 903.6 million in 2003, from Euro 946.1 million in 2002, and increased as a percentage of net sales to 31.7 percent from 29.6 percent, respectively. Manufacturing labor costs decreased 7.8 percent to Euro 240.9 million in 2003 from Euro 261.2 million in 2002. As a percentage of net sales, cost of labor increased to 8.4 percent in 2003 from 8.2 percent in 2002. The increase in cost of sales, including manufacturing labor costs, as a percentage of net sales, was mainly attributable to the currency translation of our unit sales, denominated in U.S. dollars, to Euro, such that the weakening of the U.S. dollar against the Euro increased our average cost of sales with respect to our unit sales denominated in U.S. dollars. For 2003, the average number of frames produced daily in Luxottica’s facilities (including Tristar and that of the newly acquired IC Optics) was approximately 123,000 as compared to 131,000 for 2002.

Gross Profit. For the reasons outlined above, gross profit decreased 13.6 percent to Euro 1,948.6 million in 2003 from Euro 2,255.7 million in 2002. As a percentage of net sales, gross profit decreased to 68.3 percent in 2003 from 70.4 percent in 2002.

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

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

General and administrative expenses, including intangible asset amortization, decreased 4.3 percent to Euro 281.0 million 2003 from Euro 293.8 million in 2002. As a percentage of net sales, general and administrative expenses increased to 9.9 percent in 2003 from 9.2 percent in 2002. While the reduction in general and administrative expenses is primarily due to the weakening of the U.S. dollar against the Euro, the increase as a percentage of net sales is mainly due to the greater percentage of fixed costs to total costs in the manufacturing and wholesale distribution segment, due to the reduction in sales.

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