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Benetton Group

Annual Report 2007

Benetton Group S.p.A. Villa Minelli Ponzano Veneto (Treviso) - Italy Share capital: Euro 237,482,715.60 fully paid-in Tax ID/Treviso Company register: 00193320264

The Benetton Group

Directors and other officers Group structure at December 31, 2007 Notice of Ordinary General Meeting Letter to the shareholders Disclaimer Key financial data - highlights Brands Markets Financial communication Benetton on the stock market Financial calendar www.benettongroup.com/investors Contents Glossary 1. Issuer profile 2. Information on ownership structure (pursuant to art. 123 bis TUF) as of 03.19.2008 3. Compliance Consolidated statement of income Consolidated balance sheet - Assets Consolidated balance sheet - Shareholders equity and liabilities Shareholders equity - Statement of changes Statement of gains/(losses) recognized directly in shareholders equity

5 6 8 11 12 12 15 17 18 19 20 21 46 48 49 51 54 81 82 83 84 86

Directors report

15

Corporate Governance report

45

Consolidated financial statements

81

Explanatory notes

89

Summary of main accounting standards and policies Financial risk management Comments on the principal items in the statement of income Comments on the principal asset items Comments on the principal items in shareholders equity and liabilities

89 101 108 120 134

Certification of the consolidated financial statements Auditors report

159 161

Supplementary schedules

163

Glossary

169

4. 5. 6. 7. 8. 9.

Supplementary information Corporate Governance report Benetton shares and shareholders Stock option plan Controlling interest
Relations with the holding company, its subsidiaries and other related parties

22 22 22 22 23 23 55 55 62 63 64 64 87

Compliance with personal data protection laws Principal organizational and corporate changes Significant events after December 31, 2007 Outlook for 2008 Consolidated Group results - Consolidated statement of income 10. Remuneration of Directors 11. Internal audit Committee 12. Internal controls 13. Directors interests and transactions with related parties 14. Appointment of Statutory Auditors 15. Statutory Auditors

24 24 25 25 26 26 65 66 68 70 71 72

- Business segments - Balance sheet and financial position highlights - Financials by quarter Benetton risk factors

30 33 40 41

Direction and coordination Board of Directors Treatment of corporate information Board Committees Nomination Committee Remuneration Committee Consolidated cash flow statement

16. Relations with shareholders 17 Shareholders meeting . 18. Changes since year end

73 74 74

Commentary on the cash flow statement Supplementary information - Financial position - Segment information - Other information

145 146 146 148 153

The Benetton Group


Directors and other officers
Board of Directors Luciano Benetton Carlo Benetton Alessandro Benetton Gerolamo Caccia Dominioni Gilberto Benetton Giuliana Benetton Luigi Arturo Bianchi Giorgio Brunetti Alfredo Malguzzi Gianni Mion Robert Singer Andrea Pezzangora Secretary to the Board Chairman Deputy Chairman Deputy Chairman Chief Executive Officer Directors

Board of Statutory Auditors Angelo Cas Antonio Cortellazzo Filippo Duodo Piermauro Carabellese Marco Leotta Alternate Auditors Chairman Auditors

Independent Auditors PricewaterhouseCoopers S.p.A.


The Benetton Group

Group structure at December 31, 2007


Benetton Group S.p.A. Ponzano Veneto (TV)

(1)

Benetton Realty France S.A. Paris 56.31%

Benind S.p.A. Ponzano Veneto (TV) 100%

Fabrica S.p.A. Ponzano Veneto (TV) 100%

Benetton International Property N.V. S.A. Amsterdam 100%

S.I.G.I. S.r.l. Ponzano Veneto (TV) 100%

Bencom S.r.l. Ponzano Veneto (TV) 100%

Benetton Realty Spain S.L. Barcelona 100%

Benetton Real Estate International S.A. Luxembourg 100%

Benetton Realty Russia O.O.O. Moscow 100%

Milano Report S.p.A. Bergamo 50%

Progetto Tre S.r.l. Bologna 50%

La Crmire S.A. Genve 100%

Benetton Real Estate Spain S.L. Barcelona 100%

Benetton Real Estate Belgique S.A. Bruxelles 100%

Real Estate Latvia L.L.C. Riga 100%

Benetton Realty Portugal Imobiliaria S.A. Porto 100%

Property Russia Z.A.O. Samara 100%

Benetton Realty Netherlands N.V. Amsterdam 100%

Benetton Real Estate CSH S.r.l. Chisinau 100%

Kazan Real Estate Z.A.O. Moscow 100%

Benetton Real Estate Azerbaijan L.L.C. Baku 100%

Kaliningrad Real Estate Z.A.O. Kaliningrad 100%

Estate Odessa L.L.C. Odessa 100%


(3)

Benetton Istanbul Real Estate Emlak Yatirim Ve Insaat Ticaret Ltd.S. Istanbul 100%

Benetton France S. r.l. Paris 100%

Benetton Real Estate Kazakhstan L.L.P. Almaty 100%

Real Estate Russia Z.A.O. St. Petersburg 100%

Real Estate Ukraine L.L.C. Kiev 100%

Benetton Real Estate Austria GmbH Wien 97%

Benetton France Commercial S.A.S. Paris 100%

Benetton Trading Ungheria Kft. Nagykll 100%

Benetton Retail (1988) Ltd. London 100%

Benetton Retail Spain S.L. Barcelona 100%

Benetton Retail Deutschland GmbH Mnchen 100%

Benetton Manufacturing Tunisia S. r.l. Shaline 100%

Benetton Beograd D.O.O. Beograd 100%

(1) The remaining participation is directly owned by Benetton France S. r.l. (2) The remaining participation is directly owned by Benetton Manufacturing Holding N.V. (3) The remaining participation is directly owned by Benetton International S.A.

New Ben GmbH Frankfurt am Main 50%

Benetton Commerciale Tunisie S. r.l. Sousse 100%

The Benetton Group

Benetton Retail Italia S.r.l. Ponzano Veneto (TV) 100%

Bentec S.p.A. Ponzano Veneto (TV) 100%

Benetton Deutschland GmbH Mnchen 100%

Benetton Australia Pty. Ltd. Hawthorne 100%

Olimpias S.p.A. Ponzano Veneto (TV) 100%

Benetton USA Corp. Wilmington 100%

Benetton Holding International N.V.S.A. Amsterdam 100%

Le Radar S.A. Genve 100%

Ponzano Children S.r.l. Ponzano Veneto (TV) 100%

Benair S.p.A. Ponzano Veneto (TV) 100%

Filatura di Vittorio Veneto S.p.A. Vittorio Veneto (TV) 50%

Olimpias Tunisia S. r.l. Tunis 100%

Benetton International S.A. Luxembourg 100%

United Colors of Benetton do Brasil Ltda. Curitiba 100%

Benetton Denmark A.p.S. Copenhagen 100%

Benetton Giyim Sanayi ve Ticaret A.S. Istanbul 50%


(2)

United Colors Communication S.A. Lugano 100%

Benetton International Kish Co. Ltd. Kish Island 100%

Benetton Ungheria Kft. Nagykll 100%

Benetton Retail Poland Sp. z o.o. Warsaw 100%

Benetton International Emirates L.L.C. Dubai 49%

Benetton Argentina S.A. Buenos Aires 95%

Benetton Trading USA Inc. Lawrenceville 100%

Benetton Tunisia S. r.l. Sahline 100%

Benetton India Pvt. Ltd. Gurgaon 100%

Lairb Property Ltd. Dublin 100%

Benetton Japan Co, Ltd. Tokyo 100%

Benetton Manufacturing Holding N.V. Amsterdam 100%

Benetton Asia Pacific Ltd. Hong Kong 100%

Benetton Korea Inc. Seoul 50%

Benetton Trading Taiwan Ltd. Taipei 100%

Shanghai Benetton Trading Company Ltd. Shanghai 100%

Benlim Ltd. Hong Kong 50%

Benetton 2 Retail Comrcio de Produtos Txteis S.A. Porto 100%

S.C. Benrom S.r.l. Miercurea Sibiului 100%

Benetton Istria D.O.O. Labin 100%

Benetton Mexicana S.A. de C.V. Mexico City 100%

Benetton Croatia D.O.O. Osijek 100%

Shanghai Sisley Trading Co. Ltd. Shanghai 100%

The Benetton Group

Notice of Ordinary General Meeting


Shareholders are called to the Ordinary General Meeting to be held in first calling at 11.00 a.m. on April 24, 2008, at Via Villa Minelli 1, Ponzano Veneto (TV), Italy, or in second calling, if needed, on April 28, 2008, same time and place. Agenda 1. To examine the Annual Report as of December 31, 2007. Pertinent and related resolutions; 2. To determine the annual Directors emolument; 3. To appoint the Board of Statutory Auditors and to determine its emolument; 4. To authorise the Board of Directors to the purchase and sale of own shares. Related resolutions. Pursuant to the law in force and provided by Art. 9 of the Articles of Association, the right to attend and vote is reserved to those shareholders who shall submit the communication issued by their relevant intermediaries. The communication must reach the Company at least two business days before the General Meetings date. The shares will become available again after the General Meeting has taken place. The shareholders may be represented by third parties through written proxy in accordance with the law. The Chairman of the General Meeting shall verify the qualifications of the proxy holders and their right to intervene during the proceedings of the General Meeting. All relevant documentation on the proposed resolutions will be available, within the established period, at the headquarters of the Company, at the office of Borsa Italiana S.p.A. and on the website of the Company www.benettongroup.com/investors. Regarding the appointment of the Board of Statutory Auditors reference is made to the Companys Articles of Association as specifically stated in Art. 19 also available in the website of the Company www.benettongroup.com/investors, section Governance - Articles of Association. It is pointed out that the appointment of the Board of Statutory Auditors is done on the basis of lists presented by the shareholders containing the names and numbering of the standing member candidates (3) separately from the alternate member candidates (2). The candidates shall be in possession of the qualifications required by prevailing statutory and regulatory provisions in force, including the provision of the Articles of Association above mentioned. Lists may be presented by only those shareholders who own, alone or together with others, at least 2 (two) % of share capital (according to the CONSOB Resolution n. 16319 dated January 29, 2008 pursuant to Article 144 septies of the CONSOB Regulation no. 11971/99).

The Benetton Group

The lists, signed by those presenting them, shall be filed at the Companys registered office at least 15 (fifteen) days in advance of the date set for the first calling of the Shareholders Meeting convened to vote on the appointment of statutory auditors, accompanied by (i) information about the shareholders who have filed the lists, specifying their overall percentage interest in share capital, and (ii) documentation confirming them as shareholders and the percentage of share capital they own, (iii) comprehensive details on the personal characteristics and experience of the candidates, (iv) a statement by the candidates themselves confirming that they are in possession of the requirements envisaged by prevailing statutory or regulatory requirements and the absence of any reasons for incompatibility and/or ineligibility, (v) statements by the candidates in which they accept their candidacy and provide details of their appointments as Directors or statutory auditors in other companies, (vi) any other information required by prevailing statutory and regulatory provisions. No shareholder may present or be involved in presenting more than one list, including through a third party or trust company. No candidate may appear in more than one list, otherwise they will be disqualified. Lists not observing the above provisions shall be treated as if they had not been presented. The list shall be promptly published on the Companys website at least ten days in advance of the date set for the first calling of the Shareholders Meeting. Holders of American Depositary Receipts (ADRs) representing the Companys ordinary shares will receive voting instructions from Deutsche Bank Trust Company Americas of New York as Depositary Bank.

Luciano Benetton Chairman of the Board of Directors

The Benetton Group

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Letter to the shareholders


To our shareholders, The year 2007 was one of intense work and good results: our quest for the new, an integral part of our DNA, reported a marked acceleration, translating into ideas, solutions and concrete growth projects, which have boosted revenues by more than 9% and net income by over 16% on the previous year. We have generally made the entire system faster and more determined in delivering quality fashion at an affordable price, based on our consumer credibility developed and established over more than 40 years. We are now writing a new chapter in the history that has defined our identity, knowledge, quality and style: we imagine a future with limitless growth projects, seeking the best opportunities for expansion on each occasion. We can rely on our established guiding values, a network of renowned partners able to develop and renew itself and a management team, led by the new CEO Gerolamo Caccia Dominioni, which seeks to understand the different nuances of the markets, to analyze the demands of new customer segments, to produce and circulate information and ideas needed to develop not only the business but also our corporate culture. In pursuing our strategic goal of creating value for shareholders, who are consistently assured a large return on their investment through our dividend policy, we intend to confirm our commitment and responsibility to those who contribute to the Groups work every day. We wish to offer them even more reasons for belonging to this organization and for personal and professional development in order to build an ever better, cohesive team. Likewise we will continue to be accountable to society and the natural environment. Unique in its sector, our Group has known over the years how to build strong relationships and ties, not just economic ones, in more than 120 countries. We are now focusing on extending our borders further to continue to grow responsibly and faster. As always, we have the optimism, energy and courage to look at the world with tomorrows eyes.

Luciano Benetton, Chairman Benetton Group

The Benetton Group

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Disclaimer
This document contains forward-looking statements, specifically in the section entitled Outlook for 2008, relating to future events and operating, economic and financial results of the Benetton Group. By their nature such forecasts contain an element of risk and uncertainty because they depend on the occurrence of future events and developments. The actual results may differ, even significantly, from those announced for a number of reasons, as described in the section on Risk factors.

Key financial data - highlights


The Groups financial statements for 2007 and comparative years have been drawn up in accordance with the International Financial Reporting Standards (IFRS) adopted by the European Union which are in force at the date of preparing this report. These standards do not differ, in any material respect, from those issued by the International Accounting Standards Board (IASB), meaning that any application of the latter would not have any significant effect on the Groups financial statements. Details of the accounting policies and consolidation methods used for preparing the annual financial report can be found in the section containing the Explanatory notes.

Key operating data (millions of Euro) Revenues Gross operating profit Contribution margin EBITDA (A) Ordinary EBITDA (A) Operating profit Net income for the year attributable to the Group

2007 2,085 909 763 341 337 243 145

% 100.0 43.6 36.6 16.3 16.2 11.7 7

2006 1,911 806 669 276 264 180 125

% 100.0 42.2 35.0 14.4 13.8 9.4 6.5

Change 174 103 94 65 73 63 20

% 9.1 12.8 14.1 23.6 27.6 35.4 16.3

Key financial data (millions of Euro) Working capital Assets held for sale Net capital employed Net financial indebtedness Total shareholders equity Free cash flow Net operating investments/Capex

12.31.2007 652 6 1,889 475 1,414 (34) 225

12.31.2006 623 7 1,710 369 1,341 21 188

The Benetton Group

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Financial ratios (in %) ROE (net income/shareholders equity) ROI (operating profit/net capital employed) ROS (operating profit/revenues) Income/revenues Share and market data Basic earnings per share (Euro) Shareholders equity per share (Euro) Dividend per share (Euro) Pay out ratio (%) Dividend yield Price at year end (Euro) Screen traded price: high (Euro) Screen traded price: low (Euro) Price per share/earnings per share Price per share/shareholders equity per share Market capitalization (thousands of Euro) Average no. of shares outstanding No. of shares outstanding

12.31.2007 10.48 12.87 11.66 6.97 12.31.2007 0.80 7.59 0.40 50.00 3.25 12.29 14.82 10.77 15.40 1.60 2,245,082 182,675,492 182,675,492

12.31.2006 9.47 10.50 9.39 6.54 12.31.2006 0.69 7.22 0.37 49.00 2.60 14.47 15.61 9.62 21.00 2.00 2,630,909 181,868,467 182,675,492

Number of personnel Total employees

12.31.2007 8,896

12.31.2006 8,894

(A) In addition to the standard financial indicators required by IFRS, this document also contains a number of alternative performance indicators for the purposes of allowing a better appreciation of the Groups financial and economic results. These indicators must not, however, be treated as replacing the standard ones required by IFRS. The following table shows how EBITDA and ordinary EBITDA are made up. Key operating data (millions of Euro) A Operating profit B - of which non-recurring expenses/(income) C Depreciation and amortization D Other non-monetary costs (net impairment and stock options) E - of which non-recurring F = A+C+D EBITDA G = F+B-E Ordinary EBITDA 2007 243 3 91 7 7 341 337 2006 180 (1) 84 12 11 276 264 Change 63 4 7 (5) (4) 65 73

The Benetton Group

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14

Directors report
Brands
The United Colors of Benetton Adult brand grew by 9% in 2007, thanks to enlargement of the fashion collections offered to specific market segments. In particular, the mens range was well received by consumers, reaching its medium-term growth target of 20% of total brand sales in 2007, partly thanks to the first dedicated stores and special corners, both designed to bring out the quality and completeness of this collection. As part of plans to diversify the offer by age group, the United Colors of Benetton Child brand (+15% over the year) focused on maternity wear and clothing for the under-fives. The Benetton Baby label has been established with a series of stores dedicated to young children and new mothers: there are plans to open 50 such stores in 2008 whose interiors have been specially designed to suit this kind of purchase and to enhance the products on offer. Color is traditionally one of Benettons principal innovations, as well as the brands democratic identity and its key success factor. It is now the subject of the Color Project, an advanced quality system developed during the year and one of the first of its kind to be able to ensure scientifically that a certain shade is faithfully reproduced at every stage of the creative and production process, from the designers initial choice to the garment on the shelf. This project makes it possible to reduce approximations, subjective variables, margins of error and wasted time in creating and producing collections. It forms part of Benettons plans to ensure ever higher quality and greater flexibility and speed for the entire system: in particular, it helps ensure that garments ending up in stores are of colors that satisfy fashion and market demands. The Accessories sector, identified as one of the drivers of future growth, saw the opening of the first fully dedicated store in Rome, featuring an attractive interior and sophisticated concept. The strategy of opening new UCB and Sisley accessories stores involves expanding the offer in 2008, particularly by including luxury end products. Having increased its sales by around 6%, Sisley confirmed the positive expectations for 2007 associated with the brands new glamour identity, supported by a targeted program of new openings in Italy and abroad: about 50 new locations in the year. The strong international growth potential for Sisleys trendy, quality products is also supported by a renowned network of business partners. Sisleys glamour image is being buttressed by a new style of communication which, through the lens of Camilla Akrans, a Scandinavian photographer, will underline and reinforce the brands sophisticated, international spirit. There was continued emphasis in 2007 on getting Sisley collections to market even earlier, with an increased number of trend-setting proposals during the season. Over 50% of the Sisley collections will be developed in shorter timeframes to support the brands fashion image and positioning. The Sisley Limited Edition project was also started to create a limited set of special, highly refined, sophisticated
Directors report

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Apparel

1,956

93.8%

garments for men and women. The brand has also created the Sisley Young line for young fashion conscious customers. Both projects Textile 88 4.2% seek to develop the business opportunities offered by consumer segments attracted by a refined product that breaks away from the usual mould.

Other and unallocated

41

2.0%

The new Gloss store concept for the Undercolors network, dedicated to underwear, nightwear and beachwear, was successfully launched in 35 stores in Europe, with the goal of optimizing display of the different product lines: from the cheerful, ironic Fun line to the conscious sensuality of Clean Sensuality. The flexibility of the display units also makes it possible to adapt the space according to the seasons, emphasizing the themes of the beach collection in Spring/Summer and those of the nightwear collection in Fall/Winter. The brand increased its sales by 12% over the year. The network will continue to expand in 2008 with over 30 new stores being added in the Spring/Summer season, some of which will be large enough to accommodate the brands entire range. The growth of Playlife (+23%) is the result of a global project to redefine brand position with a clearer identity based on American college life. This has resulted in a new logo, a new store concept, using environmentally-friendly materials in terms of their recyclability and production techniques, and a fresh philosophy of dressing. A total of 40 new stores were opened in Italy and in other Mediterranean countries in 2007, as well as restyling existing stores. 2007 sales of core products by brand (millions of Euro)

United Colors of Benetton Sisley Undercolors Playlife Killer Loop Other sales

1,436 341 84 26 11 79

72.6% 17.2% 4.3% 1.3% 0.6% 4.0%

Directors report

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Markets
The Benetton Group enjoyed significant growth in 2007 in both mature and emerging markets, conquering new consumer segments in the former and increasing its penetration of the latter. Its traditional ability to view the world as a single large market was matched by its attentive exploration of the different economic, social and cultural environments in individual markets, adapting the business model, strategy and expansion projects to the specific needs revealed on each occasion. Management continued to focus on gaining detailed knowledge of individual markets to make the most of the growth opportunities offered by the different types of consumer in the different local contexts. In this way the individual brands are increasingly able to tune in with each markets specific cycle, not only in terms of organization but also by offering products that respond to local styles and themes. In addition to continued search for growth opportunities in mature markets, five priority areas of growth were identified during the year: India, Turkey, Eastern Europe and the former Soviet Union, Mexico and China. Revenues in Europe grew by more than 12% on 2006, with particularly good results in Italy (+11%), Spain (+11%), Greece (+24%), Portugal (+11%) and France (+15%). Russia reported extremely strong growth of over 40%, like in all East European countries and the former Soviet Union in general. The hundredth store was opened in Russia at the start of 2007, taking the total number of stores in the former Soviet Union to over 150, with plans to open many more, particularly large ones. In the strategically important markets of Asia, excellent results were achieved in India (+58%) where there are 140 United Colors of Benetton stores and the first Child and Undercolors stores have now been opened. The success of United Colors of Benetton in this market has been confirmed in an independent survey, commissioned by the prestigious Times of India daily newspaper, which named the brand as the favorite of young, demanding Indian consumers. In September an agreement was signed with the Tata group of India to develop the Sisley brand in this country, with the first openings planned in Hyderabad and Bangalore. This is a strategic partnership not only because it has created a preferential relationship with this important, established Indian company, but also because it confirms Benettons ability to partner renowned businesses as a driver of its success. 2007 revenues from third parties by geographical area (millions of Euro)

Europe (included Italy) Asia The Americas Rest of the world

1,805 218 50 12

86.6% 10.5% 2.4% 0.5%

Directors report

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Financial communication
The Investor Relations office, engaged as always in the fundamental task of maintaining a constant flow of information between the Company and the market, organized 250 meetings with financial analysts and investors during 2007. In fact, the activities of the IR office are based on a proactive process both inside and outside the Company. Top management is kept constantly abreast of how the market perceives the Company, in order to optimize strategic decision-making. Since the arrival of new top management, the IR offices work has focused on seeking to facilitate reciprocal knowledge and contact with the market. The goal of ensuring maximum transparency, clarity and speed of market disclosure has been achieved also thanks to the various communication channels used to reach the different targets concerned. During the year the financial results were presented every quarter through public conference calls, accessible on the web thanks to a system of audio-webcasting with slideshows. The IR office regularly organizes calls, meetings, company visits, presentations at broker conferences and participation in roadshows with shareholders and investors in the major financial markets or at the Companys head office. Analysts who cover the Company are also involved in events such as presentations of new collections and store visits, organized to launch new store concepts. During 2007 several new brokers started to cover the Benetton stock, taking the total number following the Company to almost 20. Over 120 notes on the Group were published during the year. The list of analysts currently following the stock and the latest published reports can be found on the Investor Relations website. Two Shareholder Identification studies were carried out during the year, the second one completed at the start of 2008, with the aim of better identifying the geographical location and structure of institutional investors. The research showed a return of shareholders to Italy and a growth in French holdings. Among European investors, Scandinavian investors are strongly represented, while the proportion of North American investors continues to be significant.

Directors report

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Benetton on the stock market

2003 2004 2005 2006 2007 Most of the trading in Benetton ordinary shares during 2007 took place on the Italian Stock Exchange, run by Borsa Italiana S.p.A.,
and the Frankfurt Stock Exchange. On September 12, 2007 the Companys Board of Directors decided to request the voluntary delisting and deregistration of the American Depositary Shares (ADS) quoted on the New York Stock Exchange, and to request voluntary deregistration and termination of its obligations under the Securities Exchange Act of 1934. On February 21, 2008 the Board of Directors decided to send the Management Board of the Frankfurt Stock Exchange a request to delist the Companys ordinary shares from the German market. This decision was taken in view of the globalization of financial markets and the 3.5 internationalization of the Italian Stock Exchange. The Group capitalized at Euro 2.2 billion at December 31, 2007. Between the end of 2006 and end of 2007, the Benetton stock had an average price of Euro 12.43, reporting a high of Euro 14.82 on January 3 and a low of Euro 10.77 on September 17. An average of approximately 786,000 shares were traded each day over the course of 252 days of trading.

3.8

3.9

3.25

2.6

2003

2004

2005

2006

2007

The latest price of Benettons stock, for each market on which it is listed, can be found on the Investor Relations website. 2003-2007 dividend per share performance (Euro)

0.40 0.38 0.34 0.34 0.37

2003

2004

2005

2006

2007

0.40 0.38

0.34

0.34

Directors report

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0.37

Dividend yield trend (2003-2007, in %)

3.8

3.9

3.5 2.6

3.25

2003

2004

2005

2006

2007

Financial calendar
February March May August November

3.8
Thursday 21 Wednesday 19 Wednesday 14 Friday 29 Thursday 13

3.9

Meetings of the Board of Directors scheduled in 2008:

3.5 2.6

3.25

preliminary results for 2007 2007 draft annual report 2008 first-quarter report 2008 half-year report

2003

2004

2008 third-quarter report

2005

2006

2007

0.40 0.38 0.34 0.34 0.37

2003
Directors report

2004

2005

2006

2007

20

Benetton Group share performance in 2007


16 14 12 10 8 6 4 2 07.01 07.02 07.03 07.04 07.05 07.06 07.07 07.08 07.09 07.10 07.11 07.12
02.07 2006 preliminary results & 2007 forecasts 03.16 2006 results & new CEO appointment

04.26 AGM

4,000,000
05.14 1Q07 results 08.03 1H07 preliminary results

3,500,000
11.13 3Q07 results

3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000

09.12 1H07 results

09.18 Strategic partnership with Trent Ltd. for Sisley development in India

Price

Volumes

www.benettongroup.com/investors
The Group has continued to improve the Investors Relations website, promoting use of the web as the principal method of disseminating its economic and financial information; this has ensured ever wider and more rapid communication with the financial community, which sees our website as a broad, detailed source of updated information about the Company. In particular, the Investor Relations office worked in 2007 on the major task of redesigning the website, which went on-line during the first half of February 2008 at the time of presenting the preliminary results for 2007. The new site has not only an original design but also a new, innovative structure making it more user-friendly and easier to navigate. The site offers an ever wider range of financial information about the Group, which can be downloaded in various formats and is constantly updated. There is also a section devoted to Corporate Governance, which has been completely reorganized to ensure maximum accessibility to its contents. The principal change making the Investor Relations website unique is the introduction of the Interactive Value Chain. Thanks to its many multimedia contents (slideshows, videos, audio files) this innovative instrument allows users to discover everything they want to know about the Benetton Group, from the various issues relating to brands to details of the Product, Operations, Commercial and Communications functions, allowing the sites different users to gain a complete picture of the Company. Additional services and information are available at www.benettongroup.com/investors.
Directors report

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Supplementary information Corporate governance report


The information required by art. 124 bis of Italys Consolidated Law on Finance, art. 89 bis of the CONSOB Regulations and art. IA.2.6 of the Instructions accompanying the Stockmarket Regulations can be found in the Corporate Governance report appended to this document and forming an integral part thereof.

Benetton shares and shareholders


Treasury shares. During the period in question, Benetton Group S.p.A. neither bought nor sold any treasury shares, or shares or stock in holding companies, either directly or through subsidiaries, trustees or other intermediaries. Shares held by Directors and statutory auditors. The Directors Luciano, Gilberto, Giuliana and Carlo Benetton directly and indirectly own, in equal shares, the entire share capital of Edizione Holding S.p.A., the company which controls Benetton Group S.p.A. with an interest of 66.73%. Except as specified in the following table, none of the Directors, statutory auditors or managers with key positions in Benetton Group S.p.A., their spouses, unless legally separated, or their minor children, has held shares during 2007 in Benetton Group S.p.A. or its subsidiaries, either directly or through companies under their control, trust companies or other intermediaries. Luciano Benetton, Chairman of the Board of Directors, and Gerolamo Caccia Dominioni, Chief Executive Officer, purchased 330,000 and 50,000 shares respectively in Benetton Group S.p.A. on January 16 and 17, 2008.

Name & surname Alessandro Benetton Ulrich Weiss

No. of shares held as of 12.31.2006 4,000 3,500

Company held Benetton Group S.p.A. Benetton Group S.p.A.

No. of shares purchased -

No. of shares sold 3,500

No. of shares held as of 12.31.2007 4,000 -

Type of ownership Owned Owned

Stock option plan. The first vesting period envisaged by the stock option plan, approved in September 2004 by the Board of
Directors of Benetton Group S.p.A., came to an end in September 2006. As a result, a total of 1,337,519 options became exercisable, meaning that their beneficiaries could subscribe to an equal number of the Companys shares at a price of Euro 8.984 each up until the plans end date in September 2013. Further to a review of the overall structure, scope and principles of the system of incentives, in September 2006 management agreed with the Company to cancel the second tranche of the 2004 plan. At December 31, 2007 there were 220,838 unexercised options left.

Directors report

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A total of 3,520 options were exercised on February 28, 2008, causing the share capital of Benetton Group S.p.A. to increase to Euro 237,482,715.60, representing 182,679,012 shares. A total of 117,318 options were cancelled at the end of February 2008. As a result, there are still 100,000 unexercised options left. Details of the rules of this stock option plan can be found under Regulations & Codes in the Governance section of the Investor Relations website www.benettongroup.com/investors/. 2004 stock option plan

Options outstanding as of 01.01.2007 No. of options Allocation ratio (%) Weighted average exercise price (Euro) Market price (Euro) 220,838 0.121 8.984 14.47

New options granted in the period -

Options exercised in the period -

Options expired and not exercised or lost in the period -

Options cancelled in the period due to termination of employment -

Options outstanding as of 12.31.2007 220,838 0.121 8.984 12.29

of which exercisable as of 12.31.2007 220,838

8.984

Controlling interest. The majority shareholder is Edizione Holding S.p.A., an investment holding company wholly owned by the
Benetton family with registered office in Treviso (Italy). It owns 121,905,639 ordinary shares in the Company, representing a controlling interest of 66.73% (which went up to 67.08% as from January 18, 2008).

Shareholders Edizione Holding S.p.A. Institutional investors and banks Other investors

% 66.733 23.051 10.216

Relations with the holding company, its subsidiaries and other related parties. The Benetton Group has trade
dealings with Edizione Holding S.p.A. (the holding company), with subsidiary companies of the same and with other parties which, directly or indirectly, are linked by common interests with the majority shareholder. Trading relations with such parties are conducted on an arms-length basis and using the utmost transparency, in compliance with the Group Procedure for related party transactions. The total value of such transactions was nonetheless not significant in relation to the total value of the Groups production. These transactions mostly relate to the purchase and sale of goods and services.

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The Groups Italian companies have elected to file for tax on a group basis as allowed by articles 117 et seq. of the Tax Consolidation Act DPR 917/86, based on a proposal by the consolidating company Ragione S.A.p.A. di Gilberto Benetton e C., which decided to opt for this type of tax treatment on June 15, 2007. The election lasts for three years, starting from the 2007 financial year and represents a renewal of the previous election for the 2004-2006 tax period under Edizione Holding S.p.A. The relationships arising from participation in the group tax election are governed by specific rules, approved and signed by all participating companies. The related details are shown below:

(thousands of Euro) Receivables - of which for group tax election under Edizione Holding S.p.A. - of which for group tax election under Ragione S.A.p.A di G. Benetton e C. Payables - of which for group tax election under Edizione Holding S.p.A. - of which for group tax election under Ragione S.A.p.A di G. Benetton e C. Purchases of raw materials Other costs and services (1) Product sales Revenue from services and other income
(1) Of which Euro 11,568 thousand in advertising and promotion costs, corresponding to 19% of total advertising costs in 2007 (Euro 10,867 thousand in 2006).

12.31.2007 43,359 21,483 18,563 62,911 15,819 46,026 3,095 17,401 152 1,393

12.31.2006 46,399 45,742 33,696 32,566 2,895 16,654 190 660

Transactions have also taken place between companies directly or indirectly controlled by the Parent Company or between such companies and the Parent Company itself. The Parent Companys management considers that such transactions have been conducted on an arms length basis. No Director, manager, or shareholder is a debtor of the Group.

Compliance with personal data protection laws. The Company has fulfilled its obligations under current legislation
regarding personal data protection. In particular, the Company has used the Benetton Groups information systems to adopt the minimum security measures required by Italian Legislative Decree no. 196 of June 30, 2003 (Consolidated personal data protection act). All Group companies have complied with the data security model adopted by the Parent Company, as described in the annual Privacy Protection Plan.

Principal organizational and corporate changes. During first quarter 2007, Benetton Real Estate International S.A.
purchased all the share capital in the company Kazan Real Estate Z.A.O. for the purposes of making a real estate investment in Kazan (Russia) as part of the strategy of expanding trade in Eastern Europe. Benetton Real Estate International S.A. also set up Benetton Real Estate Azerbaijan L.L.C. and Benetton Real Estate CSH S.r.l. (Moldavia) in order to have vehicles on hand for making investments in commercial property in these respective regions.
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During second quarter 2007, with reference to development of the market in the Far East, Benetton Trading Taiwan Ltd. was set up with offices in Taipei (Taiwan). This wholly-owned subsidiary of Benetton Manufacturing Holding N.V. is designated to take over the direct operation of stores in Taiwan, previously managed by a local customer. Benlim Ltd. (Hong Kong), a partnership between Benetton Asia Pacific Ltd. and a local distributor, subscribed to all the share capital in Shanghai Sisley Trading Co. Ltd., a company based in Shanghai designated to manufacture Sisley products and directly and indirectly market them in China. As part of the process of simplifying the Groups corporate structure, Benetton Retail Italia S.r.l. transferred its 50% interest in Milano Report S.p.A. to Bencom S.r.l. Benetton Retailing Japan Co. Ltd. was also merged into Benetton Japan Co., Ltd. The process of winding up Benetton Societ di Servizi S.A., a Swiss registered company, and Benetton Slovakia s.r.o. was also completed. During third quarter 2007, Benetton Mexicana S.A. de C.V. was set up as a subsidiary of Benetton Manufacturing Holding N.V. as part of the commercial development strategy in Mexico. During fourth quarter 2007, as part of plans to expand in Eastern Europe and Asia, Benetton Istanbul Real Estate Ltd. was set up as a Turkish registered company and the purchase of Kaliningrad Real Estate Z.A.O., a Russian registered company, was completed. Both companies are controlled by Benetton Real Estate International S.A.

Significant events after December 31, 2007. The delisting/deregistering of the Benetton stock from the New York Stock
Exchange became effective from January 21, 2008. As a result, the Company no longer has to comply with the reporting requirements relating to the NYSE and SEC established by US law. All the documentation will continue to be published in English on the Companys website. The process of delisting from the Deutsche Brse in Frankfurt was started on February 21, 2008. An agreement was made in New York on February 29, 2008 which redefines the Groups relationship with its principal customer in the United States and Canada. Under this agreement the management of 54 stores previously operated by this customer will be transferred to Benetton USA Corp. This operation will not have any immediate significant effect on the statement of income for 2008.

Outlook for 2008. Consolidated revenues for 2008 are expected to grow between 6% and 8% (on same segment activities),
thanks to the positive results of the Spring/Summer 2008 and the progress in backlog order for the Fall/Winter 2008, reflecting both the new store openings and continued improvement in the performance of existing ones. Margins are forecasted to grow at least 7% in comparison with 2007. Investment of around 250 million should be made throughout the year, focusing on: - complete the doubling of logistics hub in Castrette (Italy) and of production center in Tunisia; - new store openings, in strategic markets; - continue roll-out of Information Technology to enhance the evolution of the business. Net financial indebtedness should amount approximately to 650 million at the end of the current year.

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Consolidated Group results Consolidated statement of income. Highlights from the Groups statements of income for 2007 and 2006 are presented
below; they are based on a reclassification according to the function of expenses. The percentage changes are calculated with reference to the absolute amounts.

(millions of Euro) Revenues Materials and subcontracted work Payroll and related costs Industrial depreciation and amortization Other manufacturing costs Cost of sales Gross operating profit Distribution and transport Sales commissions Contribution margin Payroll and related costs - of which non-recurring expenses/(income) Advertising and promotion (A) Depreciation and amortization Other expenses and income - of which non-recurring expenses/(income) General and operating expenses - of which non-recurring expenses/(income) Operating profit (B) Financial (expenses)/income Net foreign currency hedging (losses)/gains and exchange differences Income before taxes Income taxes Net income for the year attributable to: - shareholders of the Parent Company - minority interests

2007 2,085 1,032 83 17 44 1,176 909 60 86 763 156 61 74 229 3 520 3 243 (30) (10) 203 53 150 145 5

% 100.0 49.5 4.0 0.8 2.1 56.4 43.6 2.9 4.1 36.6 7.5 2.9 3.5 11.0 0.1 24.9 0.1 11.7 (1.4) (0.6) 9.7 2.5 7.2 7.0 0.2

2006 1,911 962 81 18 44 1,105 806 63 74 669 153 2 72 66 198 (3) 489 (1) 180 (18) (3) 159 31 128 125 3

% 100.0 50.3 4.2 1.0 2.3 57.8 42.2 3.3 3.9 35.0 8.0 0.1 3.7 3.5 10.4 (0.2) 25.6 9.4 (0.9) (0.2) 8.3 1.6 6.7 6.5 0.2

Change 174 70 2 (1) 71 103 (3) 12 94

% 9.1 7.3 2.6 (4.5) (1.3) 6.4 12.8 (5.7) 16.6 14.1

3 1.7 (2) n.s. (11) (14.7) 8 11.5 31 15.8 6 n.s. 31 6.3 4 n.s. 63 (12) (7) 44 22 22 20 2 35.4 67.8 n.s. 27.5 68.2 17.5 16.3 66.3

(A) Of which 12 million invoiced by holding and related companies in 2007 (11 million in 2006). (B) Operating profit, before non-recurring items, amounts to 246 million, corresponding to 11.8% of revenues (179 million in 2006 with a margin of 9.4%).

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Group net revenues amounted to 2,085 million in 2007, having increased by 174 million (+9.1%) on the figure of 1,911 million reported in 2006, with most of the growth coming from the apparel segment. Apparel segment revenues from third parties came to 1,956 million, an increase of 184 million (+10.3%) on the 2006 figure of 1,772 million. This improvement reflected: - the increase in revenues from the partner-managed network, which benefited from the markets favorable reception of the collections,

Europe (included Italy) from commercial development initiatives and from the contribution of new store openings;
since August 2006.

1,805

86.6%

- the growth in sales by directly operated stores, also thanks to the contribution of the Milano Report partnership in Italy, consolidated

218 10.5% The main driver of growth was the considerable improvement inAsia volumes/mix (+12.2% on 2006). The appreciation of the Euro, sales
particularly against the Korean Won, Japanese Yen and US Dollar, had a negative impact of 19 million on sales.

The Americas 50 2.4% Rest of the world 12 0.5% The textile segment reported 88 million in revenues from third parties, down 7.1% due to growing demand for yarn and textiles from
markets with cheaper labor costs. 2007 revenues from third parties by activity (millions of Euro)

Apparel Textile Other and unallocated

1,956 88 41

93.8% 4.2% 2.0%

Revenues in the other and unallocated segment, which include sports equipment sales, came to 41 million, reporting a decrease of 3 million on 2006. Cost of sales increased by 71 million to 1,176 million, representing 56.4% of revenues compared with 57.8% in the prior year. The individual segments reported the following trends in the cost of sales: - apparel: cost of sales amounted to 1,071 million compared with 993 million in 2006, with the increase mostly due to the major growth in sales volumes; the cost of sales margin went down to 54.7% from 56.0% in 2006; improved production efficiency and exchange rate
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United Colors of Benetton

1,436

72.6%

trends both benefited cost of sales; - textile: cost of sales decreased by 27 million, with the margin down to 90.1% of revenues from 90.5% in 2006; - other and unallocated: cost of sales decreased by 1 million, with a margin of 96.7% of revenues compared with 94.2% in 2006. Gross operating profit confirmed its recovery by reporting a margin of 43.6% compared with 42.2% in 2006. Trends in the individual segments were as follows: - apparel: gross operating profit amounted to 886 million, representing 45.3% of revenues compared with 44.0% in 2006, having benefited from increased volumes and ever more efficient supply chain management and sourcing, as well as from the weakness of the Dollar, which was partly offset by currency hedges reported as net foreign currency hedging (losses)/gains and exchange differences; - textile: gross operating profit was 22 million, representing 9.9% of revenues compared with 9.5% in 2006; - other and unallocated: gross operating profit reported a margin of 3.3% compared with 5.8% in the prior year. Selling costs (distribution, transport and sales commissions) increased to 146 million from 137 million in 2006 due to the growth in apparel segment sales; at the same time these costs came down from 7.2% of revenues to 7.0% thanks to continued optimization of logistics and transport, which offset higher petrol prices. Contribution margin was 763 million compared with 669 million in 2006, representing 36.6% of revenues compared with 35.0% in the prior year. The individual segments reported the following trends in contribution margin: - apparel: contribution margin came to 747 million compared with 651 million in 2006, while improving from 36.7% to 38.2% of revenues; - textile: contribution margin was 14 million, representing 6.2% of revenues up from 6.0% in the prior year; - other and unallocated: contribution margin represented 2.6% of revenues compared with 5.3% the year before. General and operating expenses amounted to 520 million, up from 489 million in 2006, and accounted for 24.9% of revenues compared with 25.6% in the prior year. The individual segments reported the following trends in general and operating expenses: - apparel: these expenses rose by 32 million to 511 million, reflecting expansion of the direct channel and particularly the consolidation of Milano Report; these expenses accounted for 26.1% of revenues compared with 27.0% in 2006; - textile: these expenses amounted to 8 million, representing 3.7% of revenues; - other and unallocated: these expenses represented a net positive 0.2% of revenues due to the recognition of non-recurring income and compared with a negative 1.1% in 2006. General and operating expenses are discussed in more detail below: - Non-industrial payroll and related costs increased by 3 million to 156 million, accounting for 7.5% of revenues, which was down on 2006. Analysis of these costs by individual segment shows that the increase was mainly attributable to the apparel segment as a result of expanding the direct commercial network. - Advertising and promotion costs were down to 61 million from 72 million in 2006, while decreasing from 3.7% to 2.9% of revenues, with the goal of focusing campaigns to fit brand positioning; the second half of 2006 included the costs of the Groups fortieth
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anniversary celebration, while fewer costs were incurred in 2007 for developing advertising campaigns for third-party customers. Ignoring these effects, the Groups advertising expenditure was in line with that of 2006. - Non-industrial depreciation and amortization were 8 million higher at 74 million due to investments made in the period and earlier that entered service during the year. - Other expenses and income amounted to 229 million, corresponding to 11.0% of revenues compared with 10.4% in 2006. This line item includes non-industrial general costs, additions to provisions, net operating expenses and other expenses and income, details of which are as follows: - non-industrial general costs amounted to 106 million, having increased by 10 million on 2006 due to a rise in costs for electricity and gas, routine maintenance and cleaning, rental and hire, Directors fees and other services; these costs represented 5.1% of revenues, virtually the same as in the prior year; - additions to provisions, amounting to 16 million in 2006, came to 22 million this year, of which 17 million for doubtful accounts (11 million in 2006); the provision for doubtful accounts provides 9% coverage compared with 10% in the prior year; - net operating and other expenses increased from 87 million in 2006 to 101 million this year, representing 4.8% of revenues compared with 4.6% in the prior year. The largest item included in the 2007 figure refers to 76 million in net rental expense (net of rental income), which reported an increase of 6 million attributable to the apparel segment. Capital gains realized on fixed asset disposals came to 11 million, of which 7 million classified as non-recurring mostly in relation to the sale of a retail business in Milan and of the Kstle trademark. Other expenses also include a non-recurring indemnity of 4 million paid for the early termination of a lease relating to a building owned by the Group. Operating profit was 243 million compared with 180 million in 2006, reporting an increase in margin from 9.4% to 11.7%; operating profit in the individual segments was as follows: - the apparel segment reported 236 million in operating profit compared with 172 million in 2006, with the margin rising from 9.7% to 12.1%; - the textile segment reported 6 million in operating profit, with the margin improving to 2.5% from 1.9% in 2006; - the other and unallocated segment reported an operating profit margin of 2.4% compared with 6.4% in 2006. The increase of 12 million in net financial expenses was largely due to the rise in interest rates and average indebtedness over the year, in turn mostly due to the growth in volumes and higher investments. Net foreign currency hedging losses and exchange differences were 7 million higher than in 2006 due to the appreciation of the Euro and particularly due to Dollar hedges taken out at the end of 2006 and in the first half of 2007 against US Dollar purchases invoiced in the second half of 2007. The tax charge amounted to 53 million compared with 31 million in the prior year, representing a tax rate of 26.0%, up from 19.7% in 2006; this increase is mainly due to the higher taxable income reported by Italian subsidiaries and the effect of applying the new finance act. Net income for the year attributable to the Group was 145 million compared with 125 million in 2006, representing 7.0% of revenues compared with 6.5% in the prior year.
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The average number of employees in each segment during the year was as follows: - apparel: 7,337 (of whom 3,755 in the retail channel), compared with 6,779 (of whom 3,412 in the retail channel) in 2006; - textile: 1,308 compared with 1,417 in 2006; - other and unallocated: 251 compared with 240 in 2006.

Business segments. The Groups activities are divided into three segments in order to provide the basis for effective administration
and decision-making, and to supply representative and significant information about company performance to financial investors. The business segments are as follows: - apparel, represented by the brands of United Colors of Benetton, Undercolors, Sisley, Playlife and Killer Loop. The information and results relating to the real estate companies are also included in this segment; - textile, consisting of production and sales activities for raw materials (fabrics, yarns and labels), semi-finished products and industrial services; - other and unallocated, includes activities relating to sports equipment produced for third parties by a Group manufacturing company. For comparative purposes, segment results for 2007 and 2006 are shown below. Segment results - 2007
Other and unallocated 41 41 40 1 1 (1) 1 1 2

(millions of Euro) Revenues from third parties Inter-segment revenues Total revenues Cost of sales Gross operating profit Selling costs Contribution margin General and operating expenses - of which non-recurring expenses/(income) Operating profit Depreciation and amortization Other non-monetary costs (net impairment) EBITDA

Apparel 1,956 1 1,957 1,071 886 139 747 511 4 236 78 7 321

Textile 88 137 225 203 22 8 14 8 6 12 18

Eliminations (138) (138) (138) (1) 1 1 -

Consolidated 2,085 2,085 1,176 909 146 763 520 3 243 91 7 341

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Segment results - 2006

(millions of Euro) Revenues from third parties Inter-segment revenues Total revenues Cost of sales Gross operating profit Selling costs Contribution margin General and operating expenses - of which non-recurring expenses/(income) Operating profit Depreciation and amortization Other non-monetary costs (net impairment and stock options) EBITDA

Apparel 1,772 2 1,774 993 781 130 651 479 1 172 69 12 253

Textile 95 159 254 230 24 9 15 10 5 14 19

Other and unallocated 44 44 41 3 3 (2) 3 1 4

Eliminations (161) (161) (159) (2) (2) -

Consolidated 1,911 1,911 1,105 806 137 669 489 (1) 180 84 12 276

Apparel segment results

(millions of Euro) Revenues from third parties Inter-segment revenues Total revenues Cost of sales Gross operating profit Selling costs Contribution margin General and operating expenses - of which non-recurring expenses Operating profit EBITDA

2007 1,956 1 1,957 1,071 886 139 747 511 4 236 321

2006 1,772 2

Change 184 (1)

% 10.3 7.7 10.3 7.8 13.5 7.2 14.8 6.7 n.s. 37.3 26.9

100.0 54.7 45.3 7.1 38.2 26.1 0.2 12.1 16.4

1,774 993 781 130 651 479 1 172 253

100.0 56.0 44.0 7.3 36.7 27.0 0.1 9.7 14.3

183 78 105 9 96 32 3 64 68

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Textile segment results

(millions of Euro) Revenues from third parties Inter-segment revenues Total revenues Cost of sales Gross operating profit Selling costs Contribution margin General and operating expenses - of which non-recurring expenses/(income) Operating profit EBITDA

2007 88 137 225 203 22 8 14 8 6 18

2006 95 159

Change (7)

% (7.1)

(22) (13.6) 100.0 90.5 9.5 3.5 6.0 4.1 0.1 1.9 7.5 (29) (11.2) (27) (11.5) (2) (1) (1) 1 (1) (8.0) (7.7) (8.1) n.s. 16.7 (8.7)

100.0 90.1 9.9 3.7 6.2 3.7 2.5 7.7

254 230 24 9 15 10 5 19

(2) (19.4)

Other and unallocated segment results

(millions of Euro) Revenues from third parties Inter-segment revenues Total revenues Cost of sales Gross operating profit Selling costs Contribution margin General and operating expenses - of which non-recurring income Operating profit EBITDA

2007 41 41 40 1 1 (1) 1 2

2006 44 -

Change (3) -

% (5.4) (5.4) (2.8) 25.0 n.s. (41.0)

100.0 96.7 3.3 0.7 2.6 0.2 (2.7) 2.4 4.4

44 41 3 3 (2) 3 4

100.0 94.2 5.8 0.5 5.3 (1.1) (4.4) 6.4 8.3

(3) (1) 1

(2) (46.8) (2) (53.6)

(2) (64.0) (2) (49.8)

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Balance sheet and financial position highlights. The most significant elements of the balance sheet and financial position,
compared with December 31, 2006 are as follows:

(millions of Euro) Working capital - trade receivables - inventories - trade payables - other operating receivables/(payables) (A) Assets held for sale Property, plant and equipment and intangible assets (B) Non-current financial assets (C) Other assets/(liabilities) (D) Net capital employed Net financial indebtedness (E) Total shareholders equity

12.31.2007 652 686 336 (385) 15 6 1,171 23 37 1,889 475 1,414

12.31.2006 623 627 331 (403) 68 7 1,027 21 32 1,710 369 1,341

Change 29 59 5 18 (53) (1) 144 2 5 179 106 73

(A) Other operating receivables and payables include VAT receivables and payables, sundry receivables and payables, holding company receivables and payables, receivables due from the tax authorities, deferred tax assets, accruals and deferrals, payables due to social security institutions and employees, receivables and payables for fixed asset purchases etc. (B) Property, plant and equipment and intangible assets include all categories of assets net of the related accumulated depreciation, amortization, and impairment losses. (C) Non-current financial assets include unconsolidated investments and guarantee deposits paid and received. (D) Other assets/(liabilities) include the retirement benefit obligations, the provisions for legal and tax risks, the provision for sales agent indemnities, other provisions, current income tax liabilities and deferred tax assets in relation to the company reorganization carried out in 2003. (E) Net financial indebtedness includes cash and cash equivalents and all short and medium/long-term financial assets and liabilities, as reported in the detailed statement discussed in the Explanatory notes.

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2007 and 2006 balance sheet structure (millions of Euro) - Assets

De

1 Capital employed: 1,889 Capital employed: 1,710

Ca

Of which working capital

652 2007 2006

Of which working capital

623

Eq

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34

2007 and 2006 balance sheet structure (millions of Euro) - Liabilities

Total shareholders equity

1,414

Total shareholders equity

1,341

Net financial indebtedness

475 2007 2006

Net financial indebtedness

369

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Working capital was 29 million higher than at December 31, 2006, reflecting the combined effect of: - an increase of 59 million in net trade receivables and limited growth in inventories, associated, albeit less than proportionately, with the growth in sales volumes; - a decrease of 18 million in trade payables due to the higher proportion of goods purchased for resale and of transport costs with shorter-than-average terms of payment; - a decrease of 53 million in other operating receivables/payables mostly as a result of the increase in payables relating to the group tax filing. Apart from the changes in working capital discussed above, net capital employed increased by 150 million, mainly reflecting a net increase in property, plant and equipment and intangible assets following 267 million in gross operating investments during the year, 23 million in divestments, 98 million in depreciation, amortization and impairment net of impairment reversals and 2 million in other changes. The Groups net financial indebtedness is discussed in detail in the Explanatory notes.

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Cash flows during 2007 are summarized below with comparative figures for the last year:

(millions of Euro) Cash flow from operating activities before changes in working capital Cash flow provided/(used) by changes in working capital Net interest paid/received - exchange differences Payment of taxes Cash flow provided by operating activities Net operating investments/Capex Non-current financial assets Cash flow used by investing activities Free cash flow Cash flow used by financing activities of which: - payment of dividends - net change in other sources of finance Cash flow used by financing activities Net decrease in cash and cash equivalents

2007 343 (96) (40) (11) 196 (225) (5) (230) (34)

2006 258 28 (25) (24) 237 (188) (28) (216) 21

(69) 54 (15) (49)

(64) 27 (37) (16)

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2007 and 2006 sources and applications of funds (millions of Euro) - Sources

Deficit of funds

101

Deficit of funds

31

Total inve

Cash flow from operating activities

343 Cash flow from operating activities 258

Payment Payment Interests

Equity by minorities

2 2007 2006

Change in working capital Equity by minorities

28 12

Change in

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2007 and 2006 sources and applications of funds (millions of Euro) - Applications

31

Total investments, net

230

Payment of taxes 258 Payment of dividends Interests paid, net Change in working capital

11 69 40 96 2007 2006

Total investments, net

216

es

Payment of taxes Payment of dividends Interests paid, net

24 64 25

28 12

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Cash flow from operating activities before changes in working capital amounted to 343 million compared with 258 million in 2006, reflecting the improvement in EBITDA to 341 million. Changes in working capital used 96 million in cash flow, having provided 28 million in cash flow in 2006, and mostly reflect: - an increase in trade receivables and inventories, associated, albeit less than proportionately, with the growth in sales volumes; - a decrease in trade payables due to the higher proportion of goods purchased for resale and of transport costs with shorter-than-average terms of payment. It should also be noted that there was a considerable improvement in receivables collection during 2006, with the target level of performance now almost achieved. Operating activities provided 196 million in cash flow compared with 237 million in 2006. Cash flow used by investing activities increased to 230 million from 216 million in 2006, mainly due to 164 million in investments in the commercial network. Investments in production, amounting to 56 million, related to the production centers in Istria (Croatia) and Tunisia and to the logistics hub in Castrette di Villorba (Italy). Other investments amounted to 47 million, most of which in information technology (introduction of SAP sales management software and installation of SAP applications at foreign subsidiaries), as well as for the acquisition of an aircraft by Benair S.p.A. Further information of an economic and financial nature is provided in the Explanatory notes to the consolidated financial statements.

Financials by quarter
(millions of Euro) 2007 quarters Net revenues Gross operating profit Contribution margin Operating profit Net income attributable to the Group Earnings per share (Euro) - basic earnings per share 2006 quarters Net revenues Gross operating profit Contribution margin Operating profit Net income attributable to the Group Earnings per share (Euro)
Directors report

1st quarter 460 192 160 41 27

2nd quarter 530 231 195 66 43

1st half-year 990 423 355 107 70

3rd quarter 514 220 184 59 33

Nine months 1,504 643 539 166 103

4th quarter 581 266 224 77 42

0.15

0.23

0.38

0.18

0.56

0.23

416 179 149 35 24

482 201 166 54 40

898 380 315 89 64

474 199 166 48 30

1,372 579 481 137 94

539 227 188 43 31

- basic earnings per share

0.13

0.22

0.35

0.17

0.52

0.17

40

Benetton risk factors


Taking on risks is an integral part of doing business. Our Group has procedures for managing risks in the areas of greatest exposure, namely strategic, market, operational, financial and legal/compliance risks.

Strategic risks. Strategic risks include the factors which influence the strategic opportunities and pose a threat to our Group.
More specifically, the Group must guarantee its ability: - to take advantage of business opportunities that may develop in new geographical areas and business segments; - to evaluate market potential correctly; - to allocate resources generated on more profitable markets to potential growth areas; - to seek out the world over specific skills and industrial areas in which to invest its know-how in order to ensure quality products and processes; - to protect its brands, which are essential for succeeding and competing on the market; - in a global, complex market featuring international players, to choose and integrate the models best suited to a presence in each local market (license vs. partnership; wholesale vs. retail).

Market risks. Market risks include the possible effects on our business arising from changes in the market.
- On the distribution front, competition could increase also because of the low barriers to entry. Benetton competes with local, national and global department stores, with specialist retailers, independent retailers and manufacturers, as well as with e-commerce companies. The Groups principal focus is on product quality, assortment and presentation, store ambiance, customer service and sales and marketing plans. It also competes for the most attractive commercial sites and terms of store rental and purchase. - Our business is sensitive to changes in consumer spending decisions. It may also be influenced by the business environment, interest rates, tax rules and rates, local economic conditions, uncertainty over the future economic outlook and shifts in spending towards other goods and services. Consumer preferences and economic conditions may change from one market to the next. - Our business is to some extent sensitive to the weather. An excessively mild winter, for example, may have consequences in terms of lower sales of higher margin products, with a negative impact on our results and financial position. - We must be able to combat deflationary price pressure associated with increased competition and changes in consumer preferences, which could have negative effects on our results and financial position. - The market for prime-location properties is very competitive. Our ability and that of our partners to find sites for new stores depends on the availability of properties that meet our criteria, and the ability to negotiate terms that meet our financial targets. In addition, we must be able to renew lease agreements for existing stores under the best terms possible.

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Operational risks. Operational risks refer to possible adverse consequences associated with processes, internal organization or
systems and external events relating to the current management of the business. - The success of our strategies is influenced by the commercial networks response. The policy of incentivizing our network of partners, in keeping with the Benetton business model, had the goal of fostering greater investment capacity, in order to open new stores, renovate existing ones and boost price competitiveness for the end customer. The success of this strategy depends on the ability to involve and guide our network, establishing specific objectives and regularly checking the results achieved. It should be stressed that our business model carries a risk of late customer payment and trouble in collecting credit in general. - We are exposed to risks associated with commercial expansion and brand extension. Our actions are designed to develop the existing commercial network and to strengthen our brands. Conversely, our growth could be negatively affected if we were not capable of: identifying appropriate markets and locations for new stores; maintaining expected levels of customer service; preventing a drop in sales and profits by stores selling Benetton products when we open directly operated megastores in the same regions or shopping areas; managing inventories on the basis of effective needs; delivering goods in due time. Our Groups systems, procedures and controls must be capable of supporting expansion. If not, the success of these strategies would not be guaranteed. - Our success also depends on the Groups ability to offer products that meet with consumer tastes. Our level of sales and profits also depends on the ability to anticipate and respond quickly to changes in fashion trends and consumer tastes. If our collections should fail to meet with customer approval, this would result in lower-than-planned sales, higher discounts, lower margins and higher inventories. - The Groups strategy of growth and expansion has caused fixed and operating costs to rise. In order to enhance our image and market share, we have also invested in selling our products through retail stores, even though our Group has traditionally distributed its products through an extensive worldwide customer network. However, these retail activities have resulted in an increase in fixed and operating costs. These investments also expose us to the risk that some of the chosen locations may prove to be unsuitable, due to demographic changes or location of shopping areas. - We must be able to organize and coordinate integrated production/logistics and commercial processes in order to meet the needs of a commercial calendar that satisfies the demands of ever-more sophisticated consumers. - Our future performance depends on our ability to develop the business in emerging markets. We are committed to taking forward the new commercial strategies. We are devoting particular attention to emerging markets like China and India, also involving agreements with large-scale retailers for the opening of stores in store in large shopping centers in the major cities. Our initiatives include the creation of new partnerships to manage and develop commercial activity. - We are making several changes to our information systems the very nature of which involves the risk of temporary business interruption. The modifications involve replacing current company systems with the latest versions, implementing changes and buying more integrated systems with new functions. We are aware of the risks associated with these activities, involving possible business interruption and inaccuracy of the data transferred. We nonetheless consider that we have taken all the necessary steps to limit these risks through testing, training and preparatory work, as well as through due commercial contact with suppliers of the replacement technology.

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Financial risks. We include in financial risks those associated with exchange rates, interest rates and credit.
Exchange rate risks. Our Groups assets, liabilities, sales, costs and hence operating profit are and will continue to be affected by exchange rate fluctuations in selling currencies and so in the price of products sold, the cost of sales and operating profit. Fluctuations in foreign currency exchange rates against the Euro may negatively impact assets, liabilities, sales, costs, operating profit and the international competitiveness of production by our different factories. Although we take out hedges to manage this exposure, there is a risk that the strategies adopted could fail to protect the results from negative effects arising from future fluctuations. Interest rate risks. We hold assets and liabilities that are sensitive to changes in interest rates and which are needed to manage liquidity and financial requirements. These assets and liabilities are exposed to interest rate risk, which is sometimes hedged through the use of derivatives. Credit risk and country risk. Our Group is exposed to risks associated with the internationalization of its business, including risks associated with late payment by customers in certain countries or with trouble in collecting credit in general. Our business is also exposed to political and economic instability in certain countries where we operate, to changes in laws, to language or cultural barriers, and to price or exchange rate controls.

Legal/compliance risks. Legal/compliance risks include:


- the possible inadequacy of company procedures designed to guarantee the observance of the principal laws in Italy and abroad affecting the Group, such as those governing the activities of listed companies and their related groups (Italys Consolidated Law on Finance, Italys CONSOB Regulations, Regulations of Borsa Italiana S.p.A., etc.). Issues associated with security, anti-trust and privacy regulations are also of particular importance; - the possible occurrence of events that negatively affect the credibility of our financial reporting (annual and interim financial reports), the accuracy of market disclosures and the safeguarding of assets; - the risk that an unexpected event interferes with the process of adopting Italian Law no. 262/2005 containing provisions to protect investors and regulate financial markets, forcing management to revise priorities to ensure prompt compliance; - the risks associated with the problems of keeping abreast of developments in the various sets of accounting standards adopted by our Group (IFRS and local accounting principles); - its international presence exposes the Group to different tax regimes. Changes in the related rules could expose the Group to risks of non-compliance.

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Corporate Governance report


pursuant to art. 124 bis TUF, art. 89 bis CONSOB Issuer Regulations and IA.2.6 of the Instructions accompanying the Stockmarket Regulations Traditional model of governance and control

Issuer: Benetton Group S.p.A. Website: www.benettongroup.com Year to which the Report refers: 2007 Report approved on: March 19, 2008

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Contents
Glossary 1. Issuer profile 2. a) b) c) d) e) f) g) h) i) l) m) Information on ownership structure (pursuant to art. 123 bis TUF) as of 03.19.2008 Structure of share capital Restrictions on share transfer Significant interests in share capital Shares carrying special rights Employee share ownership Restrictions on voting rights Shareholder agreements Appointment and replacement of Directors and amendments to Articles of Association Authority to increase share capital and authorizations to buy-back shares Change of control clauses Indemnity of Directors in the event of resignation, dismissal or termination following a takeover bid 3. 4. 5. Compliance Direction and coordination Board of Directors 54 54 55 55 55 58 60 61 62 62 63 48 49 51 51 51 51 52 52 52 52 52 53 53

5.1. Composition at year end 5.2. Role of the Board of Directors 5.3. Other Executive Bodies 5.4. Independent Directors 5.5. Lead Independent Director 6. Treatment of corporate information

7. Board Committees
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8. 9. 10. 11. 12.

Nominations Committee Remuneration Committee Remuneration of Directors Internal Audit Committee Internal Controls

64 64 65 66 68 68 69 69 70 70 70 71 72 73 74 74

12.1. Executive Director responsible for internal controls 12.2. Head of Internal Control 12.3. Organizational model under Italian Legislative Decree no. 231/2001 12.4. Independent auditors 12.5. Manager responsible for preparing the Companys financial reports 13. 14. 15. 16. 17. 18. Directors interests and transactions with related parties Appointment of Statutory Auditors Statutory Auditors Relations with shareholders Shareholders Meetings Changes since year end

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Glossary
Code: the Corporate Governance Code for listed companies approved in March 2006 by the Corporate Governance Committee and promoted by Borsa Italiana S.p.A. (the Italian Stock Exchange). Civ. Cod./C.C.: the Italian Civil Code. Board of Directors: the Board of Directors of Benetton Group S.p.A. Issuer or the Company or the Parent Company: Benetton Group S.p.A. Year: financial year to which this Report refers. Group: Benetton Group S.p.A. and all the companies under its control. Instructions accompanying the Stockmarket Regulations: the Instructions accompanying the Regulations of Markets organized and managed by Borsa Italiana S.p.A. Stockmarket Regulations: the Regulations of Markets organized and managed by Borsa Italiana S.p.A. CONSOB Issuer Regulations: the Regulations for issuers, published by CONSOB (Italys Stock Exchange Commission) in its resolution 11971/1999. CONSOB Market Regulations: the Regulations for markets, issued by CONSOB in its resolution 16191/2007. Report: the Corporate Governance Report that companies are required to prepare under art. 124 bis of TUF, art. 89 bis of the CONSOB Issuer Regulations and art. IA.2.6. of the Instructions accompanying the Stockmarket Regulations. TUF: Italian Legislative Decree no. 58 of February 24, 1998 (Italys Consolidated Law on Finance).

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1. Issuer profile
The Benetton Group paid particular attention to corporate governance in 2007, continuing to develop its decision-making/management, organizational and control structures in accordance with Italian and international best practices. Benetton Group S.p.A. has adopted the Corporate Governance Code for listed companies issued in 2006, in keeping with its specific peculiarities and characteristics as described in this report. The system of corporate governance, as outlined in this report, is based on the principles of fair and transparent management and disclosure, and includes an ongoing process of verifying their proper application and effectiveness. The Company has adopted the traditional system of corporate governance under which the company is governed by a Board of Directors, while the body that oversees observance of the law, the Companys Articles of Association and the principles of proper administration is the Board of Statutory Auditors, while an independent auditing firm sees to the audit of the accounts. The Internal Audit Committee (or Audit Committee for U.S. purposes) forming part of this system has assumed a fundamental role, as better described in the specific paragraph on this topic, also because of the listing of Benetton shares on the New York Stock Exchange - NYSE (up until January 2008). The process of deregistering the Benetton stock from the NYSE, started in September 2007, was completed in January 2008. The decision to abandon the US stockmarket was taken in view of the globalization of financial markets and the steady internationalization of the Italian Stock Exchange, and after having seen that the volumes traded on the NYSE were very small and that even the larger US shareholders traded the Benetton stock principally on the Italian Stock Exchange.

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Corporate Governance report

Governance of the Company as of 12.31.2007

SHAREHOLDERS MEETING (66.73% Edizione Holding S.p.A., 33.27% free float)

INDEPENDENT AUDITORS PricewaterhouseCoopers S.p.A.

BOARD OF STATUTORY AUDITORS A. Cas A. Cortellazzo F. Duodo

BOARD OF DIRECTORS
EXECUTIVE 1. L. Benetton, Chairman 2. A. Benetton, Deputy Chairman 3. G. Caccia Dominioni (CEO from 06.01.07) NON-EXECUTIVE 4. C. Benetton, Deputy Chairman 5. G. Benetton 6. G. Benetton 7. G. Mion INDEPENDENT 8. L.A. Bianchi 9. G. Brunetti 10. A. Malguzzi 11. R. Singer

SUPERVISORY & MONITORING BODY Legislative Decree 231/01 L.A. Bianchi General Counsel Head of Internal Control

INTERNAL AUDIT COMMITTEE & AUDIT COMMITTEE for SOX purposes G. Brunetti A. Malguzzi L.A. Bianchi
HEAD OF INTERNAL CONTROL

EXECUTIVE COMMITTEE L. Benetton A. Benetton G. Caccia Dominioni G. Mion

REMUNERATION COMMITTEE R. Singer A. Malguzzi G. Brunetti

DISCLOSURE COMMITTEE Chief Financial Officer Head of IR Head of Media & Comm. Head of Admin. & Report. General Counsel

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2. Information on ownership structure (pursuant to art. 123 bis TUF) as of 03.19.2008 a) Structure of share capital
Amount in Euro of subscribed and paid-in share capital: Euro 237,482,715.60 (Euro 237,478,139.60 as of 12.31.2007) Number of share classes making up share capital: 1 (ordinary shares)

No. of shares Ordinary shares 182,679,012

% of share capital 100%

Listed/unlisted Borsa Italiana S.p.A. Frankfurt Stock Exchange

Rights and obligations as per law

There are no shares with limited voting rights or without voting rights. Other financial instruments carrying the right to subscribe to new shares:

Listed/ unlisted Stock options Unlisted

No. of outstanding instruments 100,000 (220,838 as of 12.31.07)

Class of shares servicing conversion/exercise ordinary

No. of shares servicing conversion/exercise 100,000 (ratio 1:1)

Exercise price Euro 8.98

Full details of the latest status of the current stock option plan can be found in the related paragraph forming part of the Directors report. The stock option plan can be viewed in the Corporate Governance section of the Companys website at www.benettongroup.com.

b) Restrictions on share transfer. There are no restrictions on the transfer of Benetton shares, or limits on their ownership,
nor are there any special requirements in order to become a shareholder.

c) Significant interests in share capital (as of 03.19.2008)


% of ordinary capital 67.08 2.62 % of voting capital 67.08 2.62

Declarant Ragione S.A.p.A. di Gilberto Benetton e C. Zenit Asset Management AB

Direct shareholder Edizione Holding S.p.A. Zenit Asset Management AB

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d) Shares carrying special rights. No shares have been issued granting special rights of control nor are there parties with
special powers as defined by Italian Law no. 474/1994.

e) Employee share ownership: mechanism for exercising voting rights. There is no employee share ownership scheme. f) Restrictions on voting rights. There are no restrictions of any kind on the free and full exercise of voting rights by shareholders.
This is without prejudice to the requirements that must be fulfilled before being able to exercise voting rights, described in Paragraph 17.

g) Shareholder agreements. The Issuer is not aware of any agreements between shareholders pursuant to art. 122 TUF
(shareholder agreements).

h) Appointment and replacement of Directors and amendments to Articles of Association.


The appointment and replacement of Directors is governed by prevailing laws and regulations, as reflected and supplemented within the permitted limits, in the Articles of Association, which have been drawn up in compliance with the recommendations of the Corporate Governance Code for listed companies. Art. 14 of the Companys Articles of Association (available in the Corporate Governance section of the website at www.benettongroup.com) establishes how Directors are appointed and replaced. In particular, this article establishes that the Board of Directors is appointed by the Shareholders Meeting on the basis of lists presented by the shareholders, filed at the Companys registered office at least 15 days in advance of the date set for the first calling of the Shareholders Meeting convened to vote on the appointment of Directors. The lists must be accompanied by (a) information about the shareholders who have filed the lists, (b) documentation confirming them as shareholders and the percentage of share capital they own, (c) comprehensive details on the personal characteristics and experience of the candidates, (d) details as to whether the candidates qualify as independent Directors, (e) a statement by the candidates themselves confirming that they are in possession of the requirements envisaged by prevailing statutory and regulatory provisions and the absence of any reasons for incompatibility and/ or ineligibility and (f) statements by the candidates in which they accept their candidacy and provide details of their appointments as Directors or statutory auditors in other companies. The lists must be promptly published on the Companys website. Lists may be presented by only those shareholders who own, alone or together with others, at least 2.5% of share capital, or the minimum percentage envisaged by prevailing statutory and regulatory provisions in this regard. Details of such lower percentage and the procedures for appointing Directors must be provided in the notice convening the Shareholders Meeting. All the Directors requiring election, bar one, are taken from the list obtaining the highest number of votes in the Shareholders Meeting (Majority List), in the consecutive order in which they appear on that list. One Director is taken from the list obtaining the second highest number of votes in the Shareholders Meeting (Minority List), which must not be associated in any way, even indirectly, with the Majority List; the Director elected in this case is the candidate at the head of this list. No account is taken of lists that fail to obtain a percentage of votes corresponding to at least half of that required for their presentation. The Articles of Association contain a mechanism that ensures that if one or more Directors vacates office during the year, he is replaced
Corporate Governance report

by a Director from his same list, whether the Majority List or the Minority List.

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The majority required for amending the Articles of Association is the same as that specified in the same Articles of Association for resolutions by the Shareholders Meeting in extraordinary session: meetings held in first and second calling have a quorum if attended by shareholders representing more than half of share capital and can pass resolutions with the favorable vote of at least two-thirds of share capital represented at the meeting. Meetings convened in third calling have a quorum if attended by shareholders representing more than one third of share capital and can pass resolutions with the favorable vote of at least two thirds of share capital represented at the meeting. The Board of Directors is responsible for updating the Articles of Association to comply with the latest statutory and legal requirements.

i) Authority to increase share capital and authorizations to buy-back shares. The Extraordinary Shareholders
Meeting held on September 9, 2004 resolved to empower the Board of Directors to increase share capital by up to Euro 6,500,000, by issuing 5,000,000 shares, excluding pre-emption rights for shareholders, to service the stock option plan approved on July 15, 2004 (available in the Corporate Governance section of the Companys website at www.benettongroup.com). The Board of Directors has issued 3,233,577 options in execution of this authority, resolving at the same time to increase share capital on one or more occasions by Euro 4,203,650 by issuing the same number of shares as that of the options. Subsequently, in September 2006, further to a review of the overall, structure, scope and principles of the system of incentives and having consulted the Remuneration Committee and obtained the agreement of management, the Board of Directors cancelled the Plan, making the options linked to its second tranche no longer exercisable, ie. half of the total options issued, and revoking the associated part of the authority to increase share capital (by another Euro 2,296,349.90). Consequently, the Board of Directors is currently not in possession of any authority to increase share capital under art. 2443 of the Italian Civil Code. As described in the paragraph on the stock option plan forming part of the Directors report and in a) of Section 2 above, there are still 100,000 outstanding stock options carrying the right to subscribe to an equal number of shares. The Board of Directors has not been granted any authority to issue equity instruments. The Shareholders Meeting has not authorized the buy-back of shares, allowed by art. 2357 et seq. of the Italian Civil Code, to service the exercise of options. The Company does not own any treasury shares at the end of the year under review.

l) Change of control clauses. The Company and its subsidiaries have not made any significant agreements that become
effective, are amended or are terminated in the event of the contracting companys change of control. An agreement has been made by one of the Groups Italian subsidiaries, as part of a partnership arrangement with equal interests in the capital of a company carrying out retail activities in Italy, which establishes that, in the event of a change in the Companys control, the partner may exercise an option to sell its interest in the company at a market value determined by independent third parties. The sales of the company, whose shares are the object of this put option, account for less than 2% of the Groups consolidated revenues.

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m) Indemnity of Directors in the event of resignation, dismissal or termination following a takeover bid.
The Company has made an agreement with the Chief Executive Officer whereby he will be paid an indemnity in the event of termination of office for reasons other than resignation or cause. This indemnity is equal to the amount of his remuneration established for the remainder of his mandate and may nonetheless not be lower than his fixed annual remuneration. The Chief Executive Officer has been granted a mandate for the years 2007-2009 with a fixed annual remuneration of Euro 900,000. There are no agreements of this kind between the Company and other Directors.

3. Compliance
By Board resolution in February 2007, the Company has explicitly adopted the principles and recommendations of the Code in the manner and terms disclosed annually in the Corporate Governance Report. The Company has not adopted any codes of self-regulation issued by other entities. As mentioned in the introductory paragraph, the listing of Benetton shares on the NYSE (up until January 2008) involved complying with the legal and regulatory provisions established by the Securities Exchange Commission (SEC) and by NYSE for foreign private issuers, including the Sarbanes Oxley Act of 2002 as subsequently amended and updated. Compliance with this act has involved implementing and developing a particularly structured and effective system of internal controls, capable of adequately mapping and constantly monitoring the administrative and control processes adopted by the Company and the Group. The Groups corporate governance structure is heavily permeated with principles, processes and procedures that not only comply with US legislation but also best international practice in general. More details in this regard can be found in Section 11 of this report relating to Internal Control. When adopting the resolution to delist and deregister, the Board of Directors, explicitly supported by the Internal Audit Committee, informed the executive Directors, who in turn informed management, of its firm intention to basically maintain the high standards of governance and internal control achieved during the period of listing on the NYSE, even though the Company is no longer subject to US law. The deregistration formed part of a more complex reorganization project in the finance area, which has resulted in a general optimization of corporate organizational structure. In particular, the deregistration was an occasion for focusing the way internal controls are monitored on the substantive aspects of such controls over the Companys more important and riskier processes, helping reduce the number of obligations least relevant to the Companys specific needs. As a result, a number of areas of risk were revisited and the audit programs were redefined also on the basis of current expansion plans and business strategy. Internal controls, in the broad sense, have therefore been made more serviceable to company objectives.

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4. Direction and coordination


Benetton Group S.p.A. is the Parent Company of a group of other companies but is not subject to direction and coordination - as defined by articles 2497 et seq. of the Italian Civil Code - by its own holding company Edizione Holding S.p.A. In fact, the Company is free to negotiate with third parties and, in keeping with such autonomy, there are no authorization or reporting procedures involving the holding company, nor does the holding company have a centralized treasury function, which dictates or otherwise financial and/or lending policy. The Groups administration and control is structured within the Group itself, with Benetton Group S.p.A. acting as the ultimate reporting entity. The Company also has a sufficient number of independent Directors to ensure that their opinions carry a significant weight in Board decisions. This conclusion is also supported by the following facts: - there are no organizational structures dedicated to direction and coordination by the holding company; - business, financial and strategic plans and budgets for the Group are limited to the Group and its members; - the holding company Edizione Holding S.p.A. does not centrally manage relationships with public and private institutions. In January 2004, all Italian subsidiaries owned, directly or indirectly, by Benetton Group S.p.A. acknowledged the role of direction and coordination played by the Parent Company and have complied with the legal obligations to disclose this fact.

5. Board of Directors 5.1. Composition at year end. The Board of Directors in office at the close of 2007 will end its term in office with the approval
of the financial statements at December 31, 2009.

Name Luciano Benetton Carlo Benetton Alessandro Benetton Gerolamo Caccia Dominioni Giuliana Benetton Gilberto Benetton Gianni Mion Alfredo Malguzzi Robert Singer Giorgio Brunetti Luigi Arturo Bianchi
(1) (2) (3) (4)

Office Chairman Deputy Chairman Deputy Chairman CEO Director Director Director Director Director Director Director

In office since 04.26.2007 04.26.2007 04.26.2007 04.26.2007 04.26.2007 04.26.2007 04.26.2007 04.26.2007 04.26.2007 04.26.2007 04.26.2007

List (1)
(1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1)

Exec. (2) X

Non exec. (2) X

Indep. (3)

Indep. TUF (3)

% BoD Other attendance (4) appointments (5) 77.8% 66.7% 88.9% 71.4% 1 2 8 0 1 10 10 9 5 4 3

X X X X X X X X X X X X X X X X X

55.6% 66.7% 77.8% 100.0% 77.8% 88.9% 100.0%

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List of origin (majority/minority). Not applicable. The Board was appointed before adopting the new provisions contained in the Articles of Association establishing appointment by list voting. Exec./Non exec.: indicates if the Director qualifies as executive or otherwise. Indep./Indep. TUF: indicates if the Director qualifies as independent under the criteria established by the Code and/or art. 148 TUF. The Company has adopted the criteria established by the Code in full without amendments (see Paragraph 5.5). % BoD attendance: indicates the Directors attendance record in percentage terms at Board meetings (the calculation of this percentage reflects the number of meetings attended by the Director relative to the number of Board meetings held during the year or after the Directors appointment). (5) Other appointments: indicates the total number of appointments held in other companies listed on regulated markets (in Italy or abroad) and in financial, banking, insurance or large companies.

Following on from the previous table

Name Luciano Benetton Carlo Benetton Alessandro Benetton Gerolamo Caccia Dominioni Giuliana Benetton Gilberto Benetton Gianni Mion Alfredo Malguzzi Robert Singer Giorgio Brunetti Luigi Arturo Bianchi
(6) (7) (8) (9) (10)

Office Chairman Deputy Chairman Deputy Chairman CEO Director Director Director Director Director Director Director

E.C. (6) C M M

% E.C. attendance (7)

N.C. (8)

% N.C. (8)

R.C. (9)

% R.C. (10)

I.A.C. (11) % I.A.C. (12)

M M C M 100 100 100 C M 100 100 M 100

E.C.: Executive Committee; C = Chairman; M = Member. % E.C. attendance: indicates the Directors attendance record in percentage terms at Executive Committee meetings. The Executive Committee did not meet in 2007. N.C. Nominations Committee: the Company has not set up a Nominations Committee (see Section 8). R.C.: Remuneration Committee; C = Chairman; M = Member. % R.C.: indicates the Directors attendance record in percentage terms at Remuneration Committee meetings (the calculation of this percentage reflects the number of meetings attended by the Director relative to the number of Remuneration Committee meetings held during the year or after the Directors appointment to this committee). (11) I.A.C.: Internal Audit Committee; C = Chairman; M = Member. (12) % I.A.C.: indicates the Directors attendance record in percentage terms at Internal Audit Committee meetings (the calculation of this percentage reflects the number of meetings attended by the Director relative to the number of Internal Audit Committee meetings held during the year or after the Directors appointment to this committee).

Appendix A to this report contains a short curriculum vitae of every Director, listing the other appointments referred to in footnote (5) above. The following Directors ceased to hold office during the year:

Name Silvano Cassano Ulrich Weiss

Office Director Director

In office from/to 01.01.07 to 04.26.07 01.01.07 to 04.26.07

List (1)
(1) (1)

Exec. (2)

Nonexec. (2) X

Indep. (3) X

% BoD attendance (4) 0 100

Other appointments (5) 1 1

See the footnotes to the two previous tables.

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Following on from the previous table

Name Silvano Cassano Ulrich Weiss

Office Director Director

E.C. (6)

% E.C. (7)

N.C. (8)

% N.C. (8)

R.C. (9) C

% R.C. (10) 100

I.A.C. (11) C

% I.A.C. (12) 100

See the footnotes to the two previous tables. Silvano Cassano held the office of Chief Executive Officer until November 2006; he stayed on as a Director until April 26, 2007. Gerolamo Caccia Dominioni assumed the office of Director on April 26, 2007 and that of Chief Executive Officer on June 1, 2007. During the period from November 2006 to June 1, 2007 the operational management of the Company and the Group was primarily guaranteed by the executive powers granted to the Chairman, supplemented by a detailed system of delegated authority and powers of attorney involving all the principal heads of department. The Board of Statutory Auditors and the Internal Audit Committee have expressed their opinion on the adequacy and effectiveness of this system of delegated authority and powers of attorney. Maximum number of appointments allowed in other companies. The Board of Directors considers that the maximum number of appointments that its own Directors may hold as a Director or statutory auditor of other listed companies, banks, insurance companies, other financial organizations or other companies of significant size should be compatible with their effective performance of the office accepted in the Company. Accordingly the Board has adopted the following guidelines on the maximum number of appointments Directors may hold in other companies: a) an executive Director, apart from the office held in the Company, must not serve as: i) an executive Director of another listed company, or of a bank, insurance company or other financial organization or a company with net equity of more than Euro 10 billion; ii) a non-executive Director or statutory auditor (or member of another control body) of more than three of the aforesaid companies; b) a non-executive Director, apart from the office held in the Company, must not serve as: i) an executive Director of more than one of the aforesaid companies and as a non-executive Director or statutory auditor (or member of another control body) of more than three of such companies; ii) a non-executive Director or statutory auditor of more than six of the aforesaid companies. The total number of appointments held excludes companies in which Ragione S.A.p.A. di Gilberto Benetton e C. has a direct or indirect interest. In any case, before accepting the office of Director or statutory auditor (or member of another control body) in another company which is not directly or indirectly controlled by Benetton Group S.p.A. or in which the latter has a direct or indirect investment, executive Directors must inform the Board of Directors, which precludes acceptance of the appointment if it considers it to be incompatible with the executive Director functions already held and with the interests of Benetton Group S.p.A.

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Also based on the above criteria, the Board of Directors considers that during the year under review none of its members has accepted or held appointments in other companies whose number has prevented constant, attentive and effective performance of their role in the Company. This opinion has been formalized in a Board resolution and is being made public through this report.

5.2. Role of the Board of Directors. The Board of Directors met nine times during 2007; these meetings lasted an average of
two hours each. Senior managers from the Company and the Group with specific knowledge and responsibility regarding the subjects being discussed were frequently invited to attend Board meetings. The Board is due to hold nine meetings in 2008, two of which have already taken place (February 21 and March 19). In accordance with the Articles of Association, the Board is responsible for examining and approving the strategic, business and financial plans of the Company and the Group and their system of corporate governance. These matters are excluded from those delegated to the Executive Committee and the Chief Executive Officer or to the executive Directors in general (see Paragraph 5.3). During 2007 the Board examined and approved, amongst others, policies guiding Group operations, recommendations concerning organization and corporate governance, general guidelines regarding human resources management, proposals to reorganize corporate structure, operating performance, extraordinary operations and the quarterly, half-year and annual results. Also thanks to the work of the Internal Audit Committee, the Board paid particular attention to the organizational, administrative and accounting structure of the Company and the Group as established by the Chief Executive Officer, including the operation of the internal control system and the procedures for managing conflicts of interest. For the purposes of identifying the Groups strategically important companies and thus relevant for the above analysis and review, a materiality limit was first defined in terms of percentage of net capital and income before taxes with reference to the consolidated balance sheet and statement of income respectively; this made it possible to identify the companies considered most important, some of which were treated as a whole (Benetton Group S.p.A., Bencom S.r.l., Benind S.p.A., Olimpias S.p.A., S.I.G.I. S.r.l.) while others were considered only with reference to certain operational processes (Benetton Asia Pacific Ltd., Benetton Realty France S.A., Benetton Korea Inc. and Benetton Japan Co., Ltd.). Based on these results, and in view of the work of the Internal Control Committee on evaluating the adequacy of internal controls, the Board of Directors, having obtained the favorable opinion of the Internal Control Committee, reached a positive conclusion on the aforementioned organizational, administrative and accounting structure of the Company and the Group. The Board of Directors reviewed the periodic reports by the Internal Audit Committee containing details of its work, its assessment of the adequacy of internal controls, and its latest steps to ensure compliance with the Sarbanes Oxley Act (see Section 3). The executive bodies reported to the Board of Directors and Board of Statutory Auditors at least once every three months on the Groups more important operations and activities, with particular reference to significant, atypical, unusual or related party transactions.

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The necessary documentation and information were provided to Directors in reasonable advance of Board meetings, such that they were able to make decisions in an informed manner on the various issues being discussed. The Board formalized, discussed and agreed a self-evaluation report on the size, composition and operation of the Board itself and its committees. The overall assessment was positive, revealing that group discussion was both open and direct with respect and appreciation shown for individual contributions. The Directors acknowledged that the conditions had been satisfied for them to carry out their role in an informed and conscious fashion. On this occasion, certain managerial/operational issues affecting the business were also identified for inclusion on the agendas of Board meetings in order to extend collective debate to these topics as well. The independent Directors were in agreement with the above self-evaluation report and discussed it during their annual meeting (see Paragraph 5.4). The current system of delegated authority, along with the Procedure for Related Party Transactions and Significant Transactions, as discussed below (see Section 13, particularly when one or more Directors has an interest, either directly or through a third party, in a significant transaction or related party transaction) and the reporting procedures adopted, ensure that the Board is informed of all transactions with a significant impact on the balance sheet, statement of income and financial position of the Company and its Group. In particular, this Procedure defines significant transactions as those whose value exceeds Euro 5 million, which require the prior authorization of the Board of Directors; in such a case every Director or statutory auditor is entitled to request that the value of the transaction be assessed by one or more experts appointed for this purpose. The Procedure also calls for the prior approval of the Board of Directors for all those transactions with a significant impact on the balance sheet, statement of income and financial position of the Company and the Group and whose consideration, standing of the counterparty, subject-matter, method or timing of execution could affect the safekeeping of company assets. The Company has also issued a group policy, also adopted by the Boards of Directors of its subsidiaries, for the exercise of powers granted to its own proxyholders and to Directors and proxyholders of its subsidiaries. Under this policy, the executive Directors of all Group companies, even if in possession of the related authority, must obtain prior approval from the Board of Directors (or Shareholders Meeting) of their respective companies for the following transactions, should these fall outside the ordinary course of intragroup business: issue of guarantees, grant or request for loans, purchase or sale of property, purchase or sale of shares in companies and (with some exceptions) business units. The Board of Directors (or Shareholders Meeting) of the subsidiary in question must subsequently report, through its Chairman, to the Chief Executive Officer of the Parent Company. At the same time the Parent Company is also guaranteed a continuous, adequate flow of information thanks to the provisions of the Procedure for Corporate Information Disclosure (see Section 6). The Board has not received any declarations from its Directors that they are conducting activities in competition with the Issuer; the Companys shareholders have not authorized any exceptions to the non-compete provisions contained in art. 2390 of the Italian Civil Code. Having examined the recommendations of the Remuneration Committee and consulted the Board of Statutory Auditors, the Board of Directors has determined the remuneration of the executive Directors and other Directors holding particular office, allocating accordingly the overall compensation due to Board members approved by the Shareholders Meeting.

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5.3. Other Executive Bodies


Chief Executive Officers. The Board of Directors has granted operational powers to the Chairman, the Deputy Chairman and the Chief Executive Officer. Chairman - Deputy Chairman. The Chairman, Luciano Benetton, is vested with the powers of company representation and the power to carry out all acts relating to the Companys activities, with limitations on certain types of act and the following transactions in particular: - the purchase and sale of equity interests or corporate bonds for amounts exceeding Euro 25 million; - the guarantee of obligations of parties other than subsidiaries for amounts exceeding Euro 25 million; - the purchase and sale of business units and the purchase and sale of property for amounts exceeding Euro 25 million; - the grant of loans and finance to parties other than subsidiaries for amounts exceeding Euro 5 million. The Deputy Chairman, Alessandro Benetton, is vested with the powers of company representation and the power to carry out all acts relating to the Companys activities, with limitations on certain types of act and the following transactions in particular: - the purchase and sale of equity interests or corporate bonds for amounts exceeding Euro 15 million; - the guarantee of obligations of parties other than subsidiaries for amounts exceeding Euro 15 million; - the purchase and sale of business units and the purchase and sale of property for amounts exceeding Euro 15 million; - the grant of loans and finance to parties other than subsidiaries for amounts exceeding Euro 5 million. The Board of Directors has appointed a second Deputy Chairman (Carlo Benetton), who has not been granted operational powers, but who has been given the power to represent the Company if the Chairman is absent or otherwise unable. Chief Executive Officer. The Chief Executive Officer, Gerolamo Caccia Dominioni, has been vested with the power to carry out all acts relating to the Companys ordinary administration and certain acts of extraordinary administration, with the following limitations: - the purchase and sale of equity interests for amounts exceeding Euro 5 million; - the purchase and sale of securities and bonds for amounts exceeding Euro 10 million; - the purchase and sale of business units and the purchase and sale of property for amounts exceeding Euro 10 million; - the grant of loans to parties other than subsidiaries for amounts exceeding Euro 2.5 million; - the guarantee of loans to companies that are not wholly controlled, either directly or indirectly, by Benetton Group S.p.A. In the Companys model of governance, the Chief Executive Officer is its principal executive officer, being effectively responsible for running the business. The Board has decided to grant the aforementioned operational powers to the Chairman and the Deputy Chairman in order (a) to guarantee continuity and stability in managing the activities of the Company and the Group, also operationally, giving them the opportunity to have a wider, more effective role internationally and with institutions and (b) to benefit from their wealth of experience and unquestionable business expertise gained in the Companys particular sector, along with their extensive knowledge of the Company and the Group.
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The Board has not considered it necessary to designate one of the independent Directors as Lead Independent Director (see Paragraph 5.5). None of the other Directors has operational powers. Executive Committee. The Executive Committee consists of the Chairman, Luciano Benetton, the Deputy Chairman, Alessandro Benetton, the Chief Executive Officer, Gerolamo Caccia Dominioni, and the Director, Gianni Mion. The meetings of the Executive Committee are attended by members of the Board of Statutory Auditors and the Chairman of the Internal Audit Committee, none of whom is entitled to vote. The Executive Committees responsibilities include reviewing strategic, business and financial plans for the Company and the Group, as well as annual budgets and interim forecasts, presented by the Chief Executive Officer, and defining them prior to their examination by the Board of Directors. The Executive Committee also examines and approves particularly significant investment and divestment plans, the grant of loans and the provision of guarantees, and analyzes the more significant issues relating to Company performance, also to enable the Board of Directors to carry out its legal duties more effectively. The Executive Committee did not meet in 2007 since its members decided to discuss the above matters directly in meetings of the Board of Directors. The reasons for opting for a group discussion directly by the entire Board of Directors are mostly to do with the absence in the first five months of the year of a Chief Executive Officer. In fact, in the Companys model of governance the latter is the person who stimulates, promotes and organizes the Executive Committees activities, when appropriate and/or necessary. No Executive Committee meetings have been held so far in 2008, nor have any been planned as yet. Reporting to the Board of Directors. The executive bodies have reported to the Board of Directors at least once every three months on the activities carried out in the exercise of the authority vested in them. Directors knowledge of company business and operations. In order to improve Directors knowledge of the business and its operations, allowing them to fulfill their duties more effectively, the Chairman has seen to it that Board meetings have also discussed matters associated with the Groups institutional ends as well as initiatives that have been undertaken not always directly and/or solely associated with the Companys core business. The frequent participation at Board meetings of the Companys senior managers, invited to discuss specific items on the agenda, has also helped achieve this purpose.

5.4. Independent Directors. Once a year, the Board of Directors evaluates the qualifications of independence of all members
in accordance with the Code, also on the basis of information provided by the Directors themselves. The assessment is reported and formalized during the Board meeting which approves the draft annual financial statements and is based on all the independence requirements contained in the Code. The Board of Statutory Auditors verifies the criteria and procedures adopted by the Board for verifying the independence of Directors and reports the results of this work in the report presented to the Shareholders Meeting. The last report by the statutory auditors to the Shareholders Meeting (April 2007) expressed a favorable opinion. The Articles of Association do not include any restrictions on the re-election of Directors.

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The independent Directors met once during the year without the presence of the other Directors. They discussed the matters contained in the annual evaluation of the size, composition and operation of the Board of Directors, the adequacy of the Companys general organizational, administrative and accounting structure and the adequacy of information provided by subsidiaries to the Parent Company.

5.5. Lead Independent Director. In view of the comments contained in Paragraph 5.3 about the Chief Executive Officer
(being the Companys principal executive officer, separate from the Chairman of the Board of Directors), the conditions for appointing a Lead Independent Director are not considered to exist. On this subject it should be noted that the Chairman of the Board of Directors cannot be viewed as the person who controls the Issuer (Application Principle 2.C.3 of the Code). This is because being only one of the members of the family which controls the Company, adequate counterweights on the extension of his powers are deemed to exist.

6. Treatment of corporate information


The Company adopted the Procedure for Corporate Information Disclosure in February 2007, which represents a formalization of the set of existing company procedures designed to govern the preparation, circulation and publication of corporate information, with particular reference to price sensitive information. This procedure identifies and dictates the standards of conduct, the roles and responsibilities of individual company departments variously involved in the process of preparing and publishing the annual statutory and consolidated financial reports, the Form 20-F report, the interim financial reports (half-year and quarterly reports and related Form 6-K) and other information of a financial or confidential and/or price sensitive nature. This procedure also contains the guidelines followed for managing, monitoring and updating the internal system of administrative and accounting controls and related procedures, designed to allow management to issue the certifications and declarations required under both Italian legislation and U.S. law (Sarbanes Oxley Act). This procedure also requires all the Groups employees and collaborators to adopt certain standards of general conduct with the prime purpose of guaranteeing the confidentiality of the information learned in the performance of their duties. The Chief Executive Officer, in agreement with the Chairman, oversees management of confidential information, as well as the process of updating the Procedure for Corporate Information Disclosure. Communications and relations with the press and institutional and private shareholders are the responsibility of the Media & Communications and Investor Relations departments respectively. Price sensitive information is publicly disclosed only after the related press release has received final approval from the Board of Directors or Chief Executive Officer. The Media & Communications, Investor Relations and Corporate Affairs departments all take part in the process of drawing up press releases, each with reference to their specific area of responsibility. A collective body known as the Disclosure Committee also takes part in this process. Its rules of procedure were approved at the same time as the Procedure for Corporate Information Disclosure (of which it forms an integral part). The Disclosure Committee plays a primarily consultative role, acting as an instrument at the disposal of the Chief Financial Officer
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(in charge of the Accounting, Finance and Control department) and the Chief Executive Officer in performing the controls required of

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them - with the associated responsibilities - regarding the correctness, with regard to current legislation, clarity, timeliness, completeness, reliability and transparency of the information being disclosed to the market. The Disclosure Committee consists of permanent members and members explicitly invited to take part in its meetings for the purposes of discussing specific topics. The permanent members are the persons in charge of Accounting, Finance and Control, Media & Communications, Investor Relations, Administration and Reporting and Corporate Affairs. The work of this Committee - like the entire Procedure for Corporate Information Disclosure - forms part of the Disclosures Controls and Procedures and Internal Control Over Financial Reporting required by Sections 302 and 404 respectively of the Sarbanes Oxley Act, as well as part of the Administrative and accounting procedures for preparing statutory and consolidated financial statements and any other type of financial communication under art. 154-bis of TUF. The Procedure for Corporate Information Disclosure and the Disclosure Committee Rules of Procedure can be found in the Corporate Governance section of the Companys website at www.benettongroup.com. Since the end of 2006 the Company has adopted a new set of Internal Dealing Regulations to replace those previously adopted in 2002. In compliance with art. 114 of TUF and art. 152-sexies et seq. of the CONSOB Issuer Regulations, the latest Internal Dealing Regulations contain new terms, conditions and procedures for the reporting and disclosure of transactions in Benetton stock by Relevant Persons (as defined by the Regulations themselves). The Company has made provision for extended black-out periods preceding the approval of the annual and interim financial reports, during which persons defined by the Regulations as Relevant Persons may not deal in Benetton stock. The Internal Dealing Regulations can be found in the Corporate Governance section of the Companys website at www.benettongroup.com. Still in relation to price sensitive information, the Company has also adopted and implemented a Register of Insiders, in compliance with the provisions of art. 115-bis of TUF and art. 152-bis-quinquies of the CONSOB Issuer Regulations, after obtaining Board approval for the related procedural rules. This Register currently contains the names of those persons who, by virtue of their work or profession or the functions carried out on Benettons behalf, have access to price sensitive information regarding the Group. The Register of Insiders Regulations can be found in the Corporate Governance section of the Companys website at www.benettongroup.com.

7. Board Committees
The Company has not set up any committees within the Board of Directors other than those envisaged by the Code nor has it combined in a single committee the duties performed by two or more committees envisaged by the Code. Other committees not envisaged by the Code have however been set up outside the Board of Directors; these consist of committees comprising heads of specific company departments whose purpose is to optimize organization and/or internal control and generally seek to identify centers of responsibility for individual processes, procedures or stages of the same, both as part of the wider business management process and as part of accounting and administrative procedures.

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8. Nominations Committee
In view of the Companys current shareholder structure, the Board of Directors has not deemed it necessary to set up a Directors Nominations Committee.

9. Remuneration Committee
The Board of Directors nominated the following Directors as members of the Remuneration Committee for financial year 2007: Robert Singer (Chairman), Alfredo Malguzzi and Giorgio Brunetti. This Committee is therefore entirely made up of independent Directors who, as such, do not take part in share-based incentive schemes or earn remuneration which includes a variable part linked to company results, thereby ensuring that their approach to the topics discussed by this Committee is entirely objective. As expressly stated in the related rules of procedure, the Remuneration Committee makes recommendations for submission to the Board of Directors, which decides without the presence of those directly concerned, who absent themselves from the meeting during the debate and voting on the resolutions in their regard. The Human Resources Director was invited by the Committees Chairman to attend its meetings and to act as its secretary with responsibility for (i) taking the meetings minutes, (ii) working with the Committee in order to provide its members with the information they considered necessary for carrying out their duties and (iii) keeping its members updated about actual trends in corporate remuneration policies. The Remuneration Committee met twice in 2007. It took decisions regarding incentives and targets in the long and short-term incentive schemes for the Chief Executive Officer and the short-term schemes for senior management, which were also subsequently examined by the Board of Directors; it also analyzed the problems associated with managing the stock option plan and assessed the general principles adopted for the remuneration of key management personnel, reporting its findings to the Board as part of the process of approving short-term incentive schemes for management. Once again in 2007, the Committee provided recommendations to the Board of Directors as to how it should divide up the overall amount of Directors remuneration approved by the shareholders between the executive Directors and/or those with particular responsibilities, as reported in the Explanatory notes to the consolidated financial statements of the Benetton Group. The Committees Rules of Procedure allow it to use the services of external advisors at the Companys expense, even if there is no specific predetermined budget, provided the Companys Chief Executive Officer or Chairman is asked beforehand. The Committee nonetheless did not consider it necessary to use the services of any external advisors during 2007.

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10. Remuneration of Directors


A significant part of the Chief Executive Officers remuneration is linked to the Companys results on the basis of specific targets set beforehand by the Board of Directors, after consulting the Remuneration Committee. In keeping with and as a direct consequence of what was said in Paragraph 5.3 about the role of Directors with executive authority (Chairman, Deputy Chairman and Chief Executive Officer), the remuneration of the Directors, except that of the Chief Executive Officer, is not linked to the Companys results, nor does any Director take part in share-based incentive schemes, again except for the Chief Executive Officer. Attendance fees are payable to independent Directors for their attendance at meetings of the Board of Directors and its committees. A significant part of the remuneration of key management personnel is linked to the Companys results on the basis of both quantitative and qualitative objectives agreed with the Chief Executive Officer, after consulting the Remuneration Committee. Details of the outstanding part of the stock option plan can be found in the related paragraph in the Directors report. There are currently no other share-based incentive schemes. Directors remuneration - including remuneration for committee membership and attendance fees

Name Luciano Benetton Carlo Benetton Alessandro Benetton Gerolamo Caccia Dominioni Gilberto Benetton Giuliana Benetton Luigi Arturo Bianchi Giorgio Brunetti Alfredo Malguzzi Gianni Mion Robert Singer Ulrich Weiss (2)

Emoluments of office (1) 1,600 800 1,100 600 100 800 93 112 93 50 65 15

Benefits in kind

Bonuses and other incentives

Other remuneration

Total 1,600 800 1,100

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648 100 800 93 112 93 50 65 15

(1) Up until approval of the financial statements at 12.31.2007. These figures refer to emoluments relating to 2007. (2) Director until 04.26.2007.

Key management personnel earned total remuneration of Euro 2,115,000 in 2007. This amount refers to the total remuneration earned by Biagio Chiarolanza, Chief Operations Officer, by Emilio Fo, Chief Financial Officer, by Andrea Negrin, Human Resources Director, and Adolfo Pastorelli, Chief Information Technology Officer.

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11. Internal Audit Committee


The Internal Audit Committee consists of three independent, non-executive Directors. The Directors Giorgio Brunetti (Chairman), Luigi Arturo Bianchi and Alfredo Malguzzi were appointed as members of this Committee on April 26, 2007. Since Benetton shares are listed on the New York Stock Exchange, the Company has complied with the provisions of recent U.S. legislation concerning foreign private issuers by vesting the Internal Audit Committee in 2005 with all the powers needed to fulfill the requirements attributed to the audit committee by such legislation. This decision, which was formally approved by the Companys Board of Directors, was officially communicated to and approved by the U.S. Securities Exchange Commission (SEC) in Washington. Such approval was obtained also thanks to the fact that the Committee is entirely made up of independent Directors, one of whom (Giorgio Brunetti) qualifies as a financial expert under the definition of the aforementioned legislation (in possession of adequate experience in accounting and finance as required by the Code). The Internal Audit Committees rules of procedure establish that this body, insofar as allowed by Italian laws and regulations, shall have all the authority, duties, powers and responsibilities required of the audit committee under U.S. law. Early in 2007 the Board of Directors approved a number of amendments to the Internal Audit Committees rules of procedure in order to bring its duties into line with those contained in the Code. Accordingly and also for the purposes specified above, the Internal Audit Committees main duties now include: - to assist the Board of Directors in defining guidelines for the system of internal controls and in determining the criteria for deciding whether the risks facing the Company and its subsidiaries are compatible with sound, proper business management; - to oversee the monitoring of internal controls by assisting the Board of Directors in evaluating the adequacy, effectiveness and actual operation of the same; - to assess, together with the Manager responsible for preparing the Companys financial reports and the independent auditors, the appropriateness of the accounting standards adopted and their consistency for the purposes of preparing the consolidated financial statements; - to receive, as the point of contact for the independent auditors, information and/or communications regarding the consolidated financial report and Form 20-F concerning critical issues involving certain accounting practices and/or alternative accounting practices; - to assess, with the assistance of the Manager responsible for preparing the Companys financial reports and the Head of Internal Control, the proposals presented by independent auditing firms for obtaining the audit contract; - to monitor the effectiveness of the independent audit process and assess the results presented in the independent auditors report and any management letter; - to evaluate all auditing and other services provided by the independent auditors and express an opinion as to their appropriateness and consistency as a necessary requirement prior to confirming their engagement; - to assess and verify the independence of the independent auditors; - to adopt procedures for receiving, recording and addressing the complaints received by the Company from employees or others concerning accounting matters, internal accounting controls or auditing in general, guaranteeing the anonymity of the complainant
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if an employee;

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- to receive the annual report from the Head of Internal Control on the application of the Organizational and Operational Model envisaged by Italian Legislative Decree no. 231/2001, which has been adopted by the Company and also includes the Code of Ethics. To evaluate whether to present the Board of Directors with recommendations for updating and/or amending the Organizational and Operational Model envisaged by Italian Legislative Decree no. 231/2001, and its method of application; - to report to the Board of Directors at least once every six months on the work performed. The Committee carried out its duties in 2007 by meeting nine times, with the participation of the entire Board of Statutory Auditors, in compliance with its rules of procedure. Committee meetings were frequently attended, at the Chairmans invitation, by the Chief Financial Officer (Manager responsible for preparing the Companys financial reports), the Chief Executive Officer, representatives of the independent auditors and company managers whose assistance the Committee requested on specific matters. The Head of Internal Control was also invited by the Committees Chairman to attend its meetings and to act as its secretary with responsibility for taking the meetings minutes and for working with the Committee in order to provide its members with the information they considered necessary for carrying out their duties. For the purposes of the Committees effective and efficient operation, the related rules of procedure explicitly provide that the Committee, through its Chairman: - shall have full access to all corporate documents, at any time and wherever such documents are located; - shall have the authority to question Directors, employees, agents, consultants, customers and suppliers of the Company and/or its subsidiaries; - shall have the power to retain at the Companys expense external advisors regarding legal, accounting and other matters when it sees so fit, subject only to the obligation to report its expenditure at least once every six months to the Board of Directors. The operation and adequacy of internal controls were guaranteed by the Board of Directors, together with the Internal Audit Committee, also with the help of the related Internal Audit department run by its manager, who also holds the position of Head of Internal Control and as such reports directly to the Chairman of the Internal Audit Committee. The Internal Audit Committee continued during the year to receive, record and address complaints or protests presented by employees and/or third parties concerning accounting matters, internal accounting controls or auditing in general, guaranteeing the anonymity of complainants. The complaints received by the Company were addressed directly to all the members of the Committee in accordance with the Procedure for Reporting Complaints to the Internal Audit Committee adopted in 2005 in compliance with the US provisions on whistleblowers contained in Section 10A of the Securities and Exchange Act of 1934 as amended by Section 301 of the Sarbanes Oxley Act. This Procedure can be found in the Corporate Governance section of the Companys website at www.benettongroup.com.

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12. Internal Controls


The Company continued during 2007 to update the mapping of the more significant business processes affecting its results and balance sheet. The following were described for each process reviewed: the activity, the control objective associated with the risks of this activity and the existing controls. The Internal Audit department carried out numerous tests to verify the effectiveness and efficiency of the controls over operating processes, information systems and the so-called control environment. Tests, carried out using a sample-based approach, revealed a generally negligible percentage of negative results in the seven hundred or more checks performed. The heads of each function in which a deficiency in controls was revealed promptly planned a series of measures designed to eliminate the weakness or reduce the risk. In view of the listing of Benetton shares in the U.S., this process was also conducted in compliance with the provisions of the Sarbanes Oxley Act. Thanks to the collaboration of the heads of company departments, at year end the Internal Audit Committee was able to conclude positively on the process of resolving the aforementioned weaknesses in control. Based on the results of these tests and detailed information received from the Chief Executive Officer, the Internal Audit Committee and Board of Directors are of the opinion that the internal controls are appropriate for the size and complexity of the Company and the Group and that their design is capable, within reasonable limits, of preventing or in any case promptly intercepting any significant errors in financial reports. As part of the Board of Directors approval of Form 20-F in June 2007, the independent auditors issued a favorable opinion on the Groups internal controls. The Board of Statutory Auditors has also received adequate information in this regard.

12.1. Executive Director responsible for internal controls. The Board of Directors has resolved to appoint the
Parent Companys Chief Executive Officer as the Executive Director responsible for supervising the functionality of internal controls. Acting in this role, the Chief Executive Officer has prepared and submitted a Control Risk Self-Assessment report to the Internal Audit Committee; this document - whose contents and principles were agreed by the Board of Directors - provides a detailed list of the most important risk factors relating to company processes. The Chief Executive Officer based this document on an evaluation of the potential impact on the statement of income of the events considered, as well as of the probability of their occurrence. Apart from the principal business risks (strategic, operational, financial and compliance), the analysis also contained proposals by the Head of Internal Control for the introduction of key controls associated with these risks. The Chief Executive Officer also confirmed the Head of Internal Control in office. The Board of Directors delegated the Chief Executive Officer together with the Chairman of the Internal Audit Committee to determine the Head of Internal Controls remuneration.

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12.2. Head of Internal Control. The Board of Directors resolved on March 31, 2003, after consulting the Internal Audit
Committee, to appoint Roberto Taiariol as the person responsible for checking that internal controls are always adequate, fully operational and functioning. The method of determining the remuneration of the Head of Internal Control is discussed in Paragraph 12.1. The Head of Internal Control: - is not in charge of any operational areas and does not report to any heads of operational areas, including the Accounting, Finance and Control department; - has constant direct access to all the information needed to carry out his duties; - reports on his work to the Internal Audit Committee, the Board of Statutory Auditors and the Executive Director responsible for supervising the functionality of internal controls (Chief Executive Officer); - agrees a budget for this function with the Chief Executive Officer at the start of every year and has all the necessary powers for managing it with complete autonomy. The Head of Internal Controls principal activities during the year were as follows: - periodic tests of the functioning of internal controls; - assistance to the Internal Audit Committee in performing its duties; - discussion and exchange of information with the Internal Audit Committee, the Board of Statutory Auditors, the Chief Executive Officer and the independent auditors; - analysis of circumstantial reports concerning problems associated with the financial statements, the audit and system of control in general; - evaluation of the proposal to extend the engagement of the independent auditors; - analysis of the proper segregation of duties in user profiles contained in information systems; - verification of the observance of international standards in the work of some of the Groups suppliers. The Company has set up an Internal Audit department, of which the Head of Internal Control is in charge. Some of the duties of the Internal Audit department are entrusted to outside firms of consultants, who are completely independent of the Company and the Group. The involvement of outside consultants mostly relates to activities in the information technology sector, where specific technical expertise is required.

12.3. Organizational model under Italian Legislative Decree no. 231/2001. The Company, together with its
strategically important subsidiaries, adopted in a Board resolution dated September 11, 2003, a model of organization, operation and control in accordance with Italian Legislative Decree no. 231/2001, comprising: - Code of Ethics; - Operating procedures and reporting systems; - Supervisory and Monitoring Body; - Disciplinary system.

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During the course of 2007 the Supervisory and Monitoring Body, set up under art. 6.1.b of Italian Legislative Decree no. 231/2001, consisting of Ulrich Weiss (Chairman until April 25, 2007), Luigi Arturo Bianchi (Chairman from April 26, 2007), the Head of Internal Control and the Head of Corporate Affairs (from April 26, 2007), carried out controls on the operation and observance of the Organizational and Operational Model adopted by the Company. The Board of Directors will be asked in April 2008 to approve a new Organizational and Operational Model, updated in structure as well as for the types of offence it is required to prevent. The Organizational and Operational Model including the Code of Ethics can be found in the Corporate Governance section of the Companys website at www.benettongroup.com.

12.4. Independent Auditors. The Shareholders Meeting of April 26, 2007 appointed the auditing firm of PricewaterhouseCoopers S.p.A.
to audit the Companys separate and consolidated financial statements for financial years 2007, 2008, 2009, 2010, 2011 and 2012 and to perform a limited review of the half-year reports at June 30, 2008, 2009, 2010, 2011, 2012 and 2013.

12.5. Manager responsible for preparing the Companys financial reports. In compliance with art. 20 of the
Articles of Association, introduced pursuant to art. 154 bis of TUF by shareholder resolution on April 26, 2007, the Board of Directors appointed on the same date and after consulting the Board of Statutory Auditors, Emilio Fo, the Chief Financial Officer, as Manager responsible for preparing the Companys financial reports. In accordance with the Articles of Association, this position is selected from amongst persons of proven professional experience in accounting and finance and in possession of the integrity requirements envisaged by prevailing law for members of control bodies; this position has the necessary authority and powers to obtain all the most suitable resources for carrying out the required duties.

13. Directors interests and transactions with related parties


The Companys Board of Directors adopted a new Procedure for Related Party Transactions and Significant Transactions in March 2006, which included the latest recommendations on this subject contained in the Code and followed best domestic and international practices in identifying the parties, the transactions and the procedures needed to facilitate proper reporting and disclosure. This Procedure reiterates the central role played by the Board of Directors in the Companys system of corporate governance, ensuring that such transactions are always carried out in accordance with principles of substantial and procedural fairness. This Procedure contains a wide definition (based on the recommendations of IAS 24) of related parties of Benetton Group S.p.A. and stricter authorization and disclosure procedures for transactions with such parties, including the requirement, in certain cases, for the Internal Audit Committee to issue a prior opinion on individual transactions. The general principles under the Procedure are as follows: - all related party transactions regardless of their value, including those carried out through subsidiaries, must be reported to the Board
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of Directors and the Chairman of the Internal Audit Committee;

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- in the event of related party transactions that are atypical, unusual or concluded under non-standard terms and conditions, or in the case of related party transactions whose value exceeds Euro 2.5 million, it is necessary to obtain the prior approval of the Board of Directors based on the opinion of the Internal Audit Committee; - transactions with related and other parties whose value exceeds Euro 5 million (ie. Significant transactions) require the prior authorization of the Board of Directors; - the Directors and statutory auditors may request that the value of the transaction be assessed by one or more experts appointed for this purpose; - the prior approval of the Board of Directors is required for transactions with a significant impact on the balance sheet, statement of income and financial position of the Company and the Group and whose consideration, standing of the counterparty, subject-matter, method or timing of execution could affect the safekeeping of company assets. The Procedure also requires that a Director who, either directly or through a third party, has an interest in a company transaction, even if such interest is potential or indirect, must leave the meeting at the time of voting or, if his presence is needed for the purposes of maintaining the required quorum, he must abstain from voting. The Procedure for Related Party Transactions and Significant Transactions was gradually extended over 2006 and 2007 to the Groups principal companies. More details on related party transactions carried out during 2007 can be found in the section entitled Relations with the holding company, its subsidiaries and other related parties forming part of the Directors report on the consolidated financial statements. The full Procedure can be found in the Corporate Governance section of the Companys website.

14. Appointment of Statutory Auditors


The appointment and replacement of statutory auditors is governed by prevailing laws and regulations, as reflected and supplemented within the permitted limits, in the Articles of Association, which have been drawn up in compliance with the recommendations of the Code. In accordance with art. 19 of the Articles of Association the Board of Statutory Auditors consists of three standing members and two alternate members, or four alternate members if one statutory auditor has been elected on a Minority List. The Board of Statutory Auditors is appointed by the Shareholders Meeting on the basis of lists presented by the shareholders containing a number of candidates that may not exceed that of the members requiring election. The lists must contain separate indications and numbering for standing member candidates and alternate member candidates; there must be at least two alternate member candidates on each list. Lists may be presented by only those shareholders who own, alone or together with others, at least 2.5% of share capital, or the minimum percentage envisaged by the statutory and regulatory provisions governing the appointment of the Board of Statutory Auditors. The lists are filed at the Companys registered offices at least 15 days in advance of the date set for the first calling of the Shareholders Meeting convened to vote on the appointment of statutory auditors, accompanied by (a) information about the shareholders who have filed the lists, (b) documentation confirming them as shareholders and the percentage of share capital they own, (c) comprehensive details on the personal characteristics and experience of the candidates, (d) a statement by the candidates themselves confirming that they are in possession of the requirements envisaged by prevailing statutory or regulatory requirements and the absence of any reasons

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for incompatibility and/or ineligibility, (e) statements by the candidates in which they accept their candidacy and provide details of their appointments as Directors or statutory auditors in other companies. The lists must be promptly published on the Companys website. No candidate may appear in more than one list, otherwise they will be disqualified. The Shareholders Meeting appoints the first standing member candidate on the Minority List as the Chairman of the Board of Statutory Auditors. Except for the applicability of statutory and regulatory requirements governing such an event, if only one list is presented then the three candidates appearing on this list are elected by majority vote as standing statutory auditors, while two candidates are elected as alternate statutory auditors. In such a case the Shareholders Meeting appoints the Chairman of the Board of Statutory Auditors with the legally required majority vote. In the event of having to replace a statutory auditor, the replacement, including for the office of Chairman, is an alternate statutory auditor belonging to the same list as the outgoing auditor, in the order specified therein. Further to any early vacation of office, the Shareholders Meeting appoints the standing and/or alternate statutory auditors needed to complete the Board of Statutory Auditors, stating that the term in office ends at the same time as that of the statutory auditors already in office. The procedure is as follows: - in the event of having to replace auditors elected on the Majority List, the auditor or auditors, are elected by majority vote without the need for a list and with the Chairman of the Board of Statutory Auditors possibly making a recommendation; - in the event of having to replace a standing and/or alternate statutory auditor designated by the minority, the Shareholders Meeting replaces them, with the legally required majority vote, by choosing from the candidates belonging to the same list as the outgoing standing and/or alternate statutory auditor, in the order specified therein. Candidates must have confirmed their candidacy at least 15 days before the date set for the Shareholders Meeting in first calling.

15. Statutory Auditors


The current composition of the Companys Board of Statutory Auditors, appointed on May 16, 2005 for the three years 2005-2007, is presented below. Its term in office therefore ends with the Shareholders Meeting called to approve the financial statements for 2007. On this subject, CONSOB resolution no. 16319 of January 29, 2008 has established that 2% is the minimum share ownership requirement for presenting lists of candidates for the election of a companys Board of Statutory Auditors. The current composition does not include any auditor representing the minority, as no related list of candidates was submitted.

Name Angelo Cas Filippo Duodo Antonio Cortellazzo Marco Leotta Piermauro Carabellese

Office Chairman Auditor Auditor Alternate Auditor Alternate Auditor

In office 05.16.2005 05.16.2005 05.16.2005 05.16.2005 05.16.2005

List (1) M M M M M

Indep. as per Code (2) X X X X

% attend. B.S.A. (3) 100 81.8 100 NA NA

Other appointments (4) 34 23 16 19 36

Corporate Governance report

(1) List of origin (majority/minority). (2) Indep.: indicates whether the statutory auditor qualifies as independent under the Codes criteria (adopted in full by the Company). (3) % attend. B.S.A.: indicates the statutory auditors attendance record in percentage terms at meetings of the Board of Statutory Auditors (the calculation of this percentage reflects the number of meetings attended by the statutory auditor relative to the number of meetings of the Board of Statutory Auditors held during the year or after the statutory auditors appointment). (4) Other appointments: indicates the total number of appointments held in companies described in Book V, Title V, Chapters V, VI and VII of the Italian Civil Code, as shown in the list, prepared in accordance with art. 144- quinquiesdecies of the CONSOB Regulations and appended to the statutory auditors report on their supervisory activities required by para.1, art. 153 of TUF.

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Appendix B to this report contains a short curriculum vitae of every member of the Board of Statutory Auditors. The Board of Statutory Auditors met 11 times during 2007. There have been no changes in the composition of the Board of Statutory Auditors since the end of the financial year. The Board of Statutory Auditors carries out any annual review of the independence qualifications of its members, formalizing the results in the minutes of its meetings. This review uses the principles established by the Code. The Chairman of the Board of Statutory Auditors and the standing member Antonio Cortellazzo both satisfy all the requirements of independence contained in the Code. The standing member Filippo Duodo was appointed as one of the Companys statutory auditors for the first time in 1992 and has remained in office for more than nine years (thereby exceeding the maximum term envisaged by the Code for the presumption of continued independence). The Board of Statutory Auditors nonetheless considers that Filippo Duodo, like all its other members, satisfies all the criteria of independence and autonomy, allowing him to be described as essentially independent. The Company will also be extending to the statutory auditors the obligations applying to Directors in the event of having an interest in one of the Issuers transactions, as illustrated in the Procedure for Related Party Transactions and Significant Transactions. Once again in 2007, the Board of Statutory Auditors monitored the independence of the independent auditors, checking not only observance of the related laws and regulations, but also the nature and amount of non-audit services provided to the Issuer and its subsidiaries by the independent auditors and members of their network. The Board of Statutory Auditors also continued to collaborate and exchange information with the Internal Audit department and the Internal Audit Committee, facilitated by the attendance of the statutory auditors at all meetings of the Internal Audit Committee (as allowed by the latters rules of procedure).

16. Relations with shareholders


The Investor Relations department is responsible for ensuring the proper management of relations with financial analysts, institutional investors and private shareholders, both foreign and domestic, which includes coordinating activities with the financial community. The person in charge of handling investor relations is Mara di Giorgio, who is head of the related department. In compliance with the principles of fairness, clarity and equal access to information, this department makes available on the website www.benettongroup.com/investors extensive documentation and information about the Company, with particular reference to price sensitive information. As already mentioned, the following documents can be found in the Corporate Governance section of the Companys website: Articles of Association, Internal Dealing Regulations, Organizational and Operational Model (including Code of Ethics), Procedure for Related Party Transactions and Significant Transactions, Procedure for Reporting Complaints to the Internal Audit Committee, the Disclosure

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Committee Rules of Procedure, the Procedure for Corporate Information Disclosure, the Stock Option Plan Rules, the Register of Insiders Regulations, press releases and periodic financial information.

17. Shareholders Meetings


In accordance with art. 9 of the Articles of Association, shareholders are entitled to take part in Shareholders Meetings if the Company has received the legally required certificate from an authorized intermediary at least two business days before the date set for the meeting itself. Certificates received in accordance with the above procedures are also valid for second or third callings of the meeting. The shares remain restricted until after the Shareholders Meeting has taken place. Shareholders may be represented by a proxy, who must be appointed by a written instrument of proxy prepared in the form specified by law. In accordance with art. 10 of the Articles of Association, the meetings Chairman, also with the assistance of persons specially appointed for this purpose, confirms that the proxies are in order as well as the entitlements to attend the meeting, resolves any disputes, and directs and moderates the debate, possibly establishing how long each speaker may have the floor, and decides the order and methods of voting. In view of the orderly and effective conduct of Shareholders Meetings and the related debate, the Company has not considered it necessary to adopt a set of rules governing the procedure of such meetings; the powers of the chairman to moderate such meetings have therefore proven sufficient for their intended purpose. The Company makes available, mainly through its website, all the documentation needed to provide shareholders with adequate information about the issues presented for their approval. For the purpose of allowing resolutions to be adopted with the participation and adequate knowledge of attendees, this documentation is supplemented by the information provided during Shareholders Meetings, both in documentary form and through debate on the floor. No significant changes in the Issuers market capitalization or composition of its shareholders took place during 2007.

18. Changes since year end


There have been no substantial changes in the Companys corporate governance structure since the end of the financial year.

Corporate Governance report

74

Appendix A
Luciano Benetton. Born in 1935 in Treviso, Luciano Benetton started the Benetton Group in 1965 with his siblings Giuliana, Gilberto and Carlo. He is now the Groups Chairman and identifies and guides its development strategy. He was a member of the Italian Senate from 1992 until 1994. Other appointments

Office Director

Company Edizione Holding S.p.A.

Carlo Benetton. Born in 1943 in Treviso, Carlo Benetton started the Benetton Group in 1965 with his siblings Luciano, Giuliana and Gilberto; he analyzes projects relating to production, trends in different technological processes and new industrial locations in the textile-apparel sector. Other appointments

Office Chairman Deputy Chairman

Company Maccarese S.p.A. Edizione Holding S.p.A.

Alessandro Benetton. Alessandro Benetton was born in 1964 in Treviso. He is Chairman and Chief Executive Officer of 21 Investimenti S.p.A., the merchant bank he founded through Edizione Holding in 1993. He is the son of Luciano Benetton and holds a BSc from the University of Boston and an MBA from Harvard. Other appointments
Office Chairman and Chief Executive Officer Chairman Deputy Chairman Director Company 21 Investimenti S.p.A., 21 Investimenti Partners S.p.A., 21 Nextwork S.p.A. 21 Partners S.G.R. S.p.A. Nordest Merchant S.p.A. Edizione Holding S.p.A., Autogrill S.p.A., Banca Popolare di Vicenza

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Corporate Governance report

Gerolamo Caccia Dominioni. Born in 1955 in Milan, he has a degree in Economics & Business from Bocconi University. After university he started his career in Philips Italia S.p.A. where he was in charge of the Strategy and Control division for diversified businesses. In 1985 he joined the Time Warner Group where he held various posts until 1998, including Finance Director - Time Warner Italy, General Manager - Warner Music Italy, Chairman and Chief Executive Officer - Warner Music Italy. In 1998 he moved to Paris to Warner Music International where he held the position of Chairman Warner Music South Europe. He later went to London as Chairman Warner Music Europe, subsequently becoming Vice Chairman & COO Warner Music International. Giuliana Benetton. Giuliana Benetton started the Benetton Group in 1965 together with her brothers Luciano, Gilberto and Carlo; she looks after the design of knitwear collections, with the role of supervising and coordinating the various product lines. She was born in 1937 in Treviso. Other appointments

Office Director

Company Edizione Holding S.p.A.

Gilberto Benetton. Born in 1941 in Treviso, Gilberto Benetton started the Benetton Group in 1965, together with his siblings Giuliana, Luciano and Carlo. He currently serves as Chairman of Edizione Holding S.p.A., the family holding company, where he oversees financial and real estate investments. Other appointments

Office Chairman Director Member of Supervisory Board

Company Autogrill S.p.A., Edizione Holding S.p.A., Sintonia S.p.A. Telecom Italia S.p.A., Allianz S.p.A., Atlantia S.p.A., Pirelli & C. S.p.A., Schemaventotto S.p.A., Sintonia S.A. Mediobanca S.p.A.

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76

Gianni Mion. Born in 1943 in V (Padua), he is a graduate in Economics & Business from Venices Ca Foscari University and Chief Executive Officer of Edizione Holding S.p.A. and Sintonia S.p.A. He previously held important appointments in Gepi, Fintermica and Marzotto. Other appointments

Office Chief Executive Officer Director

Company Edizione Holding S.p.A., Sintonia S.p.A. Aeroporti di Roma S.p.A., Autogrill S.p.A., Atlantia S.p.A., Burgo Group S.p.A., Luxottica Group S.p.A., Schemaventotto S.p.A., Telecom Italia S.p.A., Sintonia S.A.

Alfredo Malguzzi. Born in 1962 in Lerici (La Spezia), he is a graduate in Business Administration, with a specialization in tax and corporate law, from Milans Bocconi University. He is a partner in the law firm of Pedersoli & Associati, corporate and tax advisors based in Milan. He has worked as a professional accountant since 1991, providing corporate and national and international tax advisory services thanks to the experience gained since 1985 working as an intern with leading national and international professional firms. Formerly a lecturer at Bocconi Universitys Management School in the administration and control sector (1990-1997), he is an expert in tax. He is specialized in tax and corporate matters relating to mergers, acquisitions, disposals and company restructuring. Other appointments

Office Director Chairman of Board of Statutory Auditors Auditor

Company Autogrill S.p.A., FinecoBank S.p.A., Borgo Scopeto e Caparzo S.r.l. Societ Agricola, Nebula S.r.l. Sator S.p.A., Consilium SGR p.A. biG S.r.l., Egidio Galbani S.p.A., gruppo Lactalis Italia S.p.A.

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Corporate Governance report

Robert Singer. Born in 1952 in New York City, Robert Singer has a masters degree in Science in Accounting from New York University. He is currently the Chief Executive Officer of Barilla Holding S.p.A. He has a long career in the fashion sector as President and Chief Operating Officer of Abercrombie and Fitch. Previously, he was Executive Vice President and Chief Financial Officer of Gucci Group N.V. Other appointments

Office Chief Executive Officer Director

Company Barilla Holding S.p.A. Finba Iniziative S.r.l., GranMilano S.p.A., Barilla G. e R. Fratelli S.p.A., Barilla America Inc.

Giorgio Brunetti. Born in 1937 in Venice, Mr. Brunetti has a degree in Economics and Business from Venices Ca Foscari University and qualified in Business Management at the Centro Universitario di Organizzazione Aziendale (CUOA - University Business Administration Center), which is part of the Department of Engineering of the University of Padua. He began his academic career as an assistant lecturer at Ca Foscari, subsequently becoming Professor of Business Administration in 1978. In 1992 he became a lecturer at the Department of Business Administration at Bocconi University in Milan. He is currently professor of Corporate Strategy at Bocconi University and the Chairman of its research center on Imprenditorialit e Imprenditori (Entrepreneurship and Entrepreneurs). Other appointments

Office Director Independent Auditor

Company Autogrill S.p.A., Carraro S.p.A., Messaggerie Italiane S.p.A. Gas and Energy Authority

Luigi Arturo Bianchi. He was born in 1958 in Milan. He is associate professor and in charge of the advanced course in Commercial Law at Bocconi University in Milan. As a lawyer at the law firm of Bonelli Erede Pappalardo in Milan, he specializes in corporate matters, bankruptcy proceedings and banking law. He is a member of the Italian Stock Exchanges Control Committee and of the Editorial Committee of the magazine Rivista delle Societ. Other appointments

Office
Corporate Governance report

Company Anima S.G.R. S.p.A., Assicurazioni Generali S.p.A. MBE Holding S.p.A.

Director Auditor

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Appendix B
Angelo Cas - Chairman of the Board of Statutory Auditors. Angelo Cas (Milan, 1940) is a professional accountant registered in Milan since 1965 and a registered auditor since 1971. He has a degree in Economics & Business from Milans Bocconi University. Mr. Cas chaired the Fdration des Experts Comptables Europens (FEE) from 1991 to 1993, having been its Deputy Chairman for six years. He was a member of the International Auditing Practices Committee of IFAC (now IAASB) from 1993 to 2000 and a member of the Board of IFAC (International Federation of Accountants) from 2001 to 2005. Among his various appointments, he has also been a member of the Commission responsible for issuing Italian Accounting Principles and Chairman of the Commission for establishing Standards of Conduct for Boards of Statutory Auditors set up by Italys National Council of Professional Accountants. He has chaired the Scientific Technical Committee of OIC (Organismo Italiano Contabilit - Italys Accounting Board) since 2004. He currently serves as a Director of Aedes Immobiliare and Falck, and Chairman of the Board of Statutory Auditors of Rcs Libri, Indesit, Mediobanca, Vittoria Assicurazioni, Bracco, Fiditalia, Sg Factoring, Sg Leasing, Edizione Holding. Filippo Duodo - Statutory auditor. Filippo Duodo (Venice, 1939) is a professional accountant registered in Treviso and has been a registered auditor since 1995. After his degree in Economics & Business from Venices Ca Foscari University in 1963, he has worked as a professional corporate and tax advisor since 1970. He has served as a Director of the Treviso branch of the Bank of Italy and, by decree of the Treasury Ministry, as special receiver of Cassa Rurale di Preganziol and as Chairman of the Supervisory Committee of Finanziaria Ernesto Breda S.p.A., a listed company in Milan being compulsorily wound up. He has served as Chairman of the North-East Professional Accountants Association and as a statutory auditor of major groups. He has been a statutory auditor of Eni S.p.A. and Snamprogetti S.p.A. since 1998. Since 2002 he has been Chairman of the Board of Statutory Auditors of Sviluppi Immobiliari S.p.A., sub-holding company of Beni Stabili, and Chairman of the Board of Statutory Auditors of Banca Meridiana of the Veneto Banca Group. Since 2001 he has been Chairman of the Board of Statutory Auditors of CEPAV UNO and CEPAV DUE, both Eni consortia for the construction of high-speed rail links between Milan and Bologna and Milan and Verona. Antonio Cortellazzo - Statutory auditor. Antonio Cortellazzo (Este (Padua), 1937) has been a professional accountant since 1967 and a registered auditor since the official register was established. A graduate in Economics & Business, he has held important appointments within the profession in Italy and abroad. He was a lecturer in Professional Method from 1999 to 2004 at Padua Universitys Department of Economics and at the Scuola Superiore della Pubblica Amministrazione Locale (a specialist training college for local public administrators). After holding important appointments in Credito Italiano, Banca Cattolica del Veneto, Banco Ambrosiano Veneto, Banca Intesa, and listed companies like Grassetto, Safilo and Stefanel, he is currently a Director or statutory auditor of several companies in North-East Italy, such as Carraro and Fondazione per la Ricerca Biomedica Avanzata Onlus (a charity for advanced biomedical research).

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Marco Leotta - Alternate auditor. Marco Leotta (Rome, 1956) is a professional accountant and registered auditor. After graduating with a first-class degree cum laude in Economics from La Sapienza University in Rome in 1980, he joined Studio di Consulenza Legale e Tributaria, the tax advisory practice of Andersen Legal, becoming an associate in 1986 and a partner in 1992. In 2003 he joined the newly-formed firm of Studio Tributario e Societario as a partner. Leotta has over twenty years of experience in providing corporate and tax advice and assistance to leading companies and Italian and international groups, particularly with reference to mergers and acquisitions, reorganization processes and national and international tax planning. He is a member or Chairman of the Board of Statutory Auditors of several important Italian companies, some of which members of multinational groups. Piermauro Carabellese - Alternate auditor. Piermauro Carabellese (Milan, 1958) has been a partner in the firm of Negri-Clementi Toffoletto Montironi & Soci since the start of 2003, with responsibility for tax. He is a tax specialist in the area of the tax structuring of mergers and acquisitions and related financing. After graduating with a first-class degree in Business Administration from Milans Bocconi University in 1982, he obtained a masters in tax from the same university in 1985. He is a professional accountant, registered in Milan since 1984, and was a tax partner at PricewaterhouseCoopers from 1990 to 2002, also serving as Managing Partner of the Italian tax practice. He has chaired the Commission set up by Italys Association of Professional Accountants on international and community tax law.

Corporate Governance report

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Consolidated financial statements


Consolidated statement of income
(thousands of Euro) Revenues Materials and subcontracted work Payroll and related costs Industrial depreciation and amortization Other manufacturing costs Cost of sales Gross operating profit Distribution and transport Sales commissions Contribution margin Payroll and related costs - of which non-recurring expenses Advertising and promotion (A) Depreciation and amortization Other expenses and income - of which non-recurring expenses/(income) General and operating expenses - of which non-recurring expenses/(income) Operating profit Share of income/(loss) of associated companies Financial (expenses)/income Net foreign currency hedging (losses)/gains and exchange differences Income before taxes Income taxes Net income for the year attributable to: - shareholders of the Parent Company - minority interests Basic earnings per share (Euro) Diluted earnings per share (Euro) 2007 2,085,272 1,032,103 83,257 17,388 43,196 1,175,944 909,328 60,031 86,237 763,060 156,035 61,019 73,642 229,188 3,096 519,884 3,096 243,176 43 (29,735) (10,333) 203,151 52,762 150,389 145,330 5,059 0.80 0.80 2006 1,910,975 961,600 81,175 18,209 43,749 1,104,733 806,242 63,690 73,952 668,600 153,500 2,108 71,537 66,031 198,000 (2,890) 489,068 (782) 179,532 83 (17,723) (2,560) 159,332 31,376 127,956 124,914 3,042 0.69 0.68 7 8 9 3 4 5 6 Notes 1 2 3 5

10

81

(A) Of which Euro 11,568 thousand charged by holding and related companies in 2007 (Euro 10,867 thousand in 2006).

Consolidated financial statements

Consolidated balance sheet - Assets


(thousands of Euro) Non-current assets Property, plant and equipment Land and buildings Plant, machinery and equipment Furniture, fittings and electronic devices Vehicles and aircraft Assets under construction and advances Leased assets Leasehold improvements 656,439 75,541 61,295 24,648 61,795 5,285 44,921 929,924 Intangible assets Goodwill and other intangible assets of indefinite useful life Intangible assets of finite useful life 28,458 212,273 240,731 Other non-current assets Investments Guarantee deposits Medium/long-term financial receivables Other medium/long-term receivables (B) Deferred tax assets Total non-current assets Current assets Inventories Trade receivables Tax receivables Other receivables, accrued income and prepaid expenses (C) Financial receivables Cash and banks Total current assets Assets held for sale
Consolidated financial statements

12.31.2007

12.31.2006

Notes

11 611,317 67,484 54,600 10,501 10,376 7,886 42,350 804,514 12 28,458 194,152 222,610

2,066 25,157 5,147 33,996 163,050 229,416 1,400,071

2,445 21,947 3,461 48,331 172,446 248,630 1,275,754

13 14 15 16 17

336,063 680,741 27,586 88,051 19,288 133,841 1,285,570 5,771 2,691,412

330,706 610,131 35,523 81,034 40,474 180,738 1,278,606 7,035 2,561,395

18 19 20 21 22 23

24

TOTAL ASSETS
(B) Of which Euro 18,563 thousand due from holding and related companies (Euro 21,428 thousand at 12.31.2006). (C) Of which Euro 21,933 thousand due from holding and related companies (Euro 24,314 thousand at 12.31.2006).

82

Consolidated balance sheet - Shareholders equity and liabilities


(thousands of Euro) Shareholders equity Shareholders equity attributable to the Group Share capital Additional paid-in capital Fair value and hedging reserve Other reserves and retained earnings Net income for the year 237,478 65,155 (2,672) 941,780 145,330 1,387,071 Minority interests Total shareholders equity Liabilities Non-current liabilities Medium/long-term loans Other medium/long-term payables Lease financing Retirement benefit obligations Other medium/long-term provisions and liabilities
(D)

12.31.2007

12.31.2006

Notes

25 237,478 65,155 (2,396) 893,570 124,914 1,318,721 22,288 1,341,009 29 27 28 26

27,613 1,414,684

399,553 58,248 2,292 50,784 26,380 537,257

341 25,244 5,244 53,434 27,545 111,808

30 31 32 33 34

Current liabilities Trade payables Other payables, accrued expenses and deferred income Current income tax liabilities Other current provisions and liabilities Current portion of lease financing Current portion of medium/long-term loans Financial payables and bank loans Total liabilities TOTAL SHAREHOLDERS EQUITY AND LIABILITIES
(D) Of which Euro 46,026 thousand due to holding and related companies (Euro 13,813 thousand at 12.31.2006). (E) Of which Euro 15,819 thousand due to holding and related companies (Euro 19,838 thousand at 12.31.2006). Consolidated financial statements
(E)

385,401 111,171 8,622 3,291 2,952 68 227,966 739,471 1,276,728 2,691,412

403,345 104,214 8,445 4,884 4,036 500,222 83,432 1,108,578 1,220,386 2,561,395

35 36 37 38 39 40 41

83

Shareholders equity - Statement of changes


Share capital 236,026 1,452 237,478 237,478 Additional paid-in capital 56,574 8,581 65,155 65,155

(thousands of Euro) Balances as of 01.01.2006 Carryforward of 2005 net income Dividends distributed as approved by Ordinary Shareholders Meeting of 05.09.2006 Exercise of stock options Valuation of stock options Changes in the period (IAS 39) Allocation of shareholders equity to minority interests arising under a business combination Allocation of surplus value to capitalized deferred charges (IFRS 3) Dividends distributed to minority interests Payment for future capital increases Valuation of put option held by minority shareholders Differences arising on Euro translation of financial statements of foreign consolidated companies Net income for the year Balances as of 12.31.2006 Carryforward of 2006 net income Dividends distributed as approved by Ordinary Shareholders Meeting of 04.26.2007 Changes in the period (IAS 39) Formation of new subsidiaries Dividends distributed to minority interests Increase in share capital Differences arising on Euro translation of financial statements of foreign consolidated companies Net income for the year Balances as of 12.31.2007

Consolidated financial statements

84

Fair value and hedging reserve 123 (2,519) (2,396) (276) (2,672)

Other reserves and retained earnings 850,052 111,873 (61,730) 1,883 (12,820) 889,258 124,914 (67,590) 946,582

Currency translation reserve 7,262 (2,950) 4,312 (9,114) (4,802)

Net income/ (loss) 111,873 (111,873) 124,914 124,914 (124,914) 145,330 145,330

Minority interests 13,050 166 7,358 (2,144) 1,500 (684) 3,042 22,288 638 (968) 1,500 (904) 5,059 27,613

Total 1,274,960 (61,730) 10,033 1,883 (2,519) 166 7,358 (2,144) 1,500 (12,820) (3,634) 127,956 1,341,009 (67,590) (276) 638 (968) 1,500 (10,018) 150,389 1,414,684

85

Consolidated financial statements

Statement of gains/(losses) recognized directly in shareholders equity


(thousands of Euro) Gains/(losses) recognized directly in cash flow hedge reserve Gains/(losses) recognized directly in fair value reserve Gains/(losses) recognized directly in translation reserve Gains/(losses) recognized directly in shareholders equity Transfers from cash flow hedge reserve Transfers from fair value reserve Transfers from translation reserve Net income for the year Net income recognized in the year Attributable to: - shareholders of the Parent Company - minority interests 2007 (2,662) (10,319) (12,981) 2,386 301 150,389 140,095 2006 (2,396) (3,634) (6,030) (123) 127,956 121,803

135,940 4,155

119,445 2,358

Consolidated financial statements

86

Consolidated cash flow statement


(thousands of Euro) Operating activities Net income for the year attributable to the Group and minority interests Income taxes expense Income before taxes Adjustments for: - depreciation and amortization - net capital (gains)/losses and non-monetary items - net provisions charged to statement of income - use of provisions - exchange differences - share of (income)/losses of associated companies - net financial expenses/(income) Cash flow from operating activities before changes in working capital Cash flow provided/(used) by changes in working capital Payment of taxes Net interest paid/received Exchange differences Cash flow provided by operating activities Investing activities Operating investments Operating divestments Business combinations Sale of investments Operations in non-current financial assets Cash flow used by investing activities Financing activities Net change in other sources of finance Payment of dividends Cash flow used by financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash in companies acquired Translation differences and other movements Cash and cash equivalents at the end of the year (A)
(A) Includes Euro 3,057 thousand in current account overdrafts (1,519 in 2006). The cash flow statement does not contain any material flows with related parties.

2007

2006

150,389 52,762 203,151

127,956 31,376 159,332

91,030 (2,677) 22,251 (10,787) 10,333 (43) 29,735 342,993 (95,535) (11,134) (30,400) (10,333) 195,591

84,240 2,524 17,099 (25,928) 2,560 (83) 17,723 257,467 28,253 (24,136) (21,496) (3,207) 236,881

(256,781) 31,325 (211) 3 (3,868) (229,532)

(219,540) 31,764 (28,197) 62 (96) (216,007)

54,201 (68,558) (14,357) (48,298) 179,219 (137) 130,784

26,564 (63,874) (37,310) (16,436) 196,327 804 (1,476) 179,219


Consolidated financial statements

87

The Explanatory notes (pages 89 through 157) are to be considered an integral part of this report.

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Explanatory notes
Group activities Benetton Group S.p.A. (the Parent Company) and its subsidiary companies (hereinafter also referred to as the Group) primarily manufacture and market fashion apparel in wool, cotton and woven fabrics, as well as leisurewear. The manufacture of finished articles from raw materials is undertaken partly within the Group and partly using subcontractors, whereas selling is carried out through an extensive commercial network both in Italy and abroad, consisting mainly of stores operated and owned by third parties. The legal headquarters and other such information are shown on the last page of this document. The Parent Company is listed on the Milan and Frankfurt stock exchanges. On September 12, 2007 the Parent Companys Board of Directors decided to request the voluntary delisting and deregistration of the American Depositary Shares (ADS) quoted on the New York Stock Exchange (NYSE), and to request voluntary deregistration and termination of its reporting obligations under the Securities Exchange Act of 1934. This decision was taken in view of the globalization of financial markets and the internationalization of the Italian Stock Exchange, and after having seen that the volumes traded on the New York Stock Exchange were very small and that even the larger US shareholders traded the Benetton stock principally on the Milan Stock Exchange. In addition, the process of delisting from the Deutsche Brse in Frankfurt was started on February 21, 2008. These consolidated financial statements were approved by the Board of Directors of Benetton Group S.p.A. in a resolution dated March 19, 2008. Form and content of the consolidated financial statements Starting from the 2006 nine-month report, the Group has classified its statement of income by function of expense rather than by nature of expense as in the past. This modification has been made to present the consolidated financial statements and interim financial reports on the same basis as that used by the Groups Directors and management and by the financial community to analyze the Benetton business. It should also be noted that the statement of income format used for the consolidated financial statements and interim financial reports of the Benetton Group differs from the one used by Benetton Group S.p.A. for its individual annual financial statements. This is because this Company principally acts as a financial holding company and provider of services to its subsidiaries. The consolidated financial statements of the Group include the financial statements as of December 31 of Benetton Group S.p.A. and all Italian and foreign companies in which the Parent Company holds, directly or indirectly, the majority of the voting rights. The consolidated financial statements also include the accounts of certain companies in which the Groups interest is 50%, or less, and over which it exercises a significant influence such that it has control over their financial and operating policies. In particular, the following companies have been consolidated: a. Benetton Korea Inc., since the effective voting rights held by Benetton total 51% of all voting rights; b. Benetton Giyim Sanayi ve Ticaret A.S. (a Turkish company), since the licensing and distribution agreements grant Benetton a dominant influence over the company, as well as the majority of risks and rewards linked to its business activities;
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c. Milano Report S.p.A., a company which manages stores, mainly in Lombardy, selling Benetton-branded products, insofar as most of the risks and rewards of the business are attributable to Benetton itself by virtue, amongst others, of the margins earned on sales; d. New Ben GmbH, a German company, which manages stores selling Benetton-branded products, insofar as the shareholder agreement gives Benetton the right to appoint the majority of the companys Directors. In addition, most of the risks and rewards of the business are attributable to Benetton; e. Benlim Ltd., a company based in Hong Kong 50% controlled by Benetton Asia Pacific Ltd. set up for the purpose of manufacturing Sisley products under license in China and marketing and distributing them in this country through Shanghai Sisley Trading Co. Ltd., a Chinese company wholly-owned by Benlim Ltd. Benlim Ltd. has been consolidated because most of the risks and rewards of its business and that of its subsidiary are attributable to Benetton. In particular, the licensing and distribution agreements between the parties give the Group a dominant influence over these companies; f. Shanghai Sisley Trading Co. Ltd., 50% controlled by the Group by virtue of the arrangements described in the previous point. Financial statements of subsidiaries have been reclassified, where necessary, for consistency with the format adopted by the Parent Company. Such financial statements have been adjusted so that they are consistent with the reference international accounting and financial reporting standards. These financial statements have been prepared on a going concern basis, matching costs and revenues to the accounting periods to which they relate. The reporting currency is the Euro and all values have been rounded to thousands of Euro, unless otherwise specified. Consolidation criteria The method of consolidation adopted for the preparation of the consolidated financial statements is as follows: a. Consolidation of subsidiary companies financial statements according to the line-by-line method, with elimination of the carrying value of the shareholdings held by the Parent Company and other consolidated companies against the relevant shareholders equity. b. When a company is consolidated for the first time, any positive difference emerging from the elimination of its carrying value on the basis indicated in a. above, is allocated, where applicable, to the assets and liabilities of the subsidiary. The excess of the cost of acquisition over the net assets is recorded as Goodwill and other intangible assets of indefinite useful life. Negative differences are recorded in the statement of income as income. c. Intercompany receivables and payables, costs and revenues, and all significant transactions between consolidated companies, including the intragroup payment of dividends, are eliminated. Unrealized intercompany profits and gains and losses arising from transactions between Group companies are also eliminated. d. Minority interests in shareholders equity and the result for the period of consolidated subsidiaries are classified separately as Minority interests under shareholders equity and as Income attributable to minority interests in the consolidated statement of income. e. The financial statements of foreign subsidiaries are translated into Euro using period-end exchange rates for assets and liabilities and average exchange rates for the period for the statement of income. Differences arising from the translation into Euro of foreign currency financial statements are reflected directly in consolidated shareholders equity as a separate component.

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Accounting standards and policies Application of IFRS. The Groups financial statements for 2007 and comparative periods have been drawn up in accordance with the International Financial Reporting Standards (IFRS) adopted by the European Union which are in force at the date of preparing this report. These standards do not differ, in any material respect, from those issued by the International Accounting Standards Board (IASB), meaning that any application of the latter would not have any significant effect on the Groups financial statements. IFRS 7 - Financial instruments: disclosures and an amendment to IAS 1 - Presentation of financial statements: additional disclosures relating to capital both came into force in 2007. - IFRS 7 calls for additional disclosures regarding the significance of financial instruments for an entitys financial position and performance. These disclosures incorporate some of the information previously required by IAS 32 - Financial instruments: disclosure and presentation. The new accounting standard also requires the disclosure of information relating to the extent of risks arising from the use of financial instruments, and a description of the objectives, policies and processes adopted by management for managing these risks. Most of the information required by IFRS 7 about the Benetton Group is presented in the paragraph on Financial risk management and in the notes on specific items contained in the financial statements; - The amendment to IAS 1 requires disclosure of the objectives, policies and processes adopted for managing capital; the Group has provided the necessary disclosures in the paragraph on Capital management. Apart from those described above, no accounting standards or interpretations have been revised or issued, applicable from January 1, 2007, that have had a significant impact on the Groups consolidated financial statements. New accounting standards. - IFRS 8 - Operating Segments, supersedes IAS 14 - Segment Reporting with effect from January 1, 2009. The new accounting standard requires an entity to base the information contained in its segment reporting on factors used by management for taking operating decisions, thereby requiring operating segments to be identified on the basis of internal reports that are regularly reviewed by the entitys management for the purposes of allocating resources to the different segments and assessing their performance. The Group is evaluating the effects of adopting this standard. Valuation criteria. The financial statements have been prepared on a historical cost basis, with the exception of the valuation of certain financial instruments. The more important accounting policies adopted by the Group for valuing the contents of its financial statements are detailed below: Revenues. Revenues arise from ordinary company operations and include sales revenues and service revenues. Revenues from product sales, net of any discounts and returns, are recognized when the company transfers the main risks and rewards associated with ownership of the goods and when collection of the relevant receivables is reasonably certain. Revenues from sales by directly operated stores are recognized when the customer pays. The Groups policy regarding returns by customers is quite restrictive, allowing these only in very specific circumstances (eg. defective goods, late shipment). At the end of each year the Group considers past trends to estimate the overall amount of returns expected in the following year relating to sales in the year just ended. This amount is then deducted from revenues reported in that year.
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Revenues from services are recorded with reference to the stage of completion of the transaction as of the balance sheet date. Revenues are recorded in the financial period in which the service is provided, based on the percentage of completion method. If revenues from the services cannot be estimated reliably, they are only recognized to the extent that the relative costs are recoverable. Recognizing revenues using this method makes it possible to provide suitable information about the service provided and the economic results achieved during the financial period. Royalties are recognized on an accruals basis in accordance with the substance of the contractual agreements. Financial income. Interest income is recorded on a time-proportion basis, taking account of the effective yield of the asset to which it relates. Dividends. Dividends from third parties are recorded when the shareholders right to receive payment becomes exercisable, following a resolution of the shareholders of the company in which the shares are held. Expense recognition. Expenses are recorded on an accruals basis. Income and costs relating to lease contracts. Income and costs from operating lease contracts are recognized on a straight-line basis over the duration of the contract to which they refer. Income taxes. Current income taxes are calculated on the basis of taxable income, in accordance with applicable local regulations. The Groups Italian companies have elected to file for tax on a group basis as allowed by articles 117 et seq. of the Tax Consolidation Act DPR 917/86, based on a proposal by the consolidating company Ragione S.A.p.A. di Gilberto Benetton e C., which decided to opt for this type of tax treatment on June 15, 2007. The election lasts for three years, starting from the 2007 financial year and represents a renewal of the previous election for the 2004-2006 tax period under Edizione Holding S.p.A. The relationships arising from participation in the group tax election are governed by specific rules, approved and signed by all participating companies. This participation enables the companies to record, and then transfer current taxes even when the taxable result is negative, recognizing a corresponding receivable due from Edizione Holding S.p.A. and Ragione S.A.p.A. di Gilberto Benetton e C.; conversely, if the taxable result is positive, the current taxes transferred give rise to a payable in respect of such companies. The relationship between the parties, governed by contract, provides for the transfer of the full amount of tax calculated on the taxable losses or income at current IRES (corporation tax) rates. Deferred tax assets are recorded for all temporary differences to the extent it is probable that taxable income will be available against which the deductible temporary difference can be utilized. The same principle is applied to the recognition of deferred tax assets on the carryforward of unused tax losses.

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The carrying value of deferred tax assets is reviewed at every balance sheet date and, if necessary, reduced to the extent that it is no longer probable that sufficient taxable income will be available to recover all or part of the asset. The general rule provides that, with specific exceptions, deferred tax liabilities are always recognized. Deferred tax assets and liabilities are calculated using tax rates which are expected to apply in the period when the asset is realized or the liability settled, using the tax rates and tax regulations which are in force at the balance sheet date. Tax assets and liabilities for current taxes are only offset if there is a legally enforceable right to set off the recognized amounts and if it is intended to settle or pay on a net basis or to realize the asset and settle the liability simultaneously. It is possible to offset deferred tax assets and liabilities only if it is possible to offset the current tax balances and if the deferred tax balances refer to income taxes levied by the same tax authority. Earnings per share. Basic earnings per share are calculated by dividing income attributable to Parent Company shareholders by the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share are calculated by dividing the income or loss attributable to Parent Company shareholders by the weighted average number of outstanding shares, taking account of all potential ordinary shares with a dilutive effect (for example employee stock option plans). Property, plant and equipment. These are recorded at purchase or production cost, including the price paid to buy the asset (net of discounts and rebates) and any costs directly attributable to the purchase and commissioning of the asset. The cost of a commercial property purchased is the purchase price or equivalent of the price in cash including all other directly attributable expenses such as legal costs, registration taxes and other transaction costs. Financial expenses relating to assets requiring a significant period of time before being ready for their planned use or sale are recognized as a cost in the year incurred. The cost of internally produced assets is the cost at the date of completion of work. Property, plant and equipment are shown at cost less accumulated depreciation and impairment losses, plus any recovery of asset value. Plant and machinery may have components with different useful lives. Depreciation is calculated on the useful life of each individual component. In the event of replacement, new components are capitalized to the extent that they satisfy the criteria for recognition as an asset, and the carrying value of the replaced component is eliminated from the balance sheet. The residual value and useful life of an asset is reviewed at least at every financial year-end and if, regardless of depreciation already recorded, an impairment loss occurs determined under the criteria contained in IAS 36, the asset is correspondingly written down in value; if, in future years, the reasons for the write-down no longer apply, its value is restored. Ordinary maintenance costs are expensed in full to the statement of income as incurred, while maintenance costs which increase the value of the asset are allocated to the related assets and depreciated over their residual useful lives.

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The value of an asset is systematically depreciated over its useful life, on a straight-line basis, indicatively as shown below:

Useful life (years) Buildings Plant and machinery Industrial and commercial equipment Other assets: - office and store furniture, fittings and electronic devices - vehicles - aircraft 4 - 10 4-5 20 33 - 50 4 - 12 4 - 10

Land is not depreciated. The commercial properties are depreciated over 50 years. Leasehold improvement costs are depreciated over the shorter of the period during which the improvement may be used and the residual duration of the lease contract. Assets acquired under finance leases are recognized at their fair value at the start of the lease, while the corresponding lease installments are recorded as a liability to the leasing company; assets are depreciated at the normal depreciation rate used for similar assets. In the case of sale and leaseback transactions resulting in a finance lease, any gain resulting from the sale and leaseback is deferred and released to income over the lease term. Leases for which the lessor effectively maintains all risks and rewards incidental to asset ownership are classified as operating leases. Costs pertaining to operating leases are expensed to income on a straight-line basis over the length of the related agreement. Intangible assets. Intangible assets are measured initially at cost, normally defined as their purchase price, inclusive of any non-refundable purchase taxes and less any trade discounts and rebates; also included is any directly attributable expenditure on preparing the asset for its intended use, up until the asset is capable of operating. The cost of an internally generated intangible asset includes only those expenses which can be directly attributed or allocated to it as from the date on which it satisfies the criteria for recognition as an asset. After initial recognition, intangible assets are carried at cost, less accumulated amortization and any accumulated impairment losses calculated in accordance with IAS 36. Goodwill is recognized initially by capitalizing, in intangible assets, the excess of the purchase cost over the fair value of the net assets of the newly acquired. As required by IAS 38, at the time of recognition, any intangible assets that have been generated internally by the acquired entity are eliminated from goodwill. Goodwill is not amortized, but is submitted to an impairment test annually to identify any reductions in value, or more often whenever there is any evidence of impairment loss (see impairment of non-financial assets). Research costs are charged to the statement of income in the period in which they are incurred. Items which meet the definition of assets acquired as part of a business combination are only recognized separately if their fair value can be measured reliably.
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Intangible assets are amortized unless they have indefinite useful lives. Amortization is applied systematically over the intangible assets useful life, which reflects the period it is expected to benefit. The residual value at the end of the useful life is assumed to be zero, unless there is a commitment by third parties to buy the asset at the end of its useful life or there is an active market for the asset. Management reviews the estimated useful lives of intangible assets at every financial year end. Normally, the amortization period for main brands ranges from 15 to 25 years; patent rights are amortized over the duration of their rights of use, while deferred and commercial expenses are amortized over the remaining term of the lease contracts, with the exception of fonds de commerce of French companies, which are amortized over 20 years. Impairment losses of non-financial assets. The Groups activities are divided into three segments which, apart from being the basis for making strategic decisions, provide representative, accurate and significant information about its business performance. The three segments identified are as follows: - apparel; - textile; - other and unallocated. The Benetton Group has identified assets and CGUs within each segment (for example: stores operated directly and by third parties, and textile segment factories) to be submitted to impairment testing as well as its method of implementation: for real estate and some categories of asset (for example: fonds de commerce) fair value is used, while value in use is adopted for most of the other assets. The carrying amounts of the Benetton Groups property, plant and equipment and intangible assets are submitted to impairment testing whenever there are obvious internal or external signs indicating that the asset or group of assets (defined as Cash-Generating Units or CGUs) may be impaired. In the case of goodwill, other intangible assets with indefinite lives and intangible assets not in use, the impairment test must be carried out at least annually and, anyway, whenever there is evidence of possible impairment. The impairment test is carried out by comparing the carrying amount of the asset or CGU with the recoverable value of the same, defined as the higher of fair value (net of any costs to sell) and its value in use. Value in use is determined by calculating the present value of future net cash flows expected to be generated by the asset or CGU. If the carrying amount is higher than the recoverable amount, the asset or CGU is written down by the difference. The conditions and methods applied by the Group for reversing impairment losses, excluding in any case those relating to goodwill that may not be reversed, are as set out in IAS 36.

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Financial assets. All financial assets are measured initially at cost, which corresponds to the consideration paid including transaction costs (such as advisory fees, stamp duties and payment of amounts required by regulatory authorities). Classification of financial assets determines their subsequent valuation, which is as follows: - held-to-maturity investments, loans receivable and other financial receivables: these are recorded at amortized cost, less any writedowns carried out to reflect impairment losses. Gains and losses associated with this type of asset are recognized in the statement of income when the investment is removed from the balance sheet on maturity or if it becomes impaired; - available for sale financial assets: these are recorded at fair value, and gains and losses deriving from subsequent measurement are recognized in shareholders equity. If the fair value of these assets cannot be determined reliably, they are measured at cost, as adjusted for any impairment. Each type of financial asset referred to above, outstanding at the reporting date, is specifically reported in the balance sheet or in the Explanatory notes. If it is no longer appropriate to classify an investment as held-to-maturity following a change of intent or ability to hold it until maturity, it must be reclassified as available for sale and remeasured to fair value. The difference between its carrying amount and fair value remains in shareholders equity until the financial asset is sold or otherwise transferred, in which case it is booked to the statement of income. Investments in subsidiaries that are not consolidated on a line-by-line basis, because they are not yet operative or are in liquidation as of the balance sheet date, are measured at fair value, unless this cannot be determined, in which case they are carried at cost. The amount by which cost exceeds shareholders equity of subsidiary companies at the time they are acquired is allocated on the basis described in paragraph b. of the consolidation methods. Investments in associated companies are valued using the equity method. Investments in other companies, in which the interest held is less than 20%, are measured at fair value. The original value of these investments is reinstated in future accounting periods should the reasons for such write-downs no longer apply. All financial assets are recognized on the date of negotiation, i.e. the date on which the Group undertakes to buy or sell the asset. A financial asset is removed from the balance sheet only if all risks and rewards associated with the asset are effectively transferred together with it or, should the transfer of risks and rewards not occur, if the Group no longer has control over the asset. Inventories. Inventories are valued at the lower of purchase or manufacturing cost, generally determined on a weighted average cost basis, and their market or net realizable value. Manufacturing cost includes raw materials and all attributable direct and indirect production-related expenses. The calculation of estimated realizable value includes any manufacturing costs still to be incurred and direct selling expenses. Obsolete and slow-moving inventories are written down in relation to their possibility of employment in the production process or to realizable value. Trade receivables. These are stated at fair value, which reflects their estimated realizable value. The value initially recognized is subsequently adjusted to take account of any write-downs reflecting estimated losses on receivables; additions to the provision for doubtful accounts are recorded in Other operating expenses and income in the statement of income. Any medium/long-term receivables that include an implicit interest component are discounted to present value using an appropriate market rate. Receivables discounted without recourse, for which all risks and rewards are substantially transferred to the assignee, are derecognized from the financial statements at their nominal value. Commissions paid to factoring companies for their services are included in service costs.
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Accruals and deferrals. These are recorded to match costs and revenues within the accounting periods to which they relate. Cash and banks. These include cash equivalents held to meet short-term cash commitments and which are highly liquid and readily convertible to known amounts of cash. Retirement benefit obligations. The provision for employee termination indemnities (TFR) and other retirement benefit obligations, included in this item, fall within the scope of IAS 19 (Employee benefits) being equivalent to defined benefit plans. The amount recorded in the balance sheet is valued on an actuarial basis using the projected unit credit method. The process of discounting to present value uses a rate of interest which reflects the market yield on securities issued with a similar maturity to that expected for this liability. The calculation relates to TFR matured for employment services already performed and includes assumptions concerning future increases in wages and salaries for foreign subsidiaries and Italian subsidiaries with less than 50 employees. Under the new TFR rules introduced by Italian Law no. 296 of December 27, 2006, Italian subsidiaries with more than 50 employees may no longer include future salary increases in their actuarial assumptions; this has produced a reduction in the present value of the obligation, which has been recognized through the statement of income. Net cumulative actuarial gains and losses which exceed 10% of the Groups defined benefit obligation are recorded in the statement of income over the expected average remaining working life of the employees participating in the plan (under the corridor approach). There are currently no post-employment benefit plans. Share-based payments (stock options). The Group stock option plan provides for the physical delivery of the shares on the date of exercise. Share-based payments are measured at fair value on the grant date. This value is booked to the statement of income on a straight-line basis over the period during which the options vest and it is offset by an entry to a reserve in shareholders equity; the amount booked is based on an estimate of the stock options which will effectively vest for staff so entitled, taking into account the attached conditions not based on the market value of the shares. Provisions for contingent liabilities. The Group makes provisions only when a present obligation exists for a future outflow of economic resources as a result of a past event, and when it is probable that this outflow will be required to settle the obligation and a reliable estimate can be made of the same. The amount recognized as provision is the best estimate of the expenditure required to settle the present obligation completely, discounted to present value using a suitable pre-tax rate. Any provisions for restructuring costs are recognized when the Group has drawn up a detailed restructuring plan and has announced it to the parties concerned. In the case of onerous contracts where the unavoidable costs of meeting the contractual obligations exceed the economic benefits expected to be received under the contract, the present obligation is recognized and measured as a provision.

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Trade payables. These are stated at face value. The implicit interest component included in medium/long-term payables is recorded separately using an appropriate market rate. Financial liabilities. Financial liabilities are divided into two categories: - liabilities acquired with the intention of making a profit from short-term price fluctuations or which form part of a portfolio which has the objective of short-term profit-taking. These are recorded at fair value, with the related gains and losses booked to the statement of income; - other liabilities, which are recorded on the basis of amortized cost. Each type of financial liability referred to above, outstanding at the reporting date, is specifically reported in the balance sheet or in the Explanatory notes. Net investments in foreign operations. Exchange differences arising on a monetary item forming part of a net investment in a foreign operation are initially recognized in a separate component of equity and reversed to income at the time of recognizing the gains or losses on the investments disposal. Foreign currency transactions and derivative financial instruments. Transactions in foreign currencies are recorded using the exchange rates on the transaction dates. Exchange gains or losses realized during the period are booked to the statement of income. At the balance sheet date, the Group companies have adjusted receivables and payables in foreign currency using exchange rates ruling at period-end, booking all resulting gains and losses to the statement of income. The Group uses derivative financial instruments only with the intent of managing and hedging its exposure to the risk of fluctuations in exchange rates of currencies other than the Euro and in interest rates. As established by IAS, derivative financial instruments qualify as hedging instruments only when at the inception of the hedge there is formal designation and documentation of the hedging relationship and the entitys risk management objective and strategy for undertaking the hedge. In addition, the Group checks at the inception of the hedge and throughout its duration that the hedging instrument used in the hedging relationship is highly effective in offsetting changes in the fair value of cash flows attributable to the hedged risk. After initial recognition, derivative financial instruments are reported at their fair value. The method of accounting for gains and losses relating to such instruments depends on the type and sustainability of the hedge. The objective of hedging transactions is to offset the effect of exposures relating to hedged items on the statement of income. Fair value hedges for specific assets and liabilities are recorded in assets and liabilities; the hedging instrument and the underlying item are measured at fair value and the respective changes in value (which generally offset each other) are recognized in the statement of income. The valuation of financial instruments designated as hedges of the exposure to variability in cash flows or of a highly probable forecast transaction (cash flow hedges) is recorded in assets (or liabilities); this valuation is made at fair value and the effective portion of changes in value is recognized directly in an equity reserve, which is released to the statement of income in the financial periods in which the related cash flows of the underlying item occur; the ineffective portion of the changes in value is recognized in the statement of income. If a hedged transaction is no longer thought probable, the unrealized gains or losses, deferred in equity, are immediately recognized in the statement of income.
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The shareholders equity of foreign subsidiaries is subject to hedging in order to protect investments in foreign companies from fluctuations in exchange rates (translation exchange risk). Exchange differences resulting from these capital hedging transactions are debited or credited directly to shareholders equity as an adjustment to the translation differences reserve and are reversed to income at the time of disposal or settlement. Derivative instruments for managing interest and exchange rate risks, taken out on the basis of the Groups financial policy but which nonetheless do not meet the formal requirements to qualify for IFRS hedge accounting, are recorded under financial assets/liabilities with changes in value reported through the statement of income. Government capital grants. Any government capital grants are reported in the balance sheet by recording the grant as an adjusting entry to the carrying value of the asset. Identification of segments. The Group has identified business as the primary reporting basis for its segment information, since this is the primary source of risks and rewards; geographical area is the basis for its secondary segment reporting. The Groups activities are divided into three segments in order to provide the basis for effective administration and decision-making, and to supply representative and significant information about company performance to financial investors. Inter-segment transactions are carried out under arms length terms and conditions. The business segments are as follows: - apparel, represented by the brands of United Colors of Benetton, Undercolors, Sisley, Playlife and Killer Loop. The information and results relating to the real estate companies are also included in this segment; - textile, consisting of production and sales activities for raw materials (fabrics, yarns and labels), semi-finished products and industrial services; - other and unallocated, includes activities relating to sports equipment produced for third parties by a Group manufacturing company. The geographical areas defined by the Group for the purposes of secondary segment reporting in compliance with IAS 14 on the basis of significance are as follows: - Italy; - Rest of Europe; - Asia; - The Americas; - Rest of the world.

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Cash flow statement. In compliance with IAS 7, the cash flow statement, prepared using the indirect method, reports the Groups ability to generate cash and cash equivalents. Cash equivalents comprise short-term highly liquid financial investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Therefore, an investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition. Bank overdrafts are also part of the financing activity, unless they are payable on demand and form an integral part of an enterprises cash and cash equivalents management, in which case they are classified as a component of cash and cash equivalents. Cash and cash equivalents included in the cash flow statement comprise the balance sheet amounts for this item at the reporting date. Cash flows in foreign currencies are translated at the average exchange rate for the period. Income and expenses relating to interest, dividends received and income taxes are included in cash flow from operating activities. The layout adopted by the Group reports separately: - operating cash flow: operating cash flows are mainly linked to revenue-generation activities and are presented by the Group using the indirect method; this method adjusts net profit or loss for the effects of items which did not result in cash outflows or generate liquidity (i.e. non-cash transactions); - investing cash flow: investing activities are reported separately because, amongst other things, they are indicative of investments/divestments aimed at the future generation of revenues and positive cash flows; - financing cash flow: financing activities consist of the cash flows which determine a change in the size and composition of shareholders equity and loans granted. Use of estimates. Preparation of the report and related notes under IFRS has required management to make estimates and assumptions regarding assets and liabilities reported in the balance sheet and the disclosure of contingent assets and liabilities at the reporting date. The final results could be different from the estimates. The Group has used estimates for valuing assets subject to impairment testing as previously described, for valuing share-based payments, provisions for doubtful accounts, depreciation and amortization, employee benefits, deferred taxes and other provisions. The estimates and assumptions are reviewed periodically and the effects of any changes are immediately reflected in the statement of income. Accounting treatment of companies operating in hyperinflationary economies. The Group has not consolidated any subsidiaries in 2007 which operate in hyperinflationary economies. Business combinations. The Group accounts for all business combinations by applying the purchase method. The cost of each combination is determined as the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer, in exchange for control of the acquiree. Any costs directly attributable to a business combination also form part of its overall cost. Minority shareholders. Transactions between the Group and minority shareholders are regulated in the same way as transactions with parties external to the Group. The sale of shareholding interests to minority shareholders by the Group generates gains or losses that are recognized in the statement of income. The purchase of interests by minority shareholders is translated into goodwill, calculated as the excess of the amount paid over the share of the carrying value of the subsidiarys net assets.
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Financial risk management The Benetton Group has always paid special attention to the identification, valuation and hedging of financial risk. In November 2005, the Board of Directors of the Benetton Group approved the Group Financial Policy, which defines general principles and guidelines on financial management and the management of financial risks, such as market risk (exchange rate and interest rate risks), counterparty credit risk and liquidity risk. Market risks Foreign exchange rate risk. The Group is exposed to exchange rate fluctuations, which can impact on the economic results and the value of shareholders equity. Specifically, based on the type of exposure, the Group identifies the following classes of risk: - Exposure to economic exchange risk. The Groups companies may have: - costs and revenues denominated in currencies other than a companys functional currency or other currency (usually US Dollars or Euros) normally used in its reference market and whose exchange rate fluctuations can impact operating profit; - trade receivables or payables denominated in currencies other than a companys functional currency, where an exchange rate fluctuation can determine the realization or the reporting of exchange rate differences; - forecast transactions relating to future costs and revenues denominated in currencies other than the functional currency or another currency (usually US Dollars or Euros) normally used in the companies reference market and whose exchange rate fluctuations can impact on the operating profit. - Exposure to transaction exchange risk. Group companies may have financial receivables or payables denominated in currencies other than their functional currency whose exchange rate fluctuations can cause the realization or the reporting of exchange rate differences. - Exposure to translation exchange risk. Some of the Groups subsidiaries are located in countries which do not belong to the European Monetary Union and their functional currency differs from the Euro, which is the Groups reference currency: - the statements of income of these companies are translated into Euro using the periods average exchange rate, and, with revenues and margins being the same in local currency, exchange rate fluctuations can impact on the value in Euro of revenues, costs and economic results; - assets and liabilities of these companies are translated at the period-end exchange rate and therefore can have different values depending on exchange rate fluctuations. As provided for by the accounting standards adopted, the effects of such variations are recognized directly in shareholders equity as translation differences.

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101

It is the Groups policy to manage foreign exchange risk through derivative financial instruments such as currency forwards, currency swaps, currency spot transactions and currency options to reduce or hedge the exposure to such risk. The maximum duration of hedging transactions may vary, depending on the type of risk, from a minimum of two years to a maximum of five years. The Groups Financial Policy does not allow the undertaking of any transactions for the purposes of realizing gains from exchange rate fluctuations, or any transactions in currencies to which there is not an underlying exposure or transactions in currencies designed to increase the underlying exposure. Financial instruments are designated as part of a hedging relationship at the inception of the hedge. Fluctuations in the market value of hedging instruments are therefore tied to changes in the market value of the underlying hedged item for the entire duration of the hedge. The notional amount, fair value and pre-tax effects on the statement of income and shareholders equity of outstanding derivative financial instruments at December 31, 2007 are as follows:

Effect on: (thousands of Euro) Economic exchange risk - fair value hedge - cash flow hedge Transaction exchange risk - fair value hedge Translation exchange risk - cash flow hedge Notional amounts 264,962 84,569 180,393 469,879 469,879 73,332 73,332 Net fair value (5,481) (1,391) (4,090) (6,099) (6,099) 631 631 Shareholders equity (3,636) (3,636) 559 559 Statement of income (1,830) (1,376) (454) (6,099) (6,099) 72 72

The notional amounts represent the total absolute value of all transactions valued at the relevant forward exchange rate (or option strike price). Fair value has been calculated by discounting to present value (using the Black & Scholes model in the case of options) and translating future cash flows using market parameters at the balance sheet (in particular, interest rates, exchange rates and volatility). The effects on shareholders equity of economic exchange risk relate to hedges against future purchases and sales in currencies other than the Euro (cash flow hedges) which, in accordance with international accounting standards, will be recorded in the statement of income during 2008 when the related purchases and sales take place. The effects on the statement of income of transaction exchange risk are offset by gains arising on adjustment of the value of the financial receivables and payables underlying the hedging transaction. The effects on shareholders equity of translation exchange risk are partially offset by losses arising on the translation of shareholders equity underlying the hedging transaction.
Explanatory notes

102

Sensitivity analysis. The potential pre-tax effects on the statement of income of a hypothetical 10% change in exchange rates against the Euro, assuming that all other conditions remain equal, would not be significant at either December 31, 2007 or December 31, 2006 (being less than Euro one million); instead, the potential pre-tax effects on shareholders equity would be as follows:

Pre-tax shareholders equity effects (millions of Euro) Economic exchange risk Transaction exchange risk Translation exchange risk - 10% 10 19

12.31.2007 + 10% (9) (15) - 10% 9 11

12.31.2006 + 10% (8) (8)

The analysis includes derivative financial instruments, as well as trade receivables and payables, financial receivables and payables, and, in the case of translation exchange risk, the shareholders equity of companies in which investments are held. The effects on shareholders equity of economic exchange risk relate to hedges taken out against future purchases and sales in currencies other than the Euro (cash flow hedges). The effects on shareholders equity of translation exchange risk relate to the shareholders equity of companies whose capital employed mostly consists of non-monetary assets whose value over time should offset currency fluctuations and which the Group hedges only in a very few cases. Interest rate risk. The Groups companies use external financial resources in the form of loans and invest available liquidity in moneymarket and capital-market instruments. Variations in market interest rates influence the cost and revenue of funding and investment instruments, thus impacting on the Groups financial expenses and income. The Groups Financial Policy allows it to use derivative financial instruments to hedge or reduce its exposure to interest rate risk. At December 31, 2007 there are outstanding interest rate swaps with a notional value of Euro 50 million, and one cross-currency interest rate swap with a notional value of approximately Euro 4 million; all these contracts will expire in the first six months of 2008. The interest rate swaps have been taken out for the purposes of reducing the exposure to floating-rate interest but have not been designated as hedges of the related interest rate risk for hedging accounting purposes; as a result, changes in their fair value are recognized directly in the statement of income. Their fair value at December 31, 2007 was immaterial since they were due to expire in about two months time. The cross-currency interest rate swap has been taken out by the subsidiary Benetton Korea Inc. and has been designated as a hedge of both interest rate and exchange rate risks attaching to a loan whose terms (amount, maturity, interest fixing) are identical to those of the cross-currency interest rate swap.

Explanatory notes

103

At December 31, 2007 the fair value of this instrument is basically matched by the same but opposite effect on the underlying hedged item. Almost all of the interest-bearing debt consists of floating-rate loans and/or deposits and so their fair value is close to the value recognized in the balance sheet. Sensitivity analysis. The potential pre-tax effect on the statement of income of a hypothetical 10% increase in interest rates, applied to the Groups average interest-bearing debtor or creditor positions, would be to increase financial expenses by about Euro 2 million at December 31, 2007 (around Euro 1 million at December 31, 2006). A similar change but in the opposite sense would occur if rates were to fall by 10%. Credit risk The Group has different concentrations of credit risk depending on the nature of the activities which have generated the receivables. Trade credit risk basically relates to wholesale sales and is limited by only making sales to customers with an established credit history. Sales to retail customers are made in cash or using credit cards and other electronic cards. Receivables which are partially or totally irrecoverable, if sufficiently significant, are written down on an individual basis. The amount of the write-down takes into account a forecast of recoverable cash flows and their relevant collection date, as well as the fair value of warranties. Collective provisions are made for receivables which are not subject to individual write-down, taking into account bad debt history and statistical data. Financial credit risk lies in the counterparts or the issuers inability to settle its financial obligations. The Group invests liquidity in money-market and capital-market instruments. These instruments must have a minimum long-term issuer and/or counterpart rating of S&Ps A- (or equivalent) and/or a minimum short-term issuer and/or counterpart rating of S&Ps A-2 (or equivalent). With the exception of bank deposits, the maximum investment allowed in all other instruments may not exceed 10% of the Groups liquidity investments, with a ceiling of Euro 20 million for each issuer/counterpart, in order to avoid excessive concentration in a single issuer for sovereign issuers with rating lower than A (or equivalent) and for all other issuers with rating lower than AA (or equivalent). As of December 31, 2007 the Groups liquidity was mainly invested in current accounts with leading financial institutions.

Explanatory notes

104

The Groups maximum exposure to credit risk at December 31, 2007 and 2006 is as follows:

Financial receivables individually impaired

Financial receivables not individually impaired

Financial receivables not past due of which due beyond 5 years 2,289 1,292 Not past due 2 3,388 of which past due and renegotiated -

Financial receivables past due

(thousands of Euro) Non-current assets Guarantee deposits Medium/long-term financial receivables Other medium/long-term receivables Current assets Trade receivables Other receivables Financial receivables

12.31.2007 25,157 5,147 10,781

Total collateral -

Past due 10 -

Collateral -

Total 24,491 5,147 7,393

0-60 days 9 -

Beyond 60 days 645 -

Collateral -

680,741 66,569 19,288

7,617 -

60,838 138 -

37,867 78 -

1,003 -

425,947 64,539 18,831

3,235 -

148,186 1,240 252

7,903 574 205

Financial receivables individually impaired

Financial receivables not individually impaired

Financial receivables not past due of which due beyond 5 years 4,965 1,215 353 Not past due 6,950 of which past due and renegotiated -

Financial receivables past due

(thousands of Euro) Non-current assets Guarantee deposits Medium/long-term financial receivables Other medium/long-term receivables Current assets Trade receivables Other receivables Financial receivables

12.31.2006 21,947 3,461 23,903

Total collateral -

Past due 9 72

Collateral -

Total 21,457 1,391 16,881

0-60 days 32 2,070 -

Beyond 60 days 449 -

Collateral -

610,131 56,720 40,474

353 -

9,670 -

39,785 1 -

37,405 -

980 -

374,418 53,928 38,249

6,729 -

143,300 1,140 2,046

15,223 1,651 179

6,484 -

Explanatory notes

105

Liquidity risk Liquidity risk can arise through the inability to access, at economically viable conditions, the financial resources needed to guarantee the Groups ability to operate. The two main factors influencing the Groups liquidity position are the resources generated or used by operating and investing activities, and the maturity and renewal profiles of debt or liquidity profile of financial investments. At December 31, 2007 the Group had unutilized committed credit facilities in the amount of Euro 400 million and uncommitted credit facilities in the amount of around Euro 300 million. Liquidity requirements are monitored by the Parent Companys head office functions in order to guarantee effective access to financial resources and/or adequate investment of liquidity. Management feels that currently available funds and credit facilities, apart from those which will be generated by operating and financing activities, will allow the Group to satisfy its requirements as far as investment, working capital management, and debt repayment at natural maturity are concerned. The Groups financial liabilities at December 31, 2007 and 2006 are analyzed by due date in the following table; note that these amounts include cash flows arising from future financial expenses.

(thousands of Euro) Non-current liabilities Medium/long-term loans Other medium/long-term payables Lease financing Current liabilities Trade payables Other payables, accrued expenses and deferred income Current portion of lease financing Current portion of medium/long-term loans Financial payables and bank loans

12.31.2007 489,183 12,170 2,360

Contractual maturity within 1 year 19,850 -

Contractual maturity 1-2 years 18,083 1,331 1,886

Contractual maturity 2-3 years 18,123 7,974 360

Contractual maturity 3-4 years 19,817 392 114

Contractual maturity 4-5 years 413,310 706 -

Contractual maturity beyond 5 years 1,767 -

385,401 76,140 3,111 68 227,966

385,401 76,140 3,111 68 227,966

Explanatory notes

106

(thousands of Euro) Non-current liabilities Medium/long-term loans Other medium/long-term payables Lease financing Current liabilities Trade payables Other payables, accrued expenses and deferred income Current portion of lease financing Current portion of medium/long-term loans Financial payables and bank loans

12.31.2006 341 12,395 5,471

Contractual maturity within 1 year -

Contractual maturity 1-2 years 68 1,164 3,111

Contractual maturity 2-3 years 71 162 1,886

Contractual maturity 3-4 years 74 7,500 360

Contractual maturity 4-5 years 128 1 114

Contractual maturity beyond 5 years 3,568 -

403,345 62,783 4,368 599,696 83,432

403,345 62,783 4,368 599,325 83,432

131 -

80 -

80 -

80 -

Capital management The Groups objective is to create value for shareholders and to support the Groups future development by maintaining an adequate level of capitalization allowing cost-effective access to external sources of finance. Particular attention is given to the debt-equity ratio and to the debt-EBITDA ratio when seeking to achieve the Groups earnings and cash generation targets. A number of covenants relating to credit facilities and loans must also be observed. These call for: - a ratio of 1 or less between net financial position and equity; - a ratio of 3.5 or less between net financial position and EBITDA. At December 31, 2007 the ratio between net financial position and equity is 0.3 while the ratio between net financial position and EBITDA is 1.4.

Explanatory notes

107

Comments on the principal items in the statement of income [1] Revenues


(thousands of Euro) Sales of core products Miscellaneous sales Royalty income Other revenues Total 2007 1,977,151 83,798 11,252 13,071 2,085,272 2006 1,800,655 74,995 11,932 23,393 1,910,975

Sales of core products are stated net of discounts. Miscellaneous sales relate mainly to sports equipment produced for third parties by a subsidiary in Hungary, as well as the sale of semifinished products and sample items. Other revenues refer mainly to the provision of services such as processing, to cost recharges and miscellaneous services including the development of advertising campaigns. Information on the individual segments can be found in the paragraph entitled Supplementary information - Segment information. Sales of core products, by product category

(thousands of Euro) Casual apparel, accessories and footwear Fabrics and yarns Leisure apparel, accessories and footwear Total

2007 1,860,500 79,163 37,488 1,977,151

2006 1,685,174 85,552 29,929 1,800,655

Explanatory notes

108

Sales of core products, by brand

(thousands of Euro) United Colors of Benetton Sisley Undercolors Playlife Killer Loop Other sales Total

2007 1,435,288 340,699 84,513 26,092 11,396 79,163 1,977,151

2006 1,287,316 322,495 75,363 21,288 8,641 85,552 1,800,655

The United Colors of Benetton brand also includes Euro 574,742 thousand in sales by the UCB Bambino brand (Euro 497,813 thousand in 2006). Other sales refer to the sale of fabrics and yarns.

Cost of sales
[2] Materials and subcontracted work These include Euro 838,195 thousand (676,100 thousand in 2006) in costs for the purchase of raw materials, semi-finished products, finished products and related materials and Euro 193,908 thousand (285,500 thousand in 2006) in costs for subcontracted work. General and operating expenses [3] Payroll and related costs An analysis of the Groups payroll and related costs is presented below, including industrial ones classified as part of the cost of sales, and those relating to directly operated stores classified as part of general and operating expenses. 2007

(thousands of Euro) Wages and salaries Social security contributions Provision for retirement benefit obligations Other payroll and related costs Total

Industrial wages, salaries and related costs 60,074 21,205 557 1,421 83,257

Nonindustrial salaries and related costs 119,498 31,486 1,753 3,298 156,035

Advertising division salaries and related costs 1,132 361 65 1,558

Total 180,704 53,052 2,375 4,719 240,850

Explanatory notes

109

2006

(thousands of Euro) Wages and salaries Social security contributions Provision for retirement benefit obligations Stock option costs Other payroll and related costs Total

Industrial wages, salaries and related costs 58,287 18,449 3,694 745 81,175

Nonindustrial salaries and related costs 118,286 26,935 4,155 1,883 2,241 153,500

Advertising division salaries and related costs 1,128 315 55 1,498

Total 177,701 45,699 7,904 1,883 2,986 236,173

Payroll and related costs have increased mainly as a result of growth in the number of directly operated stores. The number of employees is analyzed by category below:

2007 Management White collar Workers Part-timers Total 95 5,003 2,400 1,398 8,896

2006 95 4,788 2,386 1,625 8,894

Period average 95 4,896 2,393 1,512 8,896

Explanatory notes

110

Stock options plan. The Supplementary information section of the Directors report details the stock options plan approved by the Groups Shareholders Meeting in September 2004. The estimated fair value of each share option granted by the plan is of Euro 1.874 (weighted average price). The fair value was calculated using the Black & Scholes option price valuation method. The data considered for modeling purposes was as follows:

Vesting period: 2 years Number of options granted Grant date First exercise date Expiring date Average exercise date (estimated as mid-point between first exercise and expiring dates) Dividend yield Expected volatility (historic at 260 days) Risk-free interest rate Option life (years) Expected average life (years) Unit fair value in Euro (Black & Scholes) Total fair value in Euro
(*) Cancelled on 09.21.2006.

Vesting period: 4 years (*) 1,616,788.5 09.09.2004 09.09.2008 09.09.2013 03.10.2011 4.16% 27.60% 3.671% 9.0 6.5 1.916344 2,850,457

Total 3,233,577

1,616,788.5 09.09.2004 09.09.2006 09.09.2013 03.10.2010 4.16% 27.60% 3.493% 9.0 5.5 1.831042 2,960,408

9.0 6.0 1.873693 5,810,865

Further details on the stock options plan are given below:

2007 Weighted average exercise price 8.984 8.984 8.984

2006 Weighted average exercise price 8.984 8.984 8.984 8.984

No. of options Circulating at the beginning of the year Granted Annulled Exercised Circulating at year end Exercisable at year end 220,838 220,838 220,838

No. of options 3,233,577 1,896,058 1,116,681 220,838 220,838

Explanatory notes

111

Options outstanding at December 31, 2007 have a remaining average weighted life of 5.7 years. More details about the options exercised during 2006 can be found in the Corporate Governance section of the website (Internal Dealing Notices) at www.benetton.com/investors. Key senior management. The following persons have been identified as key senior managers of the Group:

Function Biagio Chiarolanza Emilio Fo Andrea Negrin (*) Adolfo Pastorelli


(*) Andrea Negrin resigned early in 2008; the position of Group Human Resources Director has been taken over by Giovanni Di Vaio with effect from 03.01.2008.

Chief Operations Officer Chief Financial Officer Human Resources Director Chief Information Technology Officer

The following table summarizes the total remuneration of key senior managers:

(thousands of Euro) Short-term benefits Deferred compensation Other long-term benefits Severance indemnity Stock-based compensation (**) Total
(*) The figures for 2006 include the remuneration, excluding Directors emoluments, of S. Cassano, P.F. Facchini and F. De Nardis who left the Group last year. (**) These amounts correspond to the fair value of options granted and charged to the statement of income in 2006.

2007 2,115 2,115

2006 (*) 3,117 2,666 1,883 7,666

[4] Advertising and promotion Advertising and promotion costs amount to Euro 61,019 thousand (Euro 71,537 thousand in 2006) and reflect the costs incurred for developing advertising campaigns for the Group and also for third-party customers.

Explanatory notes

112

[5] Depreciation and amortization The Groups depreciation and amortization charges for the period, including the industrial ones reported in the cost of sales, are analyzed as follows: 2007

(thousands of Euro) Depreciation of property, plant and equipment Amortization of intangible assets Total

Industrial depreciation and amortization 17,239 149 17,388

Non-industrial depreciation and amortization 46,366 27,276 73,642

Total 63,605 27,425 91,030

2006

(thousands of Euro) Depreciation of property, plant and equipment Amortization of intangible assets Total

Industrial depreciation and amortization 17,902 307 18,209

Non-industrial depreciation and amortization 41,843 24,188 66,031

Total 59,745 24,495 84,240

[6] Other expenses and income

(thousands of Euro) Non-industrial general costs Other operating expenses/(income) Additions to provisions Other expenses/(income) Total

2007 105,606 94,841 22,578 6,163 229,188

2006 95,378 86,680 15,651 291 198,000

Details of these amounts are provided in the following tables.

Explanatory notes

113

Non-industrial general costs


(thousands of Euro) Other services Consulting and advisory fees Rental and hire costs Travel and entertainment costs Maintenance and cleaning Electricity and gas Sundry purchases Directors and Statutory Auditors Telephone and postage expenses Insurance Banking services Surveillance and security Other Total 2007 22,662 13,930 12,366 9,932 9,252 8,708 6,585 6,284 5,599 4,349 2,844 2,200 895 105,606 2006 20,614 13,313 11,007 9,918 6,116 7,873 6,709 5,362 4,930 4,112 2,949 1,862 613 95,378

The following table reports all the remuneration, in whatever form, due in 2007 to each individual member of the Parent Companys Board of Directors and Board of Statutory Auditors.
(thousands of Euro) Name and surname Luciano Benetton Carlo Benetton Alessandro Benetton Gerolamo Caccia Dominioni Gilberto Benetton Giuliana Benetton Luigi Arturo Bianchi Giorgio Brunetti Alfredo Malguzzi Gianni Mion Robert Singer Ulrich Weiss Angelo Cas Antonio Cortellazzo Filippo Duodo
Explanatory notes (1) Until approval of the financial statements.

Position held Chairman Deputy Chairman Deputy Chairman Chief Executive Officer Director Director Director Director Director Director Director Director Chairman of the Board of Statutory Auditors Statutory Auditor Statutory Auditor

Duration of office (1) 12.2009 12.2009 12.2009 12.2009 12.2009 12.2009 12.2009 12.2009 12.2009 12.2009 12.2009 12.2006 12.2007 12.2007 12.2007

Gross remuneration 1,600 800 1,100 648 100 800 93 112 93 50 65 15 62 58 69

114

Other operating expenses/(income)

(thousands of Euro) Operating expenses: - rental expense - indirect taxes and duties - other operating expenses Total operating expenses Operating income: - rental income - reimbursements and compensation payments - other operating income Total operating income Total

2007 144,626 10,670 19,324 174,620

2006 116,281 8,611 19,057 143,949

(68,418) (1,703) (9,658) (79,779) 94,841

(45,721) (3,640) (7,908) (57,269) 86,680

Additions to provisions

(thousands of Euro) Addition to provision for doubtful accounts Addition to provision for sales agent indemnities Addition to provision for legal and tax risks Total

2007 17,210 2,942 2,426 22,578

2006 10,680 2,029 2,942 15,651

Explanatory notes

115

Other expenses/(income)

(thousands of Euro) Other expenses: - impairment of property, plant and equipment and intangible assets - donations - out-of-period expenses - losses on disposal - costs for expected obligations - other sundry expenses Total other expenses Other income: - gains on disposals of property, plant and equipment and intangible assets - out-of-period income - release of provisions - reversal of impairment of property, plant and equipment and intangible assets - other sundry income Total other income Total

2007 8,470 3,004 2,067 1,355 140 11,343 26,379

2006 13,632 2,714 2,362 1,132 2,723 3,155 25,718

(10,810) (4,251) (2,842) (1,802) (511) (20,216) 6,163

(10,879) (456) (9,179) (3,503) (1,410) (25,427) 291

The non-recurring income and expenses included in this heading are detailed in the section entitled Supplementary information - Non-recurring events and significant transactions. [7] Share of income/(loss) of associated companies This amounts to Euro 43 thousand, most of which refers to income arising from dividends received from some of the Groups minor investments.

Explanatory notes

116

[8] Financial (expenses)/income The increase in net financial expenses relative to 2006 is largely due to the rise in interest rates and average indebtedness over the year, partly resulting from the growth in volumes and higher investments.

(thousands of Euro) Financial expenses: - expenses from hedges of economic exchange risk - expenses from hedges of transaction exchange risk - expenses from hedges of translation exchange risk - expenses from hedges of interest rate risk - interest on bank loans - early settlement trade discounts - bank charges and commissions - sundry other financial expenses - interest on advances against receivables - interest on loans from other lenders - interest on bank overdrafts Total financial expenses Financial income: - income from hedges of economic exchange risk - income from hedges of transaction exchange risk - income from hedges of translation exchange risk - income from hedges of interest rate risk - interest income on current, currency and deposit accounts - interest income from receivables - sundry other financial income Total financial income Financial (expenses)/income

2007 (8,052) (11,670) (66) (1,684) (28,246) (2,288) (2,268) (1,548) (399) (376) (308) (56,905)

2006 (1) (6,578) (7,951) (2,171) (1,365) (19,433) (2,370) (2,504) (2,242) (384) (487) (770) (46,255)

7,565 15,325 24 1,782 1,342 980 152 27,170 (29,735)

7,273 11,934 2,575 1,851 3,119 1,574 206 28,532 (17,723)

(1) For the purposes of providing more representative information, the Group has stated financial expenses and income from derivatives net of intercompany transactions. This is why financial expenses and income for 2006 have been restated and adjusted although with no effect on their net balance.

The time value of derivatives hedging economic, transaction and translation exchange risk has been recognized in the statement of income for both fair value hedges and cash flow hedges. [9] Net foreign currency hedging (losses)/gains and exchange differences Exchange differences mainly originate from customer receipts and supplier payments and from currency hedges. This line item also includes exchange differences arising from translation of receivables and payables in foreign currency at the year-end exchange rate.
Explanatory notes

117

The net increase in this amount relative to 2006 is due to the Euros appreciation and particularly Dollar hedges taken out at the end of 2006 and in the first half of 2007 against US Dollar purchases invoiced in the second half of 2007. Net foreign currency hedging (losses)/gains and exchange differences are analyzed by exchange risk as follows:
(thousands of Euro) Economic exchange risk Transaction exchange risk Translation exchange risk Others Total 2007 (8,616) (2,156) 147 292 (10,333) 2006 (3,824) 1,063 369 (168) (2,560)

[10] Income taxes The balance includes current taxes and deferred tax income and expenses:
(thousands of Euro) Current taxes Deferred tax income: - reversal of intercompany profits - impairment of investments - additions, uses and releases from provisions for risks and other charges - taxes on a different depreciable/amortizable base for property, plant and equipment and intangible assets - carried forward tax losses - fair value of derivatives - tax rate change effect on deferred tax income - other Total deferred tax income Deferred tax expenses: - reversal of excess depreciation and the application of finance lease accounting - capital gains - distributable earnings/reserves of subsidiaries - tax effect of business combination - tax rate change effect on deferred tax expenses - other Total deferred tax expenses Total
Explanatory notes

2007 45,443

2006 15,677

(249) 4,922 (1,097) (6,287) (680) 13,994 2,090 12,693

(1,138) 12,268 11,641 (4,073) (620) 2,122 955 21,155

1,257 773 2,510 (883) (9,029) (2) (5,374) 52,762

(4,277) (439) (560) (564) 384 (5,456) 31,376

118

The tax charge amounts to Euro 52,762 thousand compared with Euro 31,376 thousand in the prior year, representing a tax rate of 26.0%, up from 19.7% in 2006; this increase is mainly due not only to the effect of applying the new finance act and particularly the revised tax rate, causing a net negative impact of Euro 4,965 thousand, but also to higher taxable income reported by Italian subsidiaries. The reconciliation of the tax charge is as follows:

(in %) Theoretical tax rate Different tax rate of companies in profit Different tax rate of companies in loss Tax effect of distributable earnings/reserves of subsidiaries Effect arising from business transfers Amortization of excess consideration associated with acquisitions Effect of carried forward tax losses Effect of impairment of property, plant and equipment and intangible assets Higher rate of IRAP (Italian regional business tax) Tax rate change effect on deferred tax expenses/income Other net effects Reported tax rate

2007 37.25 (14.05) 7.56 1.32 (6.78) 0.20 (2.62) 0.49 1.50 2.44 (1.34) 25.97

2006 37.25 (16.17) 6.21 0.79 (11.51) 0.25 (0.39) 1.59 3.44 (1.78) 19.68

Explanatory notes

119

Comments on the principal asset items Non-current assets


[11] Property, plant and equipment The following table summarizes movements in property, plant and equipment during 2007 and 2006. The total amount of Euro 929,924 thousand reported at the foot of the table is stated net of accumulated.

(thousands of Euro) Balance at 01.01.2006 Change in consolidation Additions Disposals Depreciation Impairment Impairment reversals Reclassification of assets held for sale Reclassifications and translation differences Balance at 01.01.2007 Additions Disposals Depreciation Impairment Impairment reversals Reclassification of assets held for sale Reclassifications and translation differences Balance at 12.31.2007

Land and buildings 565,205 245 66,559 (10,519) (12,200) (460) 2,487 611,317 60,695 (472) (12,727) (2,374) 656,439

Plant, machinery and equipment 68,535 296 9,064 (2,467) (17,714) (96) 18 (4) 9,852 67,484 14,324 (12,239) (17,318) (633) 23,923 75,541

Furniture, fittings and electronic devices 42,273 224 33,608 (1,495) (18,358) (3,815) 10 (36) 2,189 54,600 31,030 (1,733) (21,667) (2,392) (51) 1,508 61,295

Vehicles and aircraft 10,470 1,301 (194) (1,090) 14 10,501 18,361 (163) (1,252) (328) (2,484) 13 24,648

Assets under construction and advances 10,957 17 18,883 (55) (19,426) 10,376 77,785 (11) (26,355) 61,795

Leased assets 7,728 1,047 235 (1,050) (74) 7,886 (564) (2,037) 5,285

Leasehold improvements 37,835 674 22,471 (2,464) (9,332) (8,004) (94) 1,264 42,350 15,921 (4,170) (10,077) (2,027) 977 (12) 1,959 44,921

Total 743,003 2,503 152,121 (17,194) (59,744) (11,989) 28 (594) (3,620) 804,514 218,116 (18,788) (63,605) (5,380) 977 (2,547) (3,363) 929,924

Explanatory notes

120

Investments in property, plant and equipment in the year, totaling Euro 218,116 thousand, mainly related to: - acquisitions of properties for commercial use and the modernization and refurbishment of stores for the purposes of expanding the commercial network, particularly in Eastern Europe, Russia, Turkey, Italy and Portugal; - plant, machinery and equipment purchased to boost production and distribution efficiency, particularly in Istria (Croatia), Tunisia and Italy; - the purchase of store furniture and fittings; - the purchase of an aircraft by Benair S.p.A. Leasehold improvements mainly refer to the cost of restructuring and modernizing stores belonging to third parties. Disposals in the year amounted to Euro 18,788 thousand, most of which referred to the sale of production machinery, particularly in Istria. Impairment losses recognized in the year, net of impairment reversals, amount to Euro 4,403 thousand, mainly for writing down certain commercial properties to their recoverable amount; more details can be found in the paragraph on impairment testing. The gross amount, accumulated depreciation and impairment and related net book value of the Groups property, plant and equipment are analyzed below:

(thousands of Euro) Land and buildings Plant, machinery and equipment Furniture, fittings and electronic devices Vehicles and aircraft Assets under construction and advances Leased assets Leasehold improvements Total

Gross 800,316 317,588 183,627 35,394 61,795 9,547 142,040 1,550,307

12.31.2007 Accumulated depreciation and impairment 143,877 242,047 122,332 10,746 4,262 97,119 620,383

Net 656,439 75,541 61,295 24,648 61,795 5,285 44,921 929,924

Gross 743,635 300,579 164,945 23,140 10,376 13,265 139,998 1,395,938

12.31.2006 Accumulated depreciation and impairment 132,318 233,095 110,345 12,639 5,379 97,648 591,424

Net 611,317 67,484 54,600 10,501 10,376 7,886 42,350 804,514

Explanatory notes

121

The net book value of land and buildings is analyzed according to use as follows:

(thousands of Euro) Commercial Industrial Other Total

12.31.2007 533,425 92,492 30,522 656,439

12.31.2006 488,411 94,604 28,302 611,317

Leased assets are analyzed as follows:

(thousands of Euro) Land and buildings Plant, machinery and equipment Furniture, fittings and electronic devices Leasehold improvements (Accumulated depreciation) Total

12.31.2007 5,959 236 3,105 247 (4,262) 5,285

12.31.2006 5,959 3,954 3,105 247 (5,379) 7,886

The long-term portion of the outstanding principal contained in lease repayments at December 31, 2007 is recognized as Lease financing under non-current liabilities, while the short-term portion is reported in current liabilities.

Explanatory notes

122

[12] Intangible assets The following table reports movements in the principal categories of intangible assets:

(thousands of Euro) Balance at 01.01.2006 Change in consolidation Additions Disposals Amortization Impairment Impairment reversals Reclassification of assets held for sale Reclassifications and translation differences Balance at 01.01.2007 Additions Disposals Amortization Impairment Impairment reversals Reclassifications and translation differences Balance at 12.31.2007

Goodwill and other intangible assets of indefinite useful life 8,510 19,712 236 28,458 28,458

Industrial patents 1,027 54 (256) (22) 803 268 (10) (227) 2,499 3,333

Concessions, licenses, trademarks and similar rights 16,957 1,400 (5) (2,685) 2,500 20 18,187 2,372 (92) (2,742) (1) 399 18,123

Deferred charges 102,459 319 56,813 (1,699) (15,316) (1,585) 974 (1,011) 646 141,600 26,819 (2,695) (18,023) (3,089) 825 4,360 149,797

Other 22,796 17,353 (83) (6,239) (58) (207) 33,562 20,163 (243) (6,433) (6,029) 41,020

Total 151,749 319 95,332 (1,787) (24,496) (1,643) 3,474 (1,011) 673 222,610 49,622 (3,040) (27,425) (3,090) 825 1,229 240,731

More details of the impairment of such assets can be found in the paragraph on Impairment testing.

Explanatory notes

123

Concessions, licenses, trademarks and similar rights include the net book value of the following brands:

(thousands of Euro) Killer Loop United Colors of Benetton Sisley Other Total

12.31.2007 9,334 3,088 506 727 13,655

12.31.2006 10,166 3,134 499 898 14,697

Deferred charges mainly consist of lease surrender payments to obtain the lease of buildings for use as stores (key money), which are amortized over the term of the related lease contracts (with the exception of fonds de commerce which are amortized over 20 years). Other mostly refers to Euro 31,915 thousand in software purchase and development costs (of which Euro 30,586 thousand in internally generated assets) and Euro 7,809 thousand in costs relating to assets under construction and advances (of which Euro 2,384 thousand in internally generated assets). Significant investments were also made this year in developing and implementing SAP sales management software and in installing SAP applications at foreign subsidiaries. The gross amount, accumulated amortization and impairment and related net book value of the Groups intangible assets are analyzed below:

(thousands of Euro) Goodwill and other intangible assets of indefinite useful life Industrial patents and intellectual property rights Concessions, licenses, trademarks and similar rights Deferred charges Other Total

Gross 40,952 6,443 63,366 241,490 85,979 438,230

12.31.2007 Accumulated amortization and impairment 12,494 3,110 45,243 91,693 44,959 197,499

Net 28,458 3,333 18,123 149,797 41,020 240,731

Gross 40,952 3,683 69,118 219,780 74,156 407,689

12.31.2006 Accumulated amortization and impairment 12,494 2,880 50,931 78,180 40,594 185,079

Net 28,458 803 18,187 141,600 33,562 222,610

Explanatory notes

124

Impairment testing As required by IAS 36 and internal procedures, the Group has: - checked the existence or otherwise of any indication that its property, plant and equipment and intangible assets of finite useful life might be impaired; - compared the recoverable amount of its intangible assets of indefinite useful life and of its intangible assets not yet available for use with their corresponding carrying amounts. Such a comparison was carried out irrespective of the occurrence of events indicating that the carrying amount of such assets might be impaired. The results of impairment testing in 2007 are summarized in the following table which reports, by business segment, the impairment losses recognized during the year and recorded in the statement of income under Other expenses/(income).

(thousands of Euro) Property, plant and equipment: - plant, machinery and equipment - furniture, fittings and electronic devices - vehicles and aircraft - leasehold improvements Total property, plant and equipment Intangible assets: - intangible assets of finite useful life Total

Apparel 633 2,392 328 2,027 5,380

Textile -

Other and unallocated -

Total 633 2,392 328 2,027 5,380

3,090 8,470

3,090 8,470

The principal impairment losses and reversals recognized in 2007 as a result of impairment testing were as follows: - commercial assets: all the impairment losses for the year refer solely to this class of assets and relate to stores operated both directly and by partners. Each individual store is treated like a separate CGU, for which the present value of its net future cash flows is determined in order to establish the assets value in use. If the value in use of the CGU is less than its carrying amount, an impairment loss in respect of the CGUs assets is recognized accordingly. The only exception to this method of testing relates to the fonds de commerce, measured on the basis of fair value determined by expert appraisal. Impairment losses recognized in 2007 against the commercial assets of certain stores reflected a reduction in their cash flows, caused by an unexpected decline in their sales (both actual and future), except in some cases when it was possible to express a market value. These assets included furniture and fittings, key money and leasehold improvements. All these assets were adjusted to their value in use, estimated on the basis of forecast future cash flows. The impairment losses relate to stores mostly located in Japan, Austria, Sweden, Ireland and Germany. It should also be noted that a total of Euro 1,802 thousand in impairment reversals were recognized in relation to the assets of certain directly operated stores.

Explanatory notes

125

A pre-tax rate of 7.0% was used for the purposes of discounting cash flows (except in Turkey where a rate of 12.9% was applied); - goodwill: the principal assumptions adopted by the Group are listed below:

Nature of goodwill Acquisition Mari GmbH (Germany) Acquisition 50% Benetton Giyim Sanayi A.S. (Turkey) Acquisition 50% Milano Report S.p.A. (Italy) Total

12.31.2006 3,038 5,708 19,712 28,458

Additions/ (Impairment) -

12.31.2007 3,038 5,708 19,712 28,458

Pre-tax discount rate 7.0% 12.9% 7.0%

Specific planning period (years) 5 4 4

Growth rate beyond the specific planning period 2.0% 2.0%

The Group has carried out sensitivity analyses, using different discount rates, for all assets tested for impairment under the value in use method. The results of these simulations do not differ significantly from those presented above. Other non-current assets [13] Investments. Investments in subsidiary and associated companies relate mainly to commercial companies not included in the consolidation because they were not yet operational or were in liquidation at the balance sheet date. Investments in other companies are stated at cost and refer to minority stakes in a number of companies in Italy, Japan, Korea and Switzerland. Details are as follows:

(thousands of Euro) Chesa Paravicini S.A. Korea Fashion Physical Distribution Benlim Ltd. Other investments Total

12.31.2007 1,479 145 442 2,066

12.31.2006 1,479 163 571 232 2,445

Explanatory notes

126

[14] Guarantee deposits. The guarantee deposits reported at December 31 primarily relate to lease contracts entered into by a Japanese subsidiary and by an Indian subsidiary. [15] Medium/long-term financial receivables. The overall balance of Euro 5,147 thousand includes loans mostly given by Group subsidiaries to third parties, which earn interest at market rates. A total of Euro 3,100 thousand in new loans were granted during the year, of which Euro 420 thousand repayable in 2008 and classified as current assets.

(thousands of Euro) From 1 to 5 years Beyond 5 years Total

12.31.2007 3,855 1,292 5,147

12.31.2006 2,246 1,215 3,461

[16] Other medium/long-term receivables. This line item, totaling Euro 33,996 thousand, includes Euro 18,563 thousand in receivables due from Ragione S.A.p.A. di Gilberto Benetton e C. for current taxes, calculated on taxable losses, as allowed in the rules governing participation in the group tax election for Italian companies. This line item also includes Euro 5,478 thousand in customer trade receivables (stated net of Euro 8,248 thousand in provisions for doubtful accounts as detailed in the related note on trade receivables), Euro 5,297 thousand in receivables due for fixed asset disposals and Euro 4,253 thousand in recoverable VAT, while the remainder relates to other sundry receivables. [17] Deferred tax assets. The following table provides a breakdown of net deferred tax assets:

(thousands of Euro) Tax effect of eliminating intercompany profits Tax effect of provisions, costs and revenues relating to future periods for fiscal purposes Deferred taxes on reversal of excess depreciation and application of finance lease accounting Deferred taxes on capital gains taxable over a number of accounting periods Different basis for depreciation/amortization Benefit on carried forward tax losses Deferred taxes on distributable earnings/reserves Tax effect of business combination Total

12.31.2006 5,871 48,280 (8,637) (2,552) 126,723 16,751 (5,068) (8,922) 172,446

Increases 6,120 9,892 (3,001) (1,758) 10,813 (2,595) 19,471

Decreases (5,871) (22,018) 2,874 1,425 (5,498) 84 2,236 (26,768)

Translation differences and other movements (834) (1,265) (2,099)

12.31.2007 6,120 35,320 (8,764) (2,885) 126,723 20,801 (7,579) (6,686) 163,050

Explanatory notes

127

The Group offsets deferred tax assets against deferred tax liabilities for Italian companies that have made the group tax election and for foreign subsidiaries to the extent legally allowed in their country of origin. This balance is mostly attributable to taxes paid in advance as a result of differences in calculating the amortizable/depreciable base of assets. The associated deferred tax assets have been recognized on the basis of the Groups future expected profitability following its reorganization in 2003. The balance also includes deferred tax assets recognized on provisions and costs already reported in the financial statements that will become deductible for tax in future periods. The potential tax benefit associated with carried forward tax losses of Group companies is about Euro 188 million (166 million in 2006) but has been adjusted to Euro 167 million for amounts that are currently unlikely to be fully recovered. Details of these unrecognized benefits are analyzed by year of expiry as follows:

(thousands of Euro) From 1 to 3 years From 4 to 6 years From 7 to 9 years Beyond 10 years Unlimited Total

12.31.2007 4,928 14,563 5,314 23,660 118,574 167,039

Current assets
[18] Inventories. Inventories are analyzed as follows:

(thousands of Euro) Raw materials, other materials and consumables Work in progress and semi-finished products Finished products Advances to suppliers Total

12.31.2007 90,705 49,556 193,709 2,093 336,063

12.31.2006 89,184 58,869 182,189 464 330,706

The valuation of closing inventories at weighted average cost is not appreciably different from their value at current purchase cost.

Explanatory notes

128

Inventories are stated net of the write-down provision. Movements in the write-down provision are as follows:

(thousands of Euro) Raw materials, other materials and consumables Work in progress and semi-finished products Finished products Total

12.31.2006 3,072 824 18,870 22,766

Additions 4,897 530 9,395 14,822

Uses (3,007) (824) (10,298) (14,129)

Translation differences (54) (306) (360)

12.31.2007 4,908 530 17,661 23,099

[19] Trade receivables. Short-term and long-term trade receivables and the related provisions recognized for doubtful accounts, are as follows at December 31, 2007:

(thousands of Euro) Current trade receivables (Provision for current doubtful accounts) Current trade receivables Non-current trade receivables (Provision for non-current doubtful accounts) Non-current trade receivables Total trade receivables

12.31.2007 740,876 (60,135) 680,741 13,726 (8,248) 5,478 686,219

12.31.2006 679,888 (69,757) 610,131 20,137 (3,111) 17,026 627,157

The total provision for doubtful accounts corresponds to 9% of trade receivables. Movements in this provision during the year are summarized below:

(thousands of Euro) Provision for doubtful accounts

12.31.2006 72,868

Additions 17,110

Uses (19,602)

Releases to income (1,721)

Exchange differences and other changes (272)

12.31.2007 68,383

Trade receivables include Euro 429 thousand in amounts due from associated and related companies and Euro 146 thousand due from the holding company Edizione Holding S.p.A. A total of Euro 23,435 thousand in receivables not yet due had been factored without recourse at December 31, 2007 (Euro 26,065 thousand at December 31, 2006).

Explanatory notes

129

[20] Tax receivables. This balance includes:

(thousands of Euro) VAT recoverable Tax credits Other tax receivables Total

12.31.2007 20,370 6,273 943 27,586

12.31.2006 27,735 6,021 1,767 35,523

[21] Other receivables, accrued income and prepaid expenses. This balance includes:

(thousands of Euro) Other receivables: - other - receivables from holding and related companies Total other receivables Accrued income: - other income - rental income and operating leases Total accrued income Prepaid expenses: - rental expense and operating leases - other operating costs - taxes and duties - rental and hire costs - Directors emoluments - insurance policies - advertising and sponsorships Total prepaid expenses Total

12.31.2007 52,033 22,024 74,057

12.31.2006 41,791 24,314 66,105

77 650 727

1,039 128 1,167

8,969 1,289 992 333 304 715 665 13,267 88,051

8,954 1,836 1,165 427 477 903 13,762 81,034

Explanatory notes

130

Other receivables, which total Euro 74,057 thousand (Euro 66,105 thousand at December 31, 2006), mostly refer to: - receivables from holding and related companies of which Euro 21,483 thousand due from Edizione Holding S.p.A. in relation to the group tax election for Italian companies; - Euro 17,186 thousand in receivables associated with the future establishment of a partnership serving the Groups commercial development in Iran; - Euro 17,154 thousand in advances to various suppliers; - Euro 2,622 thousand in receivables for fixed asset disposals; - Euro 1,347 thousand in advances given to employees. [22] Financial receivables

(thousands of Euro) Other current financial receivables and assets Differentials on forward exchange contracts Current financial receivables from third parties Total

12.31.2007 10,049 7,876 1,363 19,288

12.31.2006 13,427 24,254 2,793 40,474

The differentials on forward exchange contracts include the time value component of derivatives hedging economic, transaction and translation risks as detailed below:

(thousands of Euro) Economic exchange risk: - fair value hedge - cash flow hedge Total economic exchange risk Transaction exchange risk: - fair value hedge Translation exchange risk: - cash flow hedge Total

12.31.2007 566 2,087 2,653

12.31.2006 1,764 1,764

4,664

19,837

559 7,876

2,653 24,254

Explanatory notes

131

Since the differentials arising from fair value hedges refer to hedging instruments, the change in their value is considered to be offset against the change in the underlying hedged item. The differentials relating to cash flow hedges refer to exchange rate risk management. The amounts recognized in the balance sheet represent the effect of hedging highly probable transactions such as future sales and purchases in currencies other than the Euro which will take place by the end of the following year. As a result, it is reasonable to believe that the related effect of hedging deferred in shareholders equity in the Fair value and hedging reserve will be recognized in the statement of income in the next year. Differentials from transactions hedging translation exchange risk include the balance sheet recognition of hedges outstanding at year end against net investments in foreign subsidiaries. Details of the amount released by the Group from reserves to the statement of income can be found in the specific table included in the section containing the financial statements. [23] Cash and banks

(thousands of Euro) Bank and post office current accounts in Euro Checks Bank current accounts in other currencies Time deposits Cash in hand Total

12.31.2007 37,914 75,790 18,729 1,408 133,841

12.31.2006 40,670 60,992 29,649 47,994 1,433 180,738

The time deposits are liquid funds belonging to the finance companies and the Parent Company. Average interest rates reflect market returns for the various currencies concerned. The amount of checks is the result of customer payments, received in the last few days of the reporting year. [24] Assets held for sale. This balance includes the following amounts, reported at the lower of net book value and fair value less costs to sell: - Euro 3,224 thousand in relation to the factory in Pedimonte that is no longer operating after commencing plans to restructure the textile sector at the end of 2005; - Euro 2,484 thousand for an aircraft owned by one of the Groups Italian subsidiaries; - the remainder for the value of fixed assets relating to the disposal of a retail business by an Italian subsidiary, completed in January 2008.

Explanatory notes

132

Movements in this balance over the year are as follows:

(thousands of Euro) Balance at 01.01.2007 Assets sold Reclassification from property, plant and equipment Balance at 12.31.2007 7,035 (3,811) 2,547 5,771

Explanatory notes

133

Comments on the principal items in shareholders equity and liabilities Shareholders equity
[25] Shareholders equity attributable to the Group The Shareholders Meeting of Benetton Group S.p.A. resolved on April 26, 2007 to pay a dividend of Euro 0.37 per share, totaling Euro 67,590 thousand; this dividend was paid on May 4, 2007. Changes in shareholders equity during the period are detailed in the statement of changes contained in the Consolidated financial statements section. [26] Share capital. The share capital of Benetton Group S.p.A. amounts to Euro 237,478,139.60 at December 31, 2007 and consists of 182,675,492 shares with a par value of Euro 1.30 each. [27] Fair value and hedging reserve. This reserve amounts to Euro (2,672) thousand at December 31, 2007, which is stated net of Euro 1,001 thousand in related tax and reports the changes in the effective hedging component of derivatives measured at fair value. [28] Other reserves and retained earnings: These reserves amount to Euro 941,780 thousand (Euro 893,570 thousand at December 31, 2006) and include: - Euro 47,500 thousand relating to the Parent Companys legal reserve; - Euro 534,194 thousand relating to other reserves of the Parent Company (Euro 523,289 thousand at December 31, 2006); - Euro 21,452 thousand relating to monetary revaluation reserves in compliance with Italian Law no. 72 of March 19, 1983, and Law no. 413 of December 30, 1991, and, in the case of a Spanish subsidiary, in compliance with Royal Decree no. 2607/96; - Euro 338,629 thousand representing the shareholders equity of consolidated companies in excess of their carrying value, together with other consolidation adjustments; - Euro 4,807 thousand relating to share-based payments, valued at fair value on the grant date, and recognized in the statement of income on a straight-line basis with a matching increase in this reserve; - Euro (4,802) thousand relating to translation differences arising from the line-by-line consolidation of the financial statements of certain subsidiaries expressed in a foreign currency.

Explanatory notes

134

The first of the schedules below is a reconciliation of the shareholders equity and net income reported in the separate financial statements of Benetton Group S.p.A. with the corresponding consolidated amounts; the second lists the percentage of shareholders equity in consolidated subsidiaries attributable to minority shareholders. Reconciliation of shareholders equity and net income of Benetton Group S.p.A. with the corresponding consolidated amounts

12.31.2007 (thousands of Euro) Per the separate financial statements of Benetton Group S.p.A. prepared under IFRS Portion of shareholders equity and net income of consolidated subsidiaries attributable to the Group, net of the carrying value of the related investments Reversal of gains on transfer of businesses, net of deferred tax assets Reversal of write-down of investments by the Parent Company Reversal of dividends paid to the Parent Company by consolidated subsidiaries Deferred taxes on profits/reserves distributable by subsidiaries Allocation to non-current assets of the amount by which purchase of consideration for subsidiaries exceeds their net asset value at the date acquisition and related depreciation and amortization Reversal of intercompany profits/losses on transfers of property, plant and equipment, net of the related tax effect Effect of applying finance lease accounting to leased assets, net of the related tax effect Elimination of intercompany profits included in the inventories of consolidated subsidiaries, net of the related tax effect Valuation of put options held by minority shareholders Adjustment to reflect the equity value of associated companies Net effect of other consolidation entries Per the Group consolidated financial statements Shareholders equity 987,245 Net income 79,950 Shareholders equity 974,891

12.31.2006 Net income 78,785

875,314 (540,915) 325 (7,578)

171,773 7,351 (110,000) (2,509)

822,755 (540,915) 10,252 (5,069)

140,631 4,073 10,790 (110,467) 560

87,576 837 12,091 (14,531) (13,437) 144 1,387,071

(2,441) 1,134 550 717 (617) (578) 145,330

73,959 (297) 11,541 (15,245) (12,820) (331) 1,318,721

(2,653) 701 1,816 321 (6) 363 124,914

Explanatory notes

135

[29] Minority interests. The following consolidated companies have portions of their shareholders equity attributable to minority shareholders:

(in %) Foreign consolidated companies: - New Ben GmbH (Germany) - Benetton Korea Inc. (Korea) - Benetton Giyim Sanayi ve Ticaret A.S. (Turkey) - Milano Report S.p.A. (Italy) - Benlim Ltd. (Hong Kong) - Shanghai Sisley Trading Co. Ltd. (China)

12.31.2007 50 50 50 50 50 50

12.31.2006 50 50 50 50 -

Liabilities
Non-current liabilities [30] Medium/long-term loans. Medium/long-term loans granted by banks and other lenders are as follows (net of deferred loan arrangement costs):

(thousands of Euro) Loan from Intesa Sanpaolo S.p.A. Loan from UniCredit Banca dImpresa S.p.A. Loan from BNL S.p.A. (BNP Paribas group) Loan from Ministry of Industry, Italian Law no. 46/1982 Other loans Total

12.31.2007 149,730 149,730 99,821 221 51 399,553

12.31.2006 290 51 341

This balance mostly refers to three loans repayable by 2012 totaling Euro 400 million, of which Euro 150 million from Intesa Sanpaolo S.p.A., Euro 150 million from UniCredit Banca dImpresa S.p.A. and Euro 100 million from BNL S.p.A. (BNP Paribas group). These loans carry interest of one, two, three or six-month Euribor plus a spread ranging between 20 and 50 basis points depending on the ratio between net financial position and EBITDA, and call for compliance with two financial covenants, observance of which is verified every six months on the basis of the consolidated financial statements, namely: - a ratio of 4 or above between EBITDA and net financial expenses; - a ratio of 3.5 or less between net financial position and EBITDA.

Explanatory notes

136

Non-current loans mature as follows (thousands of Euro):

Year 2009 2010 2011 2012 2013 and beyond Total

12.31.2007 121 74 77 399,281 399,553

[31] Other medium/long-term payables

(thousands of Euro) Other payables due to holding and related companies Other payables due to third parties Guarantee deposits received Non-current liabilities for the purchase of fixed assets Total

12.31.2007 46,026 7,552 3,802 868 58,248

12.31.2006 13,813 7,513 3,880 38 25,244

Other payables due to holding and related companies at December 31, 2007 all refer to amounts owed to Ragione S.A.p.A. di Gilberto Benetton e C. for current taxes calculated on taxable income, as required under the rules governing relationships between companies participating in the group tax election; these liabilities are due for settlement in 2009. Other payables due to third parties include the value attributed to the put options held by minority shareholders in subsidiary companies. [32] Lease financing. Payables due to leasing companies for finance leases are shown in the following table. The short-term portion of lease financing is classified in the current liabilities section of the balance sheet.

Minimum lease payments (thousands of Euro) Within 1 year From 1 to 5 years Beyond 5 years Total 12.31.2007 3,111 2,360 5,471 12.31.2006 4,368 5,471 9,839 12.31.2007 2,952 2,292 5,244

Principal portion 12.31.2006 4,036 5,244 9,280


Explanatory notes

137

Minimum lease payments due to the leasing company are reconciled to their present value (i.e. principal portion) as follows:

(thousands of Euro) Minimum lease payments (Outstanding financial expenses) Present value of lease financing

12.31.2007 5,471 (227) 5,244

12.31.2006 9,839 (559) 9,280

The Group has purchased mainly buildings and machinery using lease financing. The average length of lease contracts is approximately eight years. The interest rates defined at the date of signing the contract are indexed to the three-month Euribor rate. All lease contracts are denominated in Euro and repayable in equal installments, with no contractual provisions for any changes in the original repayment plan. The fair value of finance leases taken out by the Group approximates the carrying amount. Amounts due to lessors are secured by rights over the leased assets. [33] Retirement benefit obligations. These refer to provisions for post-employment benefit plans relating to Group employees, of which Euro 48,061 thousand relates to provisions for employee termination indemnities (TFR) reported by the Groups Italian companies. The actuarial valuations of TFR at December 31, 2007 reflect the revised rules introduced in Italys Finance Act for 2007 passed on December 27, 2006, and subsequent decrees and regulations issued in the first few months of 2007. Under these amendments: - TFR accruing from January 1, 2007, both in the case of opting for its payment into a supplementary pension scheme or into the Treasury Account at INPS (Italys social security agency), is treated like payments into a defined contribution plan and accounted for accordingly; - TFR accruing up to December 31, 2006 continues to be treated like a defined benefit plan and accounted for in accordance with the provisions of IAS 19 for this type of plan. However, as a result of the revised rules for TFR accruing from 2007, it has been necessary to carry out a new actuarial valuation in order to exclude the component relating to future salary increases. This recalculation entailed recognizing Euro 1,419 thousand in income in the statement of income in June 2007. This amount has been deducted from the provision for retirement benefit obligations for the period and consists of the curtailment effect, less the actuarial gains and losses previously unrecognized as a result of using the corridor method.

Explanatory notes

138

Movements in these obligations over the year and the related reconciliation between the net liability and the obligations present value, as calculated under IAS 19, are as follows:

(thousands of Euro) Balance at 01.01.2007 Unrecognized actuarial (gains)/losses Actuarial (gains)/losses recognized due to regulation changes Curtailment 01.01.2007 due to regulation changes Present value of obligation at 01.01.2007 Expense charged to the statement of income Actuarial (gains)/losses for the year Indemnities paid in the year Exchange differences and other changes Present value of obligation at 12.31.2007 Unrecognized actuarial (gains)/losses Balance at 12.31.2007 53,434 (273) 4,059 (5,478) 51,742 3,794 (59) (4,860) (164) 50,453 (331) 50,784

The expense charged to the statement of income under the corridor method for defined benefit plans is detailed as follows:

(thousands of Euro) Actuarial (gains)/losses recognized due to regulation changes Curtailment 01.01.2007 due to regulation changes Current service cost Financial expenses Amortization of actuarial (gains)/losses Past service cost Total

12.31.2007 4,059 (5,478) 1,688 2,120 (14) 2,375

12.31.2006 5,591 2,340 (27) 7,904

The total amount of expenses relating to defined benefit plans is reported under payroll and related costs; it should be noted that there are no assets servicing the defined benefit plans.

Explanatory notes

139

The principal assumptions adopted for the calculation are as follows:

12.31.2007 Discount rate Inflation rate Expected rate of salary increases 1.7%-4.6% 2.0% 1.0%-3.0%

12.31.2006 4.3% 2.0% 5%-3.5%

[34] Other medium/long-term provisions and liabilities

(thousands of Euro) Balance at 01.01.2007 Additions to provisions Releases to income Utilizations and other changes Balance at 12.31.2007

Provision for legal and tax risks 7,091 1,010 (67) (1,609) 6,425

Provision for sales agent indemnities 18,314 2,942 (2,703) 18,553

Other provisions 2,140 64 (555) (247) 1,402

Total 27,545 4,016 (622) (4,559) 26,380

This item relates to the liabilities and probable risks which the Group does not expect will be resolved by the end of 2008. Since it operates in a number of sectors on a global scale, the Benetton Group has an inherent exposure to legal risks. The areas of greatest current exposure relate to claims filed by former commercial partners, former employees, subcontractors, and third parties with industrial property rights in potential conflict with products distributed by the Benetton Group or with similar rights to those of the Group. There are also a few immaterial unresolved tax disputes. During 2007 the provision for legal and tax risks was utilized to the extent of Euro 511 thousand and increased by Euro 1,010 thousand for disputes arising in the year. The sum of Euro 67 thousand, provided in prior periods, was released to income during the year after the related disputes were settled in the Groups favor. The provision for sales agent indemnities, which reflects the risk associated with the possible termination of agency agreements as established by law, was utilized to the extent of Euro 2,703 thousand and increased by Euro 2,942 thousand during the year. Other provisions relate to the costs the Group will probably have to incur for the closure of certain directly operated stores; these provisions were utilized to the extent of Euro 130 thousand over the year. The sum of Euro 555 thousand, provided in prior years against store closures, was released to income during 2007 after the related stores continued to stay open, meaning that the reason for the original provision no longer existed.

Explanatory notes

140

Current liabilities [35] Trade payables. These represent the Groups liabilities for the purchase of goods and services amounting to Euro 385,401 thousand. [36] Other payables, accrued expenses and deferred income

(thousands of Euro) Other payables: - payables for the purchase of fixed assets - other payables due to holding and related companies - other payables due to employees - other payables due to third parties - payables due to social security and welfare institutions - other payables due to tax authorities - VAT Total other payables Accrued expenses: - lease installments - other expenses - consulting and other fees Total accrued expenses Deferred income: - rental income - revenue from concession of rights - other income Total deferred income Total

12.31.2007 36,301 15,819 19,103 11,210 9,773 7,120 2,319 101,645

12.31.2006 25,992 19,838 19,056 9,389 8,608 7,533 5,561 95,977

6,135 328 141 6,604

4,762 922 42 5,726

1,672 537 713 2,922 111,171

1,826 637 48 2,511 104,214

Payables for the purchase of fixed assets mostly refer to the commercial network, Information Technology and the manufacturing division. Other payables due to holding and related companies entirely refer to amounts owed to Edizione Holding S.p.A. under the group tax election. Other payables due to employees refer to amounts accruing and not paid at the end of December. Other payables due to third parties include non-trade related payables, amongst which: remuneration owed to Directors, the liability representing the valuation of put options held by minority shareholders in Group subsidiaries, payables due to insurance companies and current guarantee deposits received.
Explanatory notes

141

Payables due to social security and welfare institutions relate to amounts owed to these institutions by Group companies and their employees. [37] Current income tax liabilities. These represent the amount payable by the Group for current income tax, stated net of taxes paid in advance, tax credits and withholding taxes. [38] Other current provisions and liabilities

(thousands of Euro) Balance at 01.01.2007 Additions to provisions Releases to income Utilizations and other changes Balance at 12.31.2007

Provision for legal and tax risks 2,626 1,416 (309) (746) 2,987

Other provisions 2,258 76 (188) (1,842) 304

Total 4,884 1,492 (497) (2,588) 3,291

This item relates to the Groups provisions against legal and tax disputes or potential liabilities that it expects to be resolved or settled during 2008. The provision for legal and tax risks mostly refers to legal disputes likely to be settled in the short term. Other provisions mostly refer to the costs to be incurred by the Group in 2008 for the closure of certain stores. The utilizations mostly relate to the payment of costs relating to a store in the United Kingdom. [39] Current portion of lease financing. This reports the portion of lease financing which is due within one year to the lessor. The reconciliation between the present value of this liability and the minimum lease payments is provided in the note relating to its non-current portion.

Explanatory notes

142

[40] Current portion of medium/long-term loans

(thousands of Euro) Syndicated loan for Euro 500 million, matured in July 2007, underwritten by a syndicate of banks, carrying floating-rate interest of six-month Euribor + 0.25% spread Loan granted by Medio Credito del Friuli repayable in half-yearly installments in 2007, carrying 2.5% annual interest and secured by a property mortgage Loan from Ministry of Industry, Italian Law no. 46/1982 Total

12.31.2007 68 68

12.31.2006 499,917 240 65 500,222

The floating-rate syndicated loan for Euro 500 million has matured and was repaid on July 31, 2007. The amount was stated net of deferred loan arrangement costs. [41] Financial payables and bank loans

(thousands of Euro) Financial payables due to banks Negative differentials on forward exchange contracts Other current financial liabilities Financial payables due to third parties Current account overdrafts Total

12.31.2007 195,282 19,500 9,657 470 3,057 227,966

12.31.2006 39,588 27,943 12,817 1,565 1,519 83,432

Explanatory notes

143

The negative differentials on forward exchange contracts include the time value component of derivatives hedging economic, transaction and translation risks as detailed below:

(thousands of Euro) Economic exchange risk: - fair value hedge - cash flow hedge Total economic exchange risk Transaction exchange risk: - fair value hedge Translation exchange risk: - fair value hedge - cash flow hedge Total translation exchange risk Total

12.31.2007 1,877 5,723 7,600

12.31.2006 676 5,379 6,055

11,891

21,334

9 9 19,500

554 554 27,943

Since the differentials arising from fair value hedges refer to hedging instruments, the change in their value is deemed to be offset against the change in the underlying hedged item. The differentials relating to cash flow hedges refer to exchange rate risk management. The amounts recognized in the balance sheet represent the effect of hedging highly probable transactions such as future sales and purchases in currencies other than the Euro which will take place by the end of the following year. As a result, it is reasonable to believe that the related effect of hedging deferred in shareholders equity in the Fair value and hedging reserve will be recognized in the statement of income in the next year. Differentials from transactions hedging translation exchange risk include the balance sheet recognition of hedges outstanding at year end against net investments in foreign subsidiaries. Details of the amount released by the Group from reserves to the statement of income can be found in the specific table included in the section containing the financial statements.

Explanatory notes

144

Commentary on the cash flow statement


Cash flow from operating activities before changes in working capital amounted to Euro 342,993 thousand in the year, compared with Euro 257,467 thousand in 2006, reflecting the improvement in EBITDA to Euro 340,874 thousand. Changes in working capital used Euro 95,535 thousand in cash flow, having provided Euro 28,253 thousand in cash flow in 2006, and mostly reflect: - an increase in trade receivables and inventories, associated, albeit less than proportionately, with the growth in sales volumes; - a decrease in trade payables due to the higher proportion of goods purchased for resale and of transport costs with shorter-than-average terms of payment. It should also be noted that there was a considerable improvement in receivables collection during 2006, with the target level of performance now almost achieved. Operating activities provided Euro 195,591 thousand in cash flow compared with Euro 236,881 thousand in 2006. Cash flow used by investing activities increased to Euro 229,532 thousand from Euro 216,007 thousand in 2006, mainly due to higher operating investments in 2007. These investments mainly related to the commercial network, development of the production centers in Istria (Croatia) and Tunisia and of the hub in Castrette di Villorba (Italy) and to information technology (introduction of SAP sales management software and installation of SAP applications at foreign subsidiaries), as well as for the acquisition of an aircraft by Benair S.p.A. Divestments in the year mostly related to the apparel segment and referred to disposals of retail businesses, and of manufacturing plant and machinery. Cash flow used by financing activities included the payment of Euro 67,590 thousand in dividends to the shareholders of Benetton Group S.p.A., the payment of Euro 968 thousand in dividends to minority shareholders of subsidiary companies and the net change in other sources of finance of Euro 54,201 thousand.

Explanatory notes

145

Supplementary information Financial position


Net financial indebtedness amounted to Euro 474,555 thousand at the end of 2007, reporting an increase of Euro 105,954 thousand since December 31, 2006, and is analyzed as follows:

(thousands of Euro) Cash and banks A Liquid assets B Current financial receivables Current portion of indebtedness Financial payables, bank loans and lease financing C Current financial indebtedness D = A+B+C Current net financial indebtedness E Non-current financial receivables Bank loans Lease financing F Non-current financial indebtedness G = E+F Non-current net financial indebtedness H = D+G Net financial indebtedness

12.31.2007 133,841 133,841 19,288 (68) (230,918) (230,986) (77,857) 5,147 (399,553) (2,292) (401,845) (396,698) (474,555)

12.31.2006 180,738 180,738 40,474 (500,222) (87,467) (587,689) (366,477) 3,461 (341) (5,244) (5,585) (2,124) (368,601)

Change (46,897) (46,897) (21,186) 500,154 (143,451) 356,703 288,620 1,686 (399,212) 2,952 (396,260) (394,574) (105,954)

Most of the balance reported in Cash and banks refers to ordinary current accounts and short-term or overnight bank deposits, with Euro 75,790 thousand relating to checks received from customers at the end of December 2007. Financial payables, bank loans and lease financing mostly consist of short-term payables due to the banking system: Euro 99 million drawn down against uncommitted credit lines and Euro 100 million drawn down against the committed credit line of Euro 500 million maturing in June 2010. This facility carries interest of one, two, three or six-month Euribor plus a spread ranging between 27.5 and 60 basis points depending on the ratio between net financial position and EBITDA, and calls for compliance with three financial covenants, observance of which is verified every six months on the basis of the consolidated financial statements, namely: - a ratio of 4 or above between EBITDA and net financial expenses;
Explanatory notes

146

- a ratio of 3.5 or less between net financial position and EBITDA; - a ratio of 1 or less between net financial position and equity. Bank loans mostly refer to three five-year loans totaling Euro 400 million, of which Euro 150 million from Intesa Sanpaolo S.p.A., Euro 150 million from UniCredit Banca dImpresa S.p.A. and Euro 100 million from BNL S.p.A. (BNP Paribas group). These loans carry interest of one, two, three or six-month Euribor plus a spread ranging between 20 and 50 basis points depending on the ratio between net financial position and EBITDA, and call for compliance with two financial covenants, observance of which is verified every six months on the basis of the consolidated financial statements, namely: - a ratio of 4 or above between EBITDA and net financial expenses; - a ratio of 3.5 or less between net financial position and EBITDA. Both the committed credit facility of Euro 500 million and the three loans totaling Euro 400 million also carry other covenants by Benetton Group S.p.A. and, in some cases, by other Group companies, that are typically used in international finance, amongst which: a. negative pledge clauses, which require any existing or future secured guarantees over assets in relation to lending transactions, bonds and other instruments of credit to be extended to the above transactions on an equal footing; b. pari passu clauses, under which no obligations may be taken on that are senior to those assumed in the two transactions described above; c. periodic reporting obligations; d. cross default clauses, which entitle the lender to demand immediate repayment of the sums lent in the event of certain types of default by other financial instruments issued by the Group; e. restrictions on major asset disposals; f. other clauses generally found in transactions of this kind. These covenants are nevertheless subject to several exceptions and restrictions. There are no relationships of a financial nature with the tax group consolidating companies Edizione Holding S.p.A. and Ragione S.A.p.A. di Gilberto Benetton e C.

Explanatory notes

147

Segment information
Segment results - 2007

(millions of Euro) Revenues from third parties Inter-segment revenues Total revenues Cost of sales Gross operating profit Selling costs Contribution margin General and operating expenses - of which non-recurring expenses/(income) Operating profit Share of income of associated companies Financial expenses Foreign currency hedging losses and exchange differences Income before taxes Income taxes Net income for the year attributable to the Group and minority interests Depreciation and amortization Other non-monetary costs Earnings before interest, taxes, depreciation, amortization and other non-monetary costs Total assets Total liabilities Capital employed Total gross operating investments

Apparel 1,956 1 1,957 1,071 886 139 747 511 4 236

Textile 88 137 225 203 22 8 14 8 6

Other and unallocated 41 41 40 1 1 (1) 1

Eliminations (138) (138) (138) (1) 1 1 -

Consolidated 2,085 2,085 1,176 909 146 763 520 3 243 (30) (10) 203 53 150

78 7

12 -

1 -

91 7

321 2,539 1,224 1,794 257

18 186 102 83 10

2 18 4 14 -

(52) (53) (2) -

341 2,691 1,277 1,889 267

Explanatory notes

148

Segment results - 2006

(millions of Euro) Revenues from third parties Inter-segment revenues Total revenues Cost of sales Gross operating profit Selling costs Contribution margin General and operating expenses - of which non-recurring expenses/(income) Operating profit Share of income of associated companies Financial expenses Foreign currency hedging losses and exchange differences Income before taxes Income taxes Net income for the year attributable to the Group and minority interests Depreciation and amortization Other non-monetary costs Earnings before interest, taxes, depreciation, amortization and other non-monetary costs Total assets Total liabilities Capital employed Total gross operating investments

Apparel 1,772 2 1,774 993 781 130 651 479 1 172

Textile 95 159 254 230 24 9 15 10 5

Other and unallocated 44 44 41 3 3 (2) 3

Eliminations (161) (161) (159) (2) (2) -

Consolidated 1,911 1,911 1,105 806 137 669 489 (1) 180 (18) (3) 159 31 128

69 12

14 -

1 -

84 12

253 2,407 1,149 1,604 188

19 194 122 95 -

4 20 7 13 -

(60) (58) (2) -

276 2,561 1,220 1,710 188

Other non-monetary costs consist of any net impairment losses recognized for property, plant and equipment and intangible assets as a result of impairment testing and of the cost of stock options allocated to the apparel segment.

Explanatory notes

149

Apparel segment results

(millions of Euro) Revenues from third parties Inter-segment revenues Total revenues Cost of sales Gross operating profit Selling costs Contribution margin General and operating expenses - of which non-recurring expenses Operating profit

2007 1,956 1 1,957 1,071 886 139 747 511 4 236

2006 1,772 2

Change 184 (1)

% 10.3 7.7 10.3 7.8 13.5 7.2 14.8 6.7 n.s. 37.3

100.0 54.7 45.3 7.1 38.2 26.1 0.2 12.1

1,774 993 781 130 651 479 1 172

100.0 56.0 44.0 7.3 36.7 27.0 0.1 9.7

183 78 105 9 96 32 3 64

Textile segment results

(millions of Euro) Revenues from third parties Inter-segment revenues Total revenues Cost of sales Gross operating profit Selling costs Contribution margin General and operating expenses - of which non-recurring expenses/(income) Operating profit

2007 88 137 225 203 22 8 14 8 6

2006 95 159

Change (7)

% (7.1)

(22) (13.6) 100.0 90.5 9.5 3.5 6.0 4.1 0.1 1.9 (29) (11.2) (27) (11.5) (2) (1) (1) 1 (8.0) (7.7) (8.1) n.s. 16.7

100.0 90.1 9.9 3.7 6.2 3.7 2.5

254 230 24 9 15 10 5

(2) (19.4)

Explanatory notes

150

Other and unallocated segment results

(millions of Euro) Revenues from third parties Inter-segment revenues Total revenues Cost of sales Gross operating profit Selling costs Contribution margin General and operating expenses - of which non-recurring income Operating profit

2007 41 41 40 1 1 (1) 1

2006 44 -

Change (3) -

% (5.4) (5.4) (2.8) 25.0 n.s. (41.0)

100.0 96.7 3.3 0.7 2.6 0.2 (2.7) 2.4

44 41 3 3 (2) 3

100.0 94.2 5.8 0.5 5.3 (1.1) (4.4) 6.4

(3) (1) 1

(2) (46.8) (2) (53.6)

(2) (64.0)

The number of employees in each segment is detailed below:

12.31.2007 Apparel Textile Other and unallocated Total 7,386 1,268 242 8,896

12.31.2006 7,287 1,348 259 8,894

Period average 7,337 1,308 251 8,896

Information by geographical area


Revenues by geographical area and business segment

(millions of Euro) Apparel Textile Other and unallocated Total revenues 2007 Total revenues 2006 Change

Italy 920 56 36 1,012 915 97

% 90.9 5.5 3.6 100.0

Rest of Europe 767 26 793 694 99

% 96.7 3.3 100.0

The Americas 50 50 63 (13)

% 99.0 1.0 100.0

Asia 210 3 5 218 231 (13)

% 96.2 1.6 2.2 100.0

Rest of the world 9 3 12 8 4

% 76.6 23.4 100.0

Total 1,956 88 41 2,085 1,911 174

Explanatory notes

151

Revenues are allocated according to the geographical area in which customers are located.

Balance sheet information by geographical area - 2007

(thousands of Euro) Total assets Gross operating investments

Italy 1,740,242 117,006

Rest of Europe 705,486 128,930

The Americas 37,130 395

Asia 163,325 13,219

Rest of the world 45,229 7,938

Total 2,691,412 267,488

Assets are reported according to the geographical location of the related legal entity. Balance sheet information by geographical area - 2006

(thousands of Euro) Total assets Gross operating investments

Italy 1,668,685 79,074

Rest of Europe 652,964 99,703

The Americas 38,243 10,371

Asia 161,675 8,391

Rest of the world 39,828 6,002

Total 2,561,395 203,541

Assets are reported according to the geographical location of the related legal entity.

Explanatory notes

152

Other information
Relations with the holding company, its subsidiaries and other related parties. The Groups relations with related parties are discussed more fully in the Directors report. Non-recurring events and significant transactions. In accordance with the disclosures required by CONSOB Circular DEM/6064293 of July 28, 2006, it is reported that the impact on the statement of income of the Groups non-recurring events and transactions has resulted in net expenses of Euro 3,096 thousand in 2007 and net income of Euro 782 thousand in 2006 as reported below:

(thousands of Euro) Non-recurring payroll and related costs - supplementary remuneration for departing key senior managers - expenses for canceling second tranche of stock option plan - income for stock options cancelled upon termination of employment Other expenses and income - non-recurring other operating expenses/(income) - reimbursements and compensation payments - non-recurring other expenses/(income) - impairment of property, plant and equipment and intangible assets - store early closure expenses - indemnity for early termination of a property lease - redundancy incentives - losses on disposals of property, plant and equipment and intangible assets - reversal of impairment of property, plant and equipment and intangible assets - gains on disposals of property, plant and equipment and intangible assets - release of provisions for store early closure and disputes - other income Total non-recurring expenses/(income)

2007 3,096 3,096 8,470 3,787 (1,802) (7,359) 3,096

2006 2,108 1,483 1,130 (505) (2,890) (1,500) (1,500) (1,390) 13,632 2,484 2,250 154 (3,503) (8,403) (7,904) (100) (782)

Explanatory notes

153

Atypical and/or unusual transactions. As required by the CONSOB Circular dated July 28, 2006, the Group has not undertaken any atypical and/or unusual transactions, meaning those whose significance/materiality, nature of the counterparties, purpose, method of determining the transfer price and timing, might give rise to doubts as to: the fairness/completeness of the information contained in the financial statements, conflicts of interest, the safekeeping of assets and interests of minority shareholders. Business combinations. Acquisitions of companies, carried out solely for the purpose of obtaining the ownership of properties, are not treated like business combinations. Earnings. The key figures used for calculating basic and diluted earnings per share are as follows:

12.31.2007 Earnings used for calculating basic earnings per share (*) Dilutive effects of potential ordinary shares
(*)

12.31.2006 124,914 124,914 181,868,467 558,678 182,427,145

145,330 145,330 182,675,492 61,261 182,736,753

Earnings used for calculating diluted earnings per share (*) Weighted average number of ordinary shares used for calculating basic earnings per share Dilutive effects of potential ordinary shares: stock option plan Weighted average number of ordinary shares used for calculating diluted earnings per share
(*) In thousands of Euro.

Research costs. The research costs, incurred by the Group in 2007 for creating new collections, have been expensed in full to the statement of income in the amount of Euro 30 million, compared with Euro 22 million in 2006. Lease contracts. The Group has rented stores through its subsidiaries operating in different countries, usually under long-term lease contracts, in accordance with local legislation and customs. Early termination is usually only allowed for breach of contract. In specific cases local legislation also allows the tenant to rescind the contract early. The amount of rent is fixed but some contracts contain clauses allowing it to be raised or terms requiring the payment of increasing rents, on top of an established minimum, upon the achievement of predetermined sales volumes. The rental expense and income recognized in the statement of income in 2007 amount respectively to Euro 144,626 thousand (of which the variable portion is Euro 7,618 thousand) and Euro 68,418 thousand (of which Euro 46,242 thousand relating to sublets).

Explanatory notes

154

At the balance sheet date, the Groups future rental payments under non-cancelable lease contracts are as follows in each of the following periods:

(thousands of Euro) Within 1 year Between 1 and 5 years Beyond 5 years Total

12.31.2007 130,306 432,279 419,212 981,797

At the balance sheet date, the Groups future rental income under non-cancelable lease contracts is as follows in each of the following periods:

(thousands of Euro) Within 1 year Between 1 and 5 years Beyond 5 years Total

12.31.2007 60,667 164,906 46,430 272,003

The total amount of future rental income includes Euro 247,306 thousand in income from properties sub-let to third parties. Significant events following the close of the financial year. The delisting/deregistering of the Benetton stock from the New York Stock Exchange became effective from January 21, 2008. As a result, the Company no longer has to comply with the reporting requirements relating to the NYSE and SEC established by US law. All the documentation will continue to be published in English on the Companys website. The process of delisting from the Deutsche Brse in Frankfurt was started on February 21, 2008. An agreement was made in New York on February 29, 2008 which redefines the Groups relationship with its principal customer in the United States and Canada. Under this agreement the management of 54 stores previously operated by this customer will be transferred to Benetton USA Corp. This operation will not have any immediate significant effect on the statement of income for 2008. Guarantees given, commitments and other contingent liabilities

(thousands of Euro) Unsecured guarantees given: - sureties Commitments: - purchase commitments

12.31.2007 3,311

22,907 26,218
Explanatory notes

155

Total

Other commitments and rights Benetton Korea Inc. Benetton Korea Inc. is a Korean company, of which 50% is owned by Benetton Japan Co., Ltd. (a company indirectly wholly-owned by Benetton Group S.p.A.), 25% by Mr. Chang Sue Kim (a natural person) and 25% by F & F Co., Ltd. (a Korean company). The shareholder agreement gives Benetton a call option over the shares held by the two Korean shareholders. This option may be exercised at any time because there is a mechanism for calculating the price which takes account of shareholders equity at the option exercise date and a perpetuity calculated on the basis of average net income in the previous two years. The likelihood of exercising this option is currently considered to be remote. Benetton Giyim Sanayi ve Ticaret A.S. (Turkey). Benetton International S.A. owns 50% of the shares in Benetton Giyim Sanayi A.S. (Turkey). The shareholder agreement gives Benetton a call option over the remaining 50% of the shares which may be exercised in the event of strategic deadlock in its management or breach of contract. Likewise, Boyner Holding A.S., the other shareholder, has a put option over its 50% shareholding. The exercise prices of these options are calculated as follows: - in the event of deadlock, Benetton shall pay a price for exercising its call option corresponding to the fair value of the shares plus a margin of 20%. Likewise, if Boyner Holding A.S. exercises its put option, the price receivable would be the fair value less 20%; - in the event of breach, the fair value of the shares shall be reduced by 30% for the party causing the breach. Even though the likelihood of exercising these options is currently thought to be remote, Benetton has recognized a liability in respect of the estimated cost of the put option given to the other shareholders. Milano Report S.p.A. Benetton Retail Italia S.r.l. purchased 50% of the shares in Milano Report S.p.A. in August 2006. The shareholder agreement gives Benetton a call option over the remaining 50% of the shares, which may be exercised only after three years have elapsed from the date Benetton purchased its 50% and only in the event of deadlock over the companys management. Likewise, Smalg S.p.A., the other shareholder, has a put option over its 50% shareholding. The exercise prices of these options are calculated as follows: - in the event of deadlock, Benetton shall pay a price for exercising its call option corresponding to the fair value of the shares plus a margin of 10% or 20% depending on the circumstances; - likewise, if Smalg S.p.A. exercises its put option, the price receivable would be the fair value less 10 or 20%. Even though the likelihood of exercising these options is currently thought to be remote, Benetton has recognized a liability in respect of the estimated cost of the put option given to the other shareholders.

Explanatory notes

156

Contingent liabilities The Group has an estimated Euro 39 million in contingent liabilities associated with ongoing legal disputes. The Group does not consider it necessary to make any provision against such liabilities because it believes the likelihood of any outlay to be remote. The subsidiary Bencom S.r.l. has had a partial tax inspection in recent months by the Tax Police for tax years 2004-2005-2006 in relation to IRES (Italian corporate income tax), IRAP (Italian regional business tax) and VAT. The related report, received on October 18, raises issues regarding the alleged evasive nature of permanent establishments set up abroad upon the introduction of the Tremonti reform and the partial deductibility of sponsorship costs paid to amateur sports associations. These matters correspond to an estimated Euro 65 million in additional tax. The Companys Board of Directors considers the matters raised to be unsubstantiated and so has decided not to make any provision against tax contingencies, also on the strength of authoritative external professional advice. In addition, the subsidiary Benind S.p.A. has been in dispute since April 2007 with the Italian customs authorities which could give rise to a liability of approximately Euro 6.5 million, plus as yet unquantified penalties. The Board of Directors of Benind S.p.A. has just made provision against the related legal costs, believing it unlikely that any sum will be paid in respect of this dispute, also based on the opinion of a respected outside consultant.

Explanatory notes

157

158

Certification of the consolidated financial statements pursuant to art. 81-ter of CONSOB Regulation no. 11971 of May 14, 1999 and subsequent amendments and additions
The undersigned Gerolamo Caccia Dominioni as Chief Executive Officer and Emilio Fo as Manager responsible for preparing the financial reports of Benetton Group S.p.A. attest, also taking account of the provisions of paragraphs 3 and 4, art. 154-bis of Italian Legislative Decree no. 58 of February 24, 1998, that the accounting and administrative processes for preparing the consolidated financial statements during 2007: - are adequate in relation to the enterprises characteristics and - have been effectively applied. The adequacy of the accounting and administrative processes for preparing the consolidated financial statements at December 31, 2007 has been evaluated on the basis of the Internal Control - Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission which represents the internationally generally accepted standard model. It is also certified that the consolidated financial statements: a) correspond to the underlying accounting records and books of account; b) prepared in accordance with the International Financial Reporting Standards adopted by the European Union and with the measures implementing Italian Legislative Decree no. 38/2005, are, based on our knowledge, able to provide a true and fair view of the issuers balance sheet, results of operations and financial position and of all the companies included in the consolidation.

March 19, 2008

Chief Executive Officer Signed by Gerolamo Caccia Dominioni

Manager responsible for preparing the Companys financial reports Signed by Emilio Fo

159

Certification of the consolidated financial statements

160

Auditors report in accordance with article 156 of law decree n 58 dated 24 february 1998
To the Shareholders of Benetton Group SpA 1 We have audited the consolidated financial statements of Benetton Group SpA and its subsidiaries (Benetton Group) as of 31 December 2007, which comprise the balance sheet, the income statement, statement of changes in equity, cash flow statement and related notes. These consolidated financial statements are the responsibility of the directors of Benetton Group SpA. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. 2 We conducted our audit in accordance with the auditing standards and criteria recommended by CONSOB. Those standards and criteria require that we plan and perform the audit to obtain the necessary assurance about whether the consolidated financial statements are free of material misstatement and, taken as a whole, are presented fairly. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the directors. We believe that our audit provides a reasonable basis for our audit opinion. For the opinion on the consolidated financial statements of the prior period, which are presented for comparative purposes as required by law, reference is made to our report dated 26 March 2007. 3 In our opinion, the consolidated financial statements of Benetton Group SpA as of 31 December 2007 comply with International Financial Reporting Standards as adopted by the European Union, as well as with the regulations issued to implement article 9 of Legislative Decree n 38/2005; accordingly, they have been drawn up clearly and give a true and fair view of the financial position, results of operations, changes in equity and cash flows of Benetton Group SpA for the year then ended.

Treviso, 28 March 2008 PricewaterhouseCoopers SpA Signed by Roberto Adami (Partner) (This report has been translated from the original which was issued in accordance with Italian legislation. References in this report to the Financial Statements refer to the Financial Statements in original Italian and not to their translation.)
Auditors report

161

162

Supplementary schedules
The following schedules contain information which is additional to that shown in the Explanatory notes to the consolidated financial statements, of which they form an integral part. The information contained in the following schedules comprises: - companies and groups included in the consolidation at December 31, 2007; - production facilities; - commercial buildings and land; - information required by article 149-duodecies of the CONSOB Regulations; - exchange rate table.

Supplementary schedules

163

Companies and groups included in the consolidation at December 31, 2007


Company name Companies and groups consolidated on a line-by-line basis: Parent Company Benetton Group S.p.A. Italian subsidiaries Benetton Retail Italia S.r.l. Olimpias S.p.A. - Benair S.p.A. Benind S.p.A. Fabrica S.p.A. Societ Investimenti e Gestioni Immobiliari (S.I.G.I.) S.r.l. Bentec S.p.A. Bencom S.r.l. - Ponzano Children S.r.l. - Milano Report S.p.A. Foreign subsidiaries - Olimpias Tunisia S. r.l. (3) - Benetton Realty Russia O.O.O. - La Crmire S.A. (1) - Le Radar S.A.
(1)

Location

Currency

Share capital

Group interest

Ponzano Veneto (Tv)

Eur

237,478,139.60

Ponzano Veneto (Tv) Ponzano Veneto (Tv) Ponzano Veneto (Tv) Ponzano Veneto (Tv) Ponzano Veneto (Tv) Ponzano Veneto (Tv) Ponzano Veneto (Tv) Ponzano Veneto (Tv) Ponzano Veneto (Tv) Bergamo

Eur Eur Eur Eur Eur Eur Eur Eur Eur Eur

5,100,000 47,988,000 1,548,000 26,000,000 4,128,000 36,150,000 12,900,000 150,000,000 110,000 1,000,000

100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 50.000%

Tunis Moscow Genve Genve Mnchen Amsterdam Luxembourg Nagykll Gurgaon Sahline Copenhagen Lugano Dubai Salzburg Istanbul Dublin Amsterdam

Tnd Rub Chf Chf Eur Eur Eur Eur Inr Tnd Dkk Chf Aed Eur Try Eur Eur

100,000 473,518,999 120,000 100,000 2,812,200 92,759,000 133,538,470 89,190 929,241,000 303,900 125,000 1,000,000 300,000 3,270,278 7,000,000 260,000 225,000

100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 50.000% 100.000% 100.000%

Benetton Deutschland GmbH (1) Benetton Holding International N.V. S.A. - Benetton International S.A. - Benetton Ungheria Kft. - Benetton India Pvt. Ltd. - Benetton Tunisia S. r.l. - Benetton Denmark A.p.S. - United Colors Communication S.A. - Benetton International Emirates L.L.C. - Benetton Austria GmbH (1) - Benetton Giyim Sanayi ve Ticaret A.S. - Lairb Property Ltd. - Benetton Manufacturing Holding N.V.
Supplementary schedules

164

Company name - Benetton Retail Deutschland GmbH - New Ben GmbH - Benetton Trading Ungheria Kft. - Benetton Retail (1988) Ltd. - Benetton Retail Spain S.L. - Benetton 2 Retail Comrcio de Produtos Txteis S.A. - S.C. Benrom S.r.l. - Benetton Istria D.O.O. - Benetton Manufacturing Tunisia S. r.l. - Benetton Commerciale Tunisie S. r.l. - Benetton Croatia D.O.O. - Benetton Trading Taiwan Ltd. - Benetton Trading USA Inc. - United Colors of Benetton Do Brasil Ltda. (2) - Benetton Japan Co., Ltd. - Benetton Korea Inc. - Benetton Retail Poland Sp. z o.o. - Benetton Asia Pacific Ltd. - Shanghai Benetton Trading Company Ltd. - Benlim Ltd. (2) - Shanghai Sisley Trading Co. Ltd. Benetton Realty France S.A. Benetton Australia Pty. Ltd. Benetton USA Corp. Benetton International Property N.V. S.A. - Benetton Real Estate International S.A. - Real Estate Russia Z.A.O. - Benetton Real Estate Austria GmbH - Benetton Realty Portugal Imobiliaria S.A. - Real Estate Ukraine L.L.C. - Benetton France S. r.l. - Benetton France Commercial S.A.S. - Property Russia Z.A.O. - Benetton Real Estate Kazakhstan L.L.P. - Real Estate Latvia L.L.C. - Benetton Real Estate Belgique S.A. - Kazan Real Estate Z.A.O.

Location Mnchen Frankfurt am Main Nagykll London Barcelona Porto Miercurea Sibiului Labin Sahline Sousse Osijek Taipei Lawrenceville Curitiba Tokyo Seoul Warsaw Hong Kong Shanghai Hong Kong Shanghai Paris Hawthorne Wilmington Amsterdam Luxembourg St. Petersburg Wien Porto Kiev Paris Paris Samara Almaty Riga Bruxelles Moscow

Currency Eur Eur Huf Gbp Eur Eur Ron Hrk Tnd Tnd Hrk Twd Usd Brl Jpy Krw Pln Hkd Usd Hkd Cny Eur Aud Usd Eur Eur Rub Eur Eur Usd Eur Eur Rub Kzt Lvl Eur Rub

Share capital 2,000,000 5,000,000 50,000,000 58,200,000 10,180,300 500,000 1,416,880 66,389,400 350,000 2,786,300 2,000,000 115,000,000 379,147,833 78,634,578 400,000,000 2,500,000,000 200,000 41,400,000 1,500,000 11,700,000 10,000,000 94,900,125 500,000 100,654,000 17,608,000 116,600,000 10,000 2,500,000 100,000 7,921 99,495,712 10,000,000 10,000 62,920,000 130,000 14,500,000 10,000

Group interest 100.000% 50.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 50.000% 100.000% 100.000% 100.000% 50.000% 50.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000%
Supplementary schedules

165

Company name - Kaliningrad Real Estate Z.A.O. (4) - Benetton Istanbul Real Estate Emlak Yatirim ve Insaat Ticaret Limited Sirketi (3) - Benetton Realty Spain S.L. - Benetton Real Estate Spain S.L. Investments in subsidiary companies carried at cost (5) - Benetton Mexicana S.A. de C.V. (3) - Benetton Beograd D.O.O. (2) - Benetton Argentina S.A.
(1)

Location Kaliningrad Istanbul Barcelona Barcelona

Currency Rub Try Eur Eur

Share capital 10,000 11,725,000 15,270,450 150,250

Group interest 100.000% 100.000% 100.000% 100.000%

Mexico City Beograd Buenos Aires Amsterdam Kish Island Baku Chisinau

Mxn Eur Ars Eur Irr Usd Mdl

1,080,000 500 150,000 45,000 100,000,000 130,000 30,000

100.000% 100.000% 100.000% 100.000% 100.000% 100.000% 100.000%

- Benetton Realty Netherlands N.V. (2) - Benetton International Kish Co. Ltd. (2) - Benetton Real Estate Azerbaijan L.L.C. - Benetton Real Estate CSH S.r.l. Investments in associated companies valued using the equity method Progetto Tre S.r.l. (3) Consorzio Generazione Forme - Co.Ge.F.
(1) (2) (3) (4) (5)
(1)

Bologna S. Mauro Torinese (To)

Eur Eur

60,000 15,492

50.000% 33.333%

In liquidation. Non-operative. Recently established company. Newly-acquired company. At cost since fair value cannot be determined (unlisted companies).

Supplementary schedules

166

Production facilities
The facilities in which the Group carries out its production activities are as follows:

Location Castrette, Italy Prato, Italy Prato, Italy Caserta, Italy Valdagno, Italy Grumolo delle Abbadesse, Italy Travesio, Italy Piobesi Torinese, Italy Soave, Italy Ponzano Veneto, Italy Follina, Italy Vittorio Veneto, Italy Osijek, Croatia Labin, Croatia Navrangpur (Gurgaon), India Sahline, Tunisia Nagykll, Hungary Sibiu, Romania Production facilities held for sale Gorizia, Italy

Production facilities (Square metres) 92,800 10,500 8,300 14,500 11,100 17,800 20,500 15,500 18,800 22,400 9,800 6,500 17,000 7,000 5,400 9,400 26,600 1,920

Core business/Production Wool dyeing and packaging Wool spinning Wool spinning Wool spinning Wool spinning and dyeworks Dyeworks Weaving factory Dyeworks Dyeworks Laundry, dyeworks, weaving and production of fabrics Dyeworks Spinning works Wool apparel, weaving, dyeworks Weaving factory Cotton apparel Cotton apparel, laundry and dyeworks Apparel, footwear and sports equipment Quality control

20,400

Supplementary schedules

167

Commercial buildings and land


The net book value of commercial buildings in each country is as follows:
(thousands of Euro) Italy East European and ex Soviet Union countries France Spain Japan Portugal Belgium Austria Switzerland Total 12.31.2007 142,658 128,146 113,016 65,459 27,907 19,337 18,574 16,038 2,290 533,425 12.31.2006 138,576 84,012 116,527 65,936 29,506 16,377 18,906 16,235 2,336 488,411

Information required by article 149-duodecies of the CONSOB Regulations


PricewaterhouseCoopers S.p.A. is responsible for auditing the Benetton Groups financial statements until the year ended December 31, 2012. The fees incurred in the year for auditing and other services provided by this firm are summarized below:
(thousands of Euro) Audit fees: - Benetton Group S.p.A. - subsidiaries Total audit fees Other services (1): - subsidiaries Total fees
(1) Other services mostly refer to tax advice.

2007 45 1,338 1,383

40 1,423

Exchange rate table


The principal exchange rates used at December 31, 2007 are listed below.
Exchange rate at 12.31.2007 0.73335 164.93000 1.47210 11.48000 10.75240 58.02100 1,377.96000 35.98600 Average exchange rate in 2007 0.68431 161.24382 1.37034 10.69030 10.41748 56.41658 1,272.88671 35.01719

Supplementary schedules

Gbp Jpy Usd Hkd Cny Inr Krw Rub

British Pound Japanese Yen US Dollar Hong Kong Dollar Chinese Renminbi Indian Rupee Korean Won Russian Rouble

168

Glossary
Style and operations
Benetton Baby. New product line devoted to maternity wear and children up to 5 years old. Clean Sensuality Line. The Undercolors line for women seeking sensual but elegant underwear. Collection structure. This refers to the composition of a collection in terms of its segments, which may differ in products, size, goals and timing. Given the different characteristics and positioning of the Benetton brands, the collection structure may vary from brand to brand and from collection to collection, in order to ensure the required flexibility for an optimal response to market requirements. Color Project. This is an advanced system, one of the first in the world, able to guarantee scientifically that a certain shade is faithfully reproduced on different types of fabric. Commercial network. Benetton Group commercial network includes stores mainly managed by independent partners for the distribution of Benetton products in 120 countries. The relationship with the partners consists in the sale of goods and the authorization to use the brand name, free of charge, as signage in the stores. Corner. Display area fitted out using a specific concept, developed to bring out a collections key features. Evergreen collection. This is a collection consisting of a very select range of articles that clearly communicate the brands personality, while defining its values and market positioning. Articles therefore remain in the collection for at least 18 months. Replenishable on-line. Fun Line. The Undercolors line for people seeking cheerful and ironic underwear. Lead time. Time period from the collection of the orders to the products shipment. Manufacturing delocalization. Benetton Group works throughout the world in the search for specific competencies and international industrial districts in which to take its know-how, so as to guarantee the quality of products and the satisfaction of customers. As such, manufacturing has evolved into a network of skills, which depends on the best industrial capabilities available in the international marketplace.

Glossary

169

Mature markets. These are the areas in Continental Europe where the Benetton Group boasts a historic presence and where new consumer segments can be reached thanks to growing diversification of the products offered by our brands. Priority emerging markets. These are the five areas of priority growth identified by the Benetton Group as: India, Turkey, Eastern Europe, Mexico and China. Reassortments. Reassortments include replenishments of products included in the collection, mainly in terms of colors and sizes. Sisley Limited Edition. A limited edition line for Men/Women featuring very refined materials and a high fashion content, distributed in selected stores in the Sisley network. Sisley Young. A brand dedicated to children aged 8 to 12 with a heavy emphasis on fashion. Store Concept. A store where the consumer can experience the brand identity, thanks to a specific choice of materials, lighting and fittings designed specially for the different brands (Twins for UCB, Pentagram for Sisley, Academy for Playlife, Gloss for Undercolors) and particular types of merchandise (Accessories, UCB Man, Benetton Baby, Sisley Young). Time to market. Time period from the idea and design of the products to the arrival on the market (delivery to stores).

Administration and finance


Business combination. The bringing together of separate entities or businesses into one for the purposes of financial reporting. Capital employed. It is used to indicate the total resources employed and includes the following: working capital; property, plant and equipment; intangible assets; assets held for sale; equity investments; and other assets and liabilities. CGU. Acronym for Cash Generating Unit. This is the smallest identifiable group of company assets that generates cash inflows that are independent of the cash inflows from other assets. Dividend yield. Ratio between the last dividend per share paid and the price per share. This ratio is used as immediate expression of the stock return. For Benetton Group dividend yield, see Key financial data - highlights, where the ratio is calculated as dividend paid (referred to the previous year) and price at period end. EBITDA. Acronym for Earnings Before Interest, Taxes, Depreciation and Amortization, EBITDA is a measurement of operating profit before non-monetary items and is equal to operating income (EBIT) plus depreciation, amortization, and other non-monetary costs.

Glossary

170

EPS. Acronym for Earnings Per Share. The EPS indicates the ratio between net income/(loss) for the year and number of shares outstanding. EV. Acronym for Enterprise Value, value of the company: EV represents the sum between market capitalization and net financial indebtedness. EVA. Acronym for Economic Value Added. This performance indicator is calculated as a difference between NOPAT and average cost of capital employed, which is intended as capital employed multiplied by WACC (Weighted Average Cost of Capital). EVA therefore represents a measure of residual operating profitability, i.e. net of the return on capital employed. Fair value. Fair value is the amount for which an asset could be exchanged, or a liability extinguished, in an arms length transaction between knowledgeable, willing parties. Free cash flow. This item on the cash flow statement represents the sum of cash flows generated by operating and investing activities. Gross operating investments. Investments in intangible assets, property, plant, and equipment, excluding gains on the acquisition of business combinations, which are allocated to intangible assets, property, plant, and equipment. Gross operating profit. This item on the statement of income by function of cost is equal to revenues less materials and subcontracted work, payroll and related costs, industrial depreciation and amortization, and other manufacturing costs. IAS / IFRS. Acronyms for International Accounting Standards and International Financial Reporting Standards, respectively, adopted by Benetton Group. Impairment testing. The activity by which the Group determines whether there is, as of the closing date of each financial reporting period, objective evidence that an asset has undergone a long-term loss in value, including a measurement of the assets recoverable value. Net financial indebtedness. This balance sheet item summarizes the Groups financial position and includes: - financial liabilities: bank loans and overdrafts, bonds, short-term financial payables, medium/long-term loans (short and long-term portions), lease financing (short and long-term portions); - financial assets: cash and banks, securities, financial receivables (short and medium/long-term). This item complies with recommendations by CESR (Committee of European Securities Regulators) and CONSOB (Italys securities regulator). NOPAT. Acronym for Net Operating Profit After Taxes. This is calculated as operating profit less the tax that pertains to it.

Glossary

171

Pay out ratio. Ratio between dividends and net income/(loss) for the year which represents the percentage of net income distributed to the shareholders as dividend. Revenues. This statement of income item includes: sales of core products, miscellaneous sales, royalty income, and other revenues, less discounts. ROE. Acronym for Return On Equity, which represents the ratio between net income/(loss) for the year and average shareholders equity. The ROE measures the return on shareholders equity after remunerating the other sources of capital and indicates the return for the shareholders. ROIC. Acronym for Return On Invested Capital, which represents the ratio between operating profit and average capital employed. The ROIC measures the return on the capital employed to service both shareholders and creditors. Total net investment/(divestment). Investments in and divestments of property, plant and equipment, intangible assets, equity investments, and other net non-operating investments. WACC. Acronym for Weighted Average Cost of Capital, WACC represents the average cost of the different sources of capital of the company, both as debt and equity. WACC is commonly used as discount rate for the operating cash flow of a company and to calculate EVA. Working capital. It is used to indicate the capital used in the companys ordinary operations and includes trade receivables, inventories, and the net of other receivables and payables, less trade payables.

Market
ADR. Acronym for American Depositary Receipt. The ADR is a negotiable certificate that represents ownership of shares in a non-US company. In 1989 Benetton Group was listed on the New York Stock Exchange, NYSE, through a Level III Program. Each Benetton ADR represents two Benetton ordinary shares. On September 12, 2007 the Parent Companys Board of Directors decided to request the voluntary delisting and deregistration of the ADS quoted on the NYSE. The delisting/deregistering of the Benetton stock from the New York Stock Exchange came into effect on January 21, 2008, as a result of which the companys ADRs have been kept under a Level I program. ADR - Level I Program. The Benetton Groups ADRs continue to be traded on the Over-the-Counter (OTC) market. CUSPID. Acronym for Committee on Uniform Securities and Identification Procedures, standards body which creates and maintains a classification system for securities. The Cuspid is a nine-character number that uniquely identifies a particular security in the US. Benetton Group ADR CUSPID is 081795403.

Glossary

172

Free float. Percentage of shares in a listed company that are freely available to the investing public, meaning they are not held by a strategic reference shareholder. In the case of Benetton Group, Edizione Holding S.p.A., a company entirely under the control of the Benetton family, is regarded as the reference shareholder. ISIN. Acronym for International Securities Identification Number, a unique international code which identifies a securities issue. Each country has a national numbering agency which assigns ISIN numbers for securities in that country. Benetton ordinary shares ISIN is IT0003106777. Issuer or the Company or the Parent Company. Benetton Group S.p.A. SEDOL. Acronym for Stock Exchange Daily Official List number, a code used by the London Stock Exchange to identify foreign stocks (London Stock Exchange). Benetton Group ordinary shares Sedol is 7128563, while for Benetton Group ADR it is 2091671.

Corporate Governance
Board of Directors. Main governing body for the administration of a company. The functionality of the Board of Directors is disciplined by the Statutory Report of the company itself. The Board of Directors of Benetton is invested with the widest possible powers for the ordinary and extraordinary administration of the Company. The Board of Directors can delegate its powers to one or more of the Directors who will exercise them, jointly or severally, in conformity with decisions taken by the Board of Directors. The Board of Directors may also entrust part of its authority to an Executive Committee made up of certain Board members. Board of Statutory Auditors. Internal body of a company, which is responsible for the control of the company management activities. The Statutory Auditors monitor the compliance of the other governing bodies, in particular the Board of Directors, with the law and the statutory report. Benetton Board of Statutory Auditors consists of three standing members and two alternate members, who can be re-appointed. The members remain in office for three financial years to the date of the Shareholders Meeting for the approval of the latest financial year results. Code. The Corporate Governance Code for listed companies approved in March 2006 by the Corporate Governance Committee and promoted by Borsa Italiana S.p.A. (the Italian Stock Exchange). Code of Ethics. Official document of the Company and its subsidiaries, directly or indirectly controlled. The Code contains a set of principles according to which the Company conducts its activity and that of the parties who operate on its behalf.

Glossary

173

CONSOB Issuer Regulations. The Regulations for issuers, published by CONSOB (Italys Stock Exchange Commission) in its resolution 11971/1999. CONSOB Market Regulations. The Regulations for markets, issued by CONSOB in its resolution 16191/2007. Corporate Governance. Set of rules and relations referring to the company administration, ownership structure and management efficiency to reach the company targets. Executive Committee. Governing body for the administration of a company. Benetton Executive Committee was set up in 2003 to ease and quicken the decisional processes of the Group. One of the Executive Committees tasks is to define, upon proposal by the Chief Executive Officer, company and group industrial and financial plans, strategies, the annual budget and interim adjustments for subsequent submittal to the Board of Directors. The Executive Committee also examines and approves particularly important investment and disinvestment plans, lines of credit facilities, the furnishing of guarantees and analyses the chief problems connected with company performance, so that the Board of Directors can accomplish its legal duties more efficiently. Instructions accompanying the Stockmarket Regulations. The Instructions accompanying the Regulations of Markets organized and managed by Borsa Italiana S.p.A. Report. The Corporate Governance Report that companies are required to prepare under art. 124-bis of TUF, art. 89-bis of the CONSOB Issuer Regulations and art. IA.2.6. of the Instructions accompanying the Stockmarket Regulations. Stock option plan. Document which governs the award of stock options for the subscription of shares at a predetermined price (exercise price) at or by a certain date (Vesting period). In September 2004, Benetton Board of Directors, in application of the powers authorized by the Extraordinary Shareholders Meeting, approved a capital increase to service a stock option plan for Benetton top management, subject to achievement of the objectives for creation of accumulated value envisaged in the 2004-2007 Guidelines. In September 2006, the first tranche of options under the Plan was allocated to management, while it was also agreed to cancel the second tranche. Stockmarket Regulations. The Regulations of Markets organized and managed by Borsa Italiana S.p.A. TUF. Italian Legislative Decree no. 58 of February 24, 1998 (Italys Consolidated Law on Finance).

Glossary

174

175

Corporate information
Headquarters Benetton Group S.p.A. Villa Minelli 31050 Ponzano Veneto (Treviso) - Italy Tel. +39 0422 519111 Legal data Share capital: Euro 237,482,715.60 fully paid-in R.E.A. (Register of Commerce) no. 84146 Tax ID/Treviso Company register: 00193320264 Media & communications department E-mail: info@benetton.it Tel. +39 0422 519036 Fax +39 0422 519930 Investor relations E-mail: ir@benetton.it Tel. +39 0422 519412 Fax +39 0422 519740

www.benettongroup.com

Graphic design: Fabrica - Catena di Villorba (Treviso) Photographies: Attilio Vianello, Francesco Minucci Consultancy and coordination: Ergon Comunicazione (Milan/Rome) Printing: Grafiche Tintoretto (Treviso - Italy)

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