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There were no significant events during the quarter, except for the co-option of the new independent director Giorgio Brunetti to replace Sergio De Simoi.

The Group has established an important policy of incentives for the network of partners, in line with the business model, with the objective of placing them in a condition to increase their investment capacity, to open new stores and to renew existing ones as well as to increase their competitive capacity in terms of price to the final customer.

On the commercial front, emphasis has been placed on development of some emerging markets, such as China and India, also through agreements with local large-scale retailers, for the opening of "store in store" facilities within large stores in the main cities. New initiatives also include the setting up of a new joint venture to manage and develop commercial activities in the Turkish market, which will be operational by the end of the first half of 2005.

At the same time, the Group is maintaining its strategic focus on policies of production and organizational efficiency, relative to the process of decentralization of production, completion of production cycles in overseas units and organizational cost reduction actions.

In this environment, consolidated revenues for 2005 are expected to be between 1,620 and 1,650 million euro, with EBIT between 9.5% and 10% of revenues. Net income of the order of 6% of revenues is forecast. The net financial position should improve further, to around 400 million euro, as a result of a positive free cash flow and net annual operative capital expenditure of 130 to 150 million euro, mostly targeted on development of the sales network.

The first quarter directors' report has been prepared in accordance with the provisions of art. 82 of the Regulation approved by Consob resolution no. 11971 of May 14, 1999 to implement Legislative Decree no. 58 of February 24, 1998 relating to issuers.

Accounting policies and consolidation criteria used are in line with those adopted for the preparation of the 2004 annual financial statements. As already done by foreign subsidiaries, the Italian companies, with effect from January 1, 2005, are calculating depreciation on commercial buildings based on a useful life of 50 years instead of 33.

On the basis of changes to Regulation no. 11971/1999, following the coming into effect of E.U. regulation no. 1606/2002 (the so-called "IAS/IFRS Regulation") relating to the application of international accounting policies (IAS/IFRS), the Group has opted for the application of art. 82 bis, according to which "share issuers may prepare quarterly reports relative to the period commencing January 1, 2005, or a subsequent date, and which are approved by September 30, 2005, in accordance with the policies used in the previous year annual and consolidated financial statements".

Therefore the quarterly consolidated statement of income and balance sheet as of March 31, 2005 are shown in the same format as that used in the preparation of the Directors' report for 2004, in observance of other provisions of the same art. 82 bis.

The Group intends to adopt IAS/IFRS accounting principles as from the consolidated half-year report as of June 30, 2005.

The transition date, namely the opening date of the financial year prior to that of first-time adoption of IAS/IFRS, is January 1, 2004. The consolidated balance sheet as of that date is required to be adjusted on the basis of international accounting standards as if they had always been applied, with the exception of obligatory and optional concessions set out in IFRS 1.

For the purposes of adjusting the opening balance sheet at the transition date and of the consolidated financial statements to December 31, 2004, the Benetton Group will adopt the following options stated in IAS/IFRS for preparing the financial statements:

- in the balance sheet, assets and liabilities will be classified according the criterion which divides categories between "current" and "non-current";

- the statement of income will be classified based on the nature of costs.

As recommended by Consob resolution no. 14490 of April 14, 2005, the independent auditors will be given the task of performing a full audit of the balances in the reconciliation required by IFRS 1 (first adoption of International Financial Reporting Standards) and, therefore, of the values in consolidated shareholders' equity at the start and end of the previous year, as well as of the income statement for the same year, on the basis of the above-mentioned IAS/IFRS accounting policies.

In addition, instructions given for the accounting audit of the half-year report provide for further significant checks in the limited audit of IAS/IFRS income statement data relating to both the current half-year and the preceding one (to June 30, 2004 and June 30, 2005), as well as of IAS/IFRS balance sheet values at the end of the previous year and of the current half year (to December 31, 2004 and June 30, 2005).

The first annual financial statements of the Benetton Group that will be prepared in accordance with international accounting standards will be those for the year ending December 31, 2005.

First quarter 2005

Revenues for the first quarter of 2005 were 378 million euro, compared with 381 million in the corresponding period of 2004. Casual sector sales amounted to 339 million euro, in line with the first quarter of 2004, thanks also to an increase in retail sales, resulting from the acquisition of new directly managed stores in the second half of 2004, and a different product mix.

In the sports sector, the net negative variation in revenues amounted to 4 million euro and resulted mainly from a 6 million euro reduction in sales of sportswear and a small increase in sports equipment revenues. Manufacturing revenues were maintained substantially in line with the first quarter of 2004.

Consolidated cost of sales was 214 million euro compared with 210 million in the corresponding period of 2004, rising from 55.1% of revenues to 56.5%, mainly influenced by the enriched product mix.

Group gross operating income was 164 million euro, 43.5% of revenues compared with 44.9% in the first quarter of 2004, with a reduction of around 7 million euro due to both the casual and sportswear businesses.

Selling, general and administrative costs, of 129 million euro, 34.1% of revenues, increased by around 3 million, equivalent to 2.5%, mainly due to expansion of the directly managed sales network. Variable distribution and transport costs were largely in line with the comparative period, in terms of both absolute value and as a percentage of revenues. Sales commissions reduced by 2.5 million euro, due mainly to transfer to the Group of agencies in Italy and Germany which were managed by third parties in the first quarter of 2004. Advertising and sponsorship expenses remained constant in terms of both absolute value and as a percentage of revenues.

Payroll costs increased by 7.4% as a result of the above-mentioned strengthening of the directly managed sales network in the second half of 2004, in particular in the German market.

Depreciation and amortization increased as a result of commercial investments made after the first quarter of 2004 and of costs arising from the early termination of a business lease contract which resulted in full depreciation and amortization of all costs associated with the activity.

Other expenses included general organizational expenses, net operating expenses and accruals.

General organizational costs reduced by 3.5% as a result of rationalization and cost reduction actions. Other operating income and expense were impacted by the increase in rental costs related to the sales network, increasing from 4% to 4.2% of revenues.

Although receipts from customers were satisfactory, increased provisions to the reserve for doubtful accounts were made in the period relative to a few specific accounts.

Income from operations was 36 million euro compared with 45 million in the first quarter of 2004, moving from 11.9% to 9.4% of revenues. This change was mainly caused by the reduction in gross operating income, as described above, and the increase in expenses due to expansion of the directly managed sales network.

There was no significant change in net exchange rate differences, nor in the percentage of net financial expense.

Net income was 23 million euro, 6.1% of revenues, compared with 28 million euro in the first quarter of 2004.

As from 2005, sales in Turkey have been reclassified from Asia to Europe; as a result, 2004 values have also been adjusted in line with the new geographic grouping.

The business sectors are as follows:

- casual, representing the Benetton brands (United Colors of Benetton, Undercolors and Sisley), including figures for the retail business as well as complementary products, such as accessories and footwear;

- manufacturing and other, composed mainly of sales of raw materials, semi-finished products and industrial services as well as of revenues and expenses from real estate activities.

Casual sector revenues were in line with the corresponding period of 2004. Cost of sales increased in terms of both absolute value, from 179 to 183 million euro, and as a percentage of revenues, 53.9% compared with 52.7% in the first quarter of 2004; this was mainly due to an enrichment of product mix.

Gross operating income was 156 million euro compared with 160 million in the comparative period, moving from 47.3% to 46.1% of revenues.

Selling, general and administrative expenses increased by 4.5% compared with the first quarter of 2004; in particular, there were increases in payroll costs, depreciation and amortization and rental costs associated with the initiatives undertaken for the sales network. General organizational expenses reduced as a result of rationalization and cost reduction actions.

Income from operations moved from 12.7% to 10% of revenues as a result of the above changes.

The change in revenues for this sector was entirely due to the reduction in sportswear sales; in fact, sales for this area were 10 million euro compared with 16 million in the first quarter of 2004, with a reduction of 6 million euro.

Income from operations was 9.9% of revenues compared with 11.4% in the relative comparative period; the reduction was exclusively due to the contraction in gross operating income as explained above, while selling, general and administrative expenses reduced in both absolute and percentage terms.

Manufacturing sector sales to third parties were in line with the first quarter of 2004. Due to the increase in the cost of sales in both absolute and percentage terms, gross operating income moved from 4 million to 3 million euro, causing the percentage of revenues to move from 16.1% to 12.2%. Also in this sector, there was a reduction in selling, general and administrative expenses. Income from operations, substantially breakeven, was in line with the first quarter of 2004.

Compared with December 31, 2004, working capital increased by 71 million euro, mainly due to normal cyclical movements, with an increase in trade receivables and inventories partially offset by the reduction in trade payables. Assets due to be sold relate to a factory in the manufacturing sector, while those in the first quarter of 2004 related to the sports equipment sector.

The change in net capital employed, in addition to comments already made, was also due to the combined effect of the following factors:

- additions to tangible and intangible fixed assets as a result of capital expenditure totaling 23 million euro;

- depreciation, amortization and sales of fixed assets of 25 million and 1 million euro respectively;

- decrease in deferred tax assets of 5 million euro.

Compared with the first quarter of 2004, working capital improved, mainly due the reduction in receivables, while inventories increased, also as a result of the expansion of the directly managed sales network.

The net financial position was 470 million euro, increasing by 39 million euro compared with December 31, 2004, and was made up as follows:

To provide better support for Group business cycles and to meet future commitments, on March 4, 2005, the Board of Directors authorized the management to negotiate a revolving line of credit for a maximum amount of 500 million euro and with a maximum duration of 5 years.

These financial resources, of 350 million euro as of March 31, 2005, will enable us to meet the maturity date in July 2005 of the 300 million euro bond loan, which places limitations on giving collateral security for new loans but does not require observance of any financial ratio ("financial covenants").

The syndicated loan of 500 million euro, maturing in July 2007, provides for compliance with two financial ratios that have to be calculated every six months based on the consolidated financial statements, namely:

- minimum ratio between EBITD (earnings before interest, tax and depreciation) and net financial charges of 2.5 times;

- maximum ratio between the net financial position and shareholders' equity of 1.

There are also limitations on significant business disposals and on the granting of collateral security for new loans.

The negative cash flow from operating activities was substantially in line with the first quarter of 2004, while free cash flow was 42 million euro compared with 51 million in the first quarter of 2004, although net operating investments were higher.