Pirelli & C. S.P.A. Milan Annual Report 2005

0 Pirelli & C. S.p.A. Milan Annual Report 2005 0 2 n a l i M . A . p . S . C & i l l e r i P A valle dell’assemblea, questa relazione di bilancio sarà consultabile sul sito www.pirelli.com

Preliminary information Directors’ Report Sustainability Report Consolidated Financial Statements

Call to the Annual General Meeting of the Ī Call to the AGM Contents Shareholders Pirelli & C. S.p.A. Structure of Pirelli Group The ordinary shareholders of Pirelli & C. Società per Azioni are called to the ordinary session of the at December 31, 2005 shareholders’ meeting to be held in Milan, Viale Sarca 214 at 10:30 A.M. Pirelli & C. S.p.A. on the Stock Market - on Thursday April 20, 2006 in ﬁrst call Selected Financial Data Chairman’s Letter - on Friday April 21, 2005 in second call to pass resolutions on the following

AGENDA

1. The ﬁnancial statements at December 31, 2005; inherent and consequent resolutions. 2. Appointment of the board of statutory auditors - appointment of the standing and alternate members; - appointment of the Chairman of the board of statutory auditors; - determination of the compensation of the members of the board of statutory auditors. 3. Proposal for the purchase and disposition procedures of treasury shares, after canceling the resolution voted by the shareholders’ meeting held on April 28, 2005 for the portion not used. Inherent and consequent resolutions. Conferring of powers.

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Call to the AGM Contents Ī Contents Pirelli & C. S.p.A. Page Structure of Pirelli Group Preliminary information 1 at December 31, 2005 Call to the Annual General Meeting of the Shareholders 1 Pirelli & C. S.p.A. on the Pirelli & C. S.p.A. 3 Stock Market Structure of Pirelli Group at December 31, 2005 4 Selected Financial Data Pirelli & C. S.p.A. on the Stock Market 4 Chairman’s Letter Five-Year Summary of Selected Consolidated Financial Data 5 Letter from the Chairman 6

Report on operations 9 The Group 10 Pirelli Labs 21 Tyres Sector 27 Pirelli Broadband Solutions 35 Pirelli & C. Real Estate 38 Pirelli & C. Ambiente 43 Information Systems 45 Proforma data 49 Equity Investments held by Directors, Statutory Auditors and General Managers 51 Stock Option Plans 51 Corporate Governance 52 Pirelli & C. S.p.A. - Summary data 85 Shareholders’ Resolutions 88

Sustainability Report 95 Pirelli and sustainable development 96 Economic dimension 99 Environmental dimension 102 Social dimension 124 Summary tables 143

Consolidated financial statements at December 31, 2005 153 Consolidated balance sheet 154 Consolidated income statement 155 Consolidated statement of changes in shareholders’ equity 156 Consolidated statement of cash flows 157 Notes to the consolidated financial statements 158 Independent Auditor’s Report 226

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Call to the AGM Pirelli & C. S.p.A. Contents 1 Ī Pirelli & C. S.p.A. Board of Directors Structure of Pirelli Group Honorary Chairman Leopoldo Pirelli at December 31, 2005 Pirelli & C. S.p.A. on the Chairman 2 Marco Tronchetti Provera Stock Market Deputy Chairman 2 Alberto Pirelli Selected Financial Data 2 Chairman’s Letter Deputy Chairman Carlo Alessandro Puri Negri Managing Director 2 and General Manager Carlo Buora Directors Carlo Acutis * Carlo Angelici * ° Gilberto Benetton Franco Bruni * ° Carlo De Benedetti * Gabriele Galateri di Genola Mario Garraffo * Dino Piero Giarda * Berardino Libonati * ¨ Giulia Maria Ligresti Massimo Moratti Giovanni Perissinotto Giampiero Pesenti * ¨ Aldo Roveri * ¨ Carlo Secchi * ° Paolo Vagnone

* Independent director ° Member of the Internal Control and Corporate Governance Committee ¨ Member of the Remuneration Committee Secretary to the Board Anna Chiara Svelto Board of Statutory Auditors 3 Chairman Luigi Guatri Standing members Roberto Bracchetti Paolo Francesco Lazzati Alternate members Franco Ghiringhelli Sebastiano Guido General Managers Tyres Sector Francesco Gori Administration and Control Claudio De Conto Finance Luciano Gobbi Independent Auditors 4 PricewaterhouseCoopers S.p.A.

1 Appointment: April 28, 2005. Expiry: shareholders’ meeting called to approve the ﬁnancial statements at December 31, 2007. 2 Office conferred by the board of directors’ meeting held on April 28, 2005. 3 Effective date of appointment: August 4, 2003. Expiry: shareholders’ meeting called to approve the ﬁnancial statements at December 31, 2005. 4 Appointment conferred by the shareholders’ meeting held on April 28, 2005.

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Call to the AGM Structure of Pirelli Group at December 31, 2005 Contents Pirelli & C. S.p.A. Ī Structure of Pirelli Group at December 31, 2005 Ī Pirelli & C. S.p.A. on the Stock Market Selected Financial Data Chairman’s Letter

Pirelli & C. S.p.A. on the Stock Market Pirelli & C. S.p.A. share capital movements since December 31, 2001

Date Capital (thousands) Transactions December 2002 Euros 339,423 bond conversions May 2003 Euros 272,083 exercise of the right of share withdrawal following the change in the company type and the corporate business purpose June 2003 Euros 1,084,247 issue of shares cum warrants (1 warrant : 1 share) with rights offering (3 ordinary shares : 1 share of any class) at Û 0.52 August 2003 Euros 1,799,400 share capital increase as a result of the merger by exchange December 2004 Euros 1,800,383 warrant conversion February 2005 Euros 1,974,633 warrant conversion March 2005 Euros 2,763,953 issue of shares with rights offering (2 ordinary shares: 5 shares of any class) at Û 0.70 December 2005 Euros 2,764,057 warrant conversion April 2006 Euros 2,764,716 warrant conversion

Number of shares outstanding

at December 31, 2005 at April 20, 2006 Pirelli & C. S.p.A. - Ordinary shares 5,178,112,143 5,181,996,293 Pirelli & C. S.p.A. - Savings shares 134,764,429 134,764,429

Market Trading on the Milan Stock Exchange

Shares traded Amount Volume (in millions of euros) Pirelli & C. - Ordinary shares 6,803,010,714 5,972 Pirelli & C. - Savings shares 96,507,318 89

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Call to the AGM Five-Year Summary of Selected Consolidated Contents Financial Data Pirelli & C. S.p.A. Structure of Pirelli Group at December 31, 2005 (IAS/IFRS) (Italian GAAP) Pirelli & C. S.p.A. on the In millions of euros 2005 2004 2003 2002 2001 Stock Market Ī Selected Financial Data Net sales 4,546 3,967 6,671 6,718 7,762 Chairman’s Letter Gross operating proﬁt 568 470 628 523 704 Operating proﬁt 355 269 268 118 297 Net income (loss) from continuing activities 349 217 4 (405) 194 Net income from discontinued operations 50 87 - - - Total net income (loss) 399 304 4 (405) 194 Net income (loss) attributable to Pirelli & C. S.p.A. 327 251 (39) (58) 125 Earnings (losses) per share (in euros) 0.07 0.07 (0.01) (0.09) 0.20

Fixed assets 7,629 6,097 5,902 6,596 7,092 Net working capital (53) 466 566 991 1,314 Net invested capital 7,576 6,563 6,468 7,587 8,406 Shareholders’ equity 5,614 3,841 3,678 4,626 5,407 Provisions 785 1,121 1,045 911 970 Net ﬁnancial (liquidity) debt position 1,177 1,601 1,745 2,050 2,029 Shareholders’ equity attributable to Pirelli & C. S.p.A. 5,205 3,502 3,429 1,933 2,119 Equity per share (in euros) 0.98 1.01 0.99 2.96 3.39

Free Cash Flow 343 287 564 476 26 Cash ﬂow per share 0.06 0.08 0.16 0.73 0.04 R&D expenditures 174 171 204 219 237 Depreciation 197 182 278 315 326 Capital expenditures 234 211 273 337 646

Gross operating margin / Net sales 12.49% 11.85% 9.41% 7.79% 9.07% Operating profit / Net sales - Ros 7.81% 6.78% 4.02% 1.76% 3.83% Net income / Shareholders’ equity * - Roe 7.38% 5.77% 0.10% n.s. 3.59% Operating profit / Net invested capital * - Roi 5.02% 4.13% 3.81% 1.56% 3.53% Net financial position / Shareholders’ equity Gearing ratio 0.21 0.42 0.47 0.44 0.38 Capital expenditures / Depreciation 1.19 1.16 0.98 1.07 1.98 R&D / Net sales (industrial aggregate) 3.83% 4.31% 3.38% 3.45% 3.12% Net sales per employee (in thousands of euros) 173 162 182 174 189

Pirelli & C. S.p.A. ordinary shares (no. in millions) 5,180.7 3,327.5 3,325.6 618.2 591.4 Pirelli & C. S.p.A. savings shares (no. in millions) 134.8 134.8 134.8 34.4 34.4 Total Pirelli & C. S.p.A. shares (no. in millions) 5,315.5 3,462.3 3,460.4 652.6 625.8 Treasury shares (no. in millions) 2.6 2.6 2.6 2.6 2.6

Factories 24 74 77 79 84 of which discontinued operations 52 Employees (at 12/31) 26,827 24,790 36,337 37,350 39,771 of which temporary employees 3,102 2,721 2,417 2,257 2,672

* Average amounts

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Call to the AGM Letter from the Chairman Contents Pirelli & C. S.p.A. To the Shareholders, Structure of Pirelli Group For the Pirelli & C. Group, 2005 was a very important year from at December 31, 2005 many standpoints. Firstly, in terms of growth: a factor highlighted by Pirelli & C. S.p.A. on the the marked improvement in all the main operating indicators. Stock Market Secondly, from the point of view of the structural reorganization Selected Financial Data following the sale (last July) of the Cables Sector. This enabled the Ī Chairman’s Letter Group to concentrate on activities with higher added value – the Tyres Sector, Pirelli Real Estate and the stake held in Telecom Italia through Olimpia – and on its two promising start-ups (Pirelli Broadband Solutions and Pirelli Ambiente) and Pirelli Labs, the fulcrum of the technological excellence of our industrial sectors. Finally, further steps forward were made in terms of internationalization, particularly the creation of a tyre production center in China during the first months of this year, and the expansion of the activities of Pirelli Real Estate into the foreign domain, beginning in Poland. This being so, the Group can enter the second half of this decade with high growth potential and a completely revised format, the main features of which are a greater emphasis on technological innovation and business models, a strong industrial vocation combined with goal-oriented diversification of its services, presence in sectors where the Group has already consolidated market leadership and in other newer markets with high development potential, and, last but not least, launching its business onto new markets with the highest growth potential. All of which is supported by a level governance recognized on an international scale, based on Pirelli’s traditional values: fairness, transparency and honesty. The results achieved in 2005 confirm the wisdom of the decision to orient our operations towards the business areas and markets with higher margins. Despite the persistently weak European economic situation, last year, the Group reported increases of double figures in terms of sales (+14.6%), operating profit (+32%), net income (+31.3%) and, with regard to the net financial position, a marked reduction in the level of net indebtedness, thanks partly to the positive effects of the sale of the Group’s Cables and Systems operations. This transaction generated an improvement in the net financial position of approximately Euros 1.2 billion, of which Euros 490 million refer to the equity value of the transaction and approximately Euros 700 million to deconsolidated net indebtedness. It should also be added that it was a source of great satisfaction to the company that the sale was achieved keeping Cables and Systems Business Unit under the same management, so as to preserve not only the value built up over the years but also the high level of professional skills of people who had always shown great loyalty to the Company. With regard to the performance of individual Sectors, Pirelli Tyres strengthened its leadership in the high-performance range in all the markets, achieving good results in every segment: Cars, Industrial Vehicles and Motorcycles. Growth in the United States was particularly significant, well above the market average. With profitability of 9% on sales, the Sector achieved the targets of the three-year plan one year early. With reference to the strategy of

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global growth, the most significant event – along with the construction Call to the AGM of a new steelcord production plant at Slatina in Romania (a joint Contents project with Continental) and the new plant to manufacture tyres for Pirelli & C. S.p.A. trucks and buses at Gravataì in Brazil – was the opening of the factory Structure of Pirelli Group at Yanzhou City, in the Province of Shangdong. By creating this plant, at December 31, 2005 Pirelli Tyres intends to extend its industrial presence to China, a Pirelli & C. S.p.A. on the market which is destined to become the most dynamic in the world. Stock Market Of fundamental importance for the future of the Sector, the Chinese Selected Financial Data factory is the result of an agreement with the Roadone Tyre Co. Ī Chairman’s Letter (of the Yinhe Group), which holds a 40% stake in the project. The company started production of radial truck tyres with 750 employees and, when fully operational, will have a productive capacity of approximately 1.2 million pieces. The signs from the first few months of this new initiative are extremely encouraging. The start-up Pirelli Broadband Solutions almost doubled its sales, thanks particularly to products for broadband access (especially ADSL) and sales of second-generation photonics products such as the CWDM (Coarse Wavelength Division Multiplexing) solution for metropolitan networks. This technology is proving to be extremely successful on the market. In fact, various collaboration agreements have been signed to supply telecommunications operators with transport solutions of the latest generation which make it possible to operate a whole telecommunications network remotely, thus increasing efficiency and reducing operating costs. The results of Pirelli Real Estate also point to a brilliant trend of the economic and financial parameters. In particular, during the three-year period 2003-2005, the operating profit, including profits from shares, reported an average annual growth rate of 22%. In 2005 alone, aggregated sales increased by 29%, whereas the operating profit including profits from shares showed an increase of 40%. Expansion of the franchising network, which now has more than 1,000 affiliates, continued. At the beginning of this year, an important agreement was signed to create a joint venture with Merill Lynch, which plans to invest Euros 1.5 billion in the Italian tourism and hotel sector by 2010. Another very important initiative was the beginning of the process of expansion into Central and Eastern Europe, with the creation of Pirelli Pekao Real Estate in Poland. The industrial plans for the Sector aim to increase the business acquired outside Italy to approximately 20% of the total by 2008. Pirelli Ambiente was conceived early in 2005 to strengthen the Group’s presence in the sector of the environment and sustainable development. Amongst other achievements, it began to market an innovative antismog filter system – using a technology based on filters of porous silicon carbide – which can reduce small particle emissions from exhaust fumes from diesel engines by approximately 90%. Furthermore, in Great Britain, a license agreement was signed with ReEnergy for the use of CDR-P (the quality fuel produced from municipal solid waste) in one of the European markets most interested in replacing at least some of the fossil fuels used to produce energy. Behind these innovations of the Group lies the constant work of Pirelli Labs in the field of R&D, to which the Group devotes approximately 4% of the sales from its industrial operations. A vital part of this commitment to technological excellence is the Group’s

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collaboration with important universities and research institutes Call to the AGM world-wide. Last year Georgia Tech, a prestigious American university Contents research institute specialized in electronics and optical technologies Pirelli & C. S.p.A. became one of our partners. A five-year agreement was signed to Structure of Pirelli Group develop new broadband technologies – in particular, a new at December 31, 2005 generation of integrated optical systems based on nanotechnologies Pirelli & C. S.p.A. on the and high-capacity home networking solutions – destined mainly for Stock Market the American telecommunications market. Selected Financial Data We should also emphasize the growing contribution of Olimpia to the Ī Chairman’s Letter result from the Group’s investments, thanks to the marked improvement in the profitability of Telecom Italia and the increase in the stake held by Pirelli compared to 2004. Telecom Italia is benefiting considerably from its merger with TIM, the resulting synergies and the acceleration in network, services and product innovation. Our confidence has been boosted by the fact that the Group is now focusing on business areas with higher added value and a high degree of research and innovation, by the development capacity resulting from this, and by the proven professional competence and qualities of our employees. As a result, we can look forward with reasonable optimism and, in particular, to even better results in 2006, unless there are unforeseen changes in the economic and market scenario. The two measures recently adopted by the Board of Directors will help to further strengthen the economic and net financial position of the Group. The first is the decision to start the process leading to the listing on the Italian Stock Exchange of a minority share of Pirelli Pneumatici S.p.A., with the aim of exploiting the highest value existing within the Company; the second is the decision to sell financial investments worth about Euros 400 million at current value. Finally, I would like to draw your attention to an important innovation to these financial statements. For the first time, they contain a new section devoted to topics relating to sustainability. Here, and in this particular context, not only the economic but also the social and environmental repercussions of our operations are considered. Such matters are beginning to play an increasingly important role in the assessment of companies by rating agencies and, indeed, public opinion. These pages confirm the Pirelli Group’s steadfast conviction to promoting sustainable industrial growth, first documented in the “Environmental Report” which has been published since 2000. The decision to include a section on sustainability within the financial statements is an indication of the high priority of this topic and, at the same time, should encourage us to operate in a way that will satisfy all the stakeholders, based on healthy, lasting growth.

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Ī Introduction Directors’ report on operations The Group 2005 economic and financial review To the Shareholders, Major events in 2005 Consolidated Financial During 2005, the Pirelli & C. S.p.A. Group continued successfully with its strategy of focusing on Statement businesses with higher margins, achieving a significant improvement in all the economic indicators. Pirelli Labs In particular, at a consolidated level, from the economic point of view, there was a two-digit increase Subsequent events in sales (+14.6 percent), operating profit (+32 percent) and net income (+31.3 percent) compared to Outlook for the current the prior year. From the financial point of view, there was a considerable reduction in net debt year which, at year-end, settled at Euro 1,177 million, thanks partly to the positive effects of the disposal Tyres Sector of the Cables and Systems activities which took place during the year. Pirelli Broadband Solutions Pirelli & C. Real Estate With regard to industrial operations, in 2005, there were excellent results by Pirelli Tyres, which Pirelli & C. Ambiente reached its profitability target (ROS at 9 percent) for 2006 in the Three-year Plan one year ahead of Information Systems schedule, despite the increase in prices of raw materials. Sales of the Pirelli Broadband Solutions Proforma Data start-up, which also benefited from the first contributions from second-generation photonics Equity Investments held products, continued to report strong growth. In the real estate sector, Pirelli Real Estate closed the by Directors, Statutory year with a further improvement and started the process of expansion on foreign markets. Auditors and General Managers Stock options plans Corporate Governance Pirelli & C. S.p.A. - Disposal of the Energy and Telecom Cables and Systems activities Summary Data Shareholders’ Resolutions On July 28, 2005, after obtaining approval from the relevant authorities, the June 1, 2005 agreement was executed between Pirelli & C. S.p.A. and Goldman Sachs Capital Partners for the purchase of Pirelli’s Energy and Telecom Cables and Systems activities by Goldman Sachs Capital Partners.

These activities were valued for a total amount of approximately Euros 1.3 billion inclusive of the intellectual property rights and a license for the use of the Pirelli trademark for two years.

Pirelli was also assigned a warrant entitling it to obtain economic beneﬁts equivalent to 5 percent of the capital of the vehicle company used by Goldman Sachs Capital Partners for the transaction; this will allow Pirelli to take advantage of any opportunities arising from the future growth of the business. The agreement provides that the pension funds of the affiliates in the United Kingdom will be carried by Pirelli, with an effect of approximately Euros 98 million.

The disposal led to an improvement in the net ﬁnancial position of about Euros 1.2 billion, of which Euros 490 million refers to the equity value of the transaction (Euros 135 million of which is represented by a vendor loan) and about Euros 700 million to the deconsolidated net debt.

In economic terms, on consolidation, taking into account the transaction costs, the accruals for the price adjustment still under discussion and for guarantees provided, for a total of approximately Euros 80 million, the impact is a gain of approximately Euros 30 million, of which Euros 10 million relates to the license for use of the trademark.

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Introduction The Group The Group Ī 2005 economic and 2005 economic and financial review financial review Major events in 2005 Consolidated net sales in 2005 amount to Euros 4,546 million. This is an increase of 14.6 percent Consolidated Financial compared to Euros 3,967 million in 2004, with gains recorded across all sectors of business. Excluding Statement the exchange effect and using the same scope of consolidation, net sales grew by 9.5 percent. Pirelli Labs Subsequent events Gross operating profit is Euros 568 million (12.5 percent of net sales), up 21 percent compared to Outlook for the current Euros 470 million in 2004 (11.8 percent of net sales). year Tyres Sector Consolidated operating profit amounts to Euros 355 million, an increase of 32 percent from Pirelli Broadband Euros 269 million in 2004, with growth in all business segments. ROS (Return on Sales) at Solutions consolidated level is equal to 7.8 percent, a further increase over 6.8 percent in 2004. Pirelli & C. Real Estate Pirelli & C. Ambiente Information Systems The share of the earnings (losses) of equity investments, which includes the effect of the result Proforma Data of the companies accounted for by the equity method, and dividends from other unconsolidated Equity Investments held holdings, is an earnings balance of Euros 267 million, compared to Euros 156 million of 2004. by Directors, Statutory In particular, the caption includes the impact of the earnings of Olimpia for Euros 152 million Auditors and General (Euros 6.6 million in 2004), due both to the improvement in the result of Telecom Italia S.p.A. and the Managers increase in the ownership percentage held by Pirelli in comparison with 2004. Stock options plans The adjustment made to the Telecom Italia S.p.A. shares held by Olimpia in its portfolio did not have Corporate Governance an impact on Olimpia’s earnings contribution since the carrying amount, in transparency, for Pirelli Pirelli & C. S.p.A. - (equal to about Euros 4 per share), is in any case lower than Olimpia’s post-adjusted share carrying Summary Data amount (about Euros 4.2 per share). Shareholders’ Resolutions It should be pointed out that the financial statements of Olimpia, included in the consolidated financial statements of the Group, have been drawn up in accordance with IAS/IFRS and comprise the valuation of the investment in Telecom Italia S.p.A. by the equity method. The caption also includes the results of the companies of the Real Estate Sector (Pirelli Real Estate Group) accounted for by the equity method, which show earnings for Euros 102 million (Euros 94 million in the prior year).

Operating proﬁt including the share of earnings (losses) of equity investments is equal to Euros 622 million. This is an increase of 46.4 percent compared to Euros 425 million in the prior year.

Financial income (expenses) shows net ﬁnancial expenses of Euros 144 million (including Euros 64 million which is due to the measurement at fair value of the derivatives on Telecom Italia S.p.A. ordinary shares held by the Group), compared to Euros 121 million in 2004.

Net income for the year ending December 31, 2005 is Euros 399 million, up 31.3 percent compared to Euros 304 million in 2004.

Net income attributable to Pirelli & C. S.p.A. in 2005 is Euros 327 million (Euros 0.066 per share), up 30.3 percent compared to Euros 251 million in 2004 (Euros 0.065 per share).

Consolidated shareholders’ equity is Euros 5,614 million, compared to Euros 3,841 million at the end of 2004. The shareholders’ equity attributable to Pirelli & C. S.p.A. at December 31, 2005 is Euros 5,205 million (Euros 0.979 per share), compared to Euros 3,502 million at the end of 2004 (Euros 1.011 per share).

The net ﬁnancial position of the Group at December 31, 2005 is a net debt position which further decreased to Euros 1,177 million compared to Euros 1,236 million at September 30, 2005 and Euros 1,601 million at December 31, 2004.

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During 2005, Pirelli Tyres reported gains over the trend of growth Introduction seen in 2004, reaching the highest levels on its reference market in The Group terms of profitability. The excellent trend reported in 2005 was the Ī 2005 economic and result of a constant focus on the product mix, the increase in financial review prices and the growth in volumes which more than compensated Major events in 2005 the further increase in the costs of energy and raw materials, in Consolidated Financial circumstances of less-than-brilliant market demand. In the Statement Pirelli Labs Consumer markets (Car and Motorcycle), there was an increase in Subsequent events volumes and sales, especially in North America, in the Premium Outlook for the current segment in all the areas, and in the Winter segment in Europe. year In the Industrial markets, there was a positive growth trend in Tyres Sector 2005, especially in original equipment, and also as a result of the On October 12, 2005, opened the first Pirelli tyres plant in China. Pirelli Broadband start-up of the production of truck radial tyres in the Chinese Solutions factory at Yanzhou, which will serve the markets of China, Pirelli & C. Real Estate South-East Asia and Australia. Pirelli & C. Ambiente Information Systems Proforma Data Pirelli Tyres plants in the world Equity Investments held by Directors, Statutory Auditors and General Italy Managers Bollate (Mi) car/light truck Stock options plans Cinisello (Mi) machineries and moulds Corporate Governance Settimo Torinese car/light truck/trucks Pirelli & C. S.p.A. - U.K. Figline Valdarno (Fi) steel cord Germany Summary Data Burton-on-Trent car/light truck Breuberg car/light truck/motorcycles Shareholders’ Resolutions Carlisle car/light truck Merzig steel cord

Spain Turkey Manresa car/light truck Izmit car/light truck/trucks Izmit steel cord

U.S.A. Rome (GA) car/light truck China Yangzhou trucks

Venezuela Guacara car/light truck

Romania Slatina car/light truck Slatina steel cord Brazil Campinas car/light truck Feira de Santana car/light truck/ motorcycles Santo André trucks Egypt Gravataì motorcycles/trucks Alexandria trucks Sumaré steel cord Argentina Merlo car/light truck

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In 2005, Pirelli Broadband Solutions significantly increased its Introduction sales compared to the prior year, thanks especially to products for The Group broadband access (particularly ADSL), which continue to have 2005 economic and buoyant development prospects both in Italy and abroad, and the financial review start-up of the sale of second-generation photonics products. Ī Major events in 2005 In this business, the CWDM (Coarse Wavelength Division Consolidated Financial Multiplexing) solution for metropolitan networks is proving to be Statement Pirelli Labs very successful with the markets. Development of the Dynamically Tunable Laser (DTL), which is undergoing the qualification phase In 2005, net sales of Pirelli Broadband Subsequent events Solutions increased thanks to Outlook for the current at the premises of important clients, continued, as did customized broadband access. year “multiple-play” solutions on the access front. Tyres Sector Pirelli Broadband In 2005, the results of Pirelli Real Estate (the net income Solutions increased to Euro 147 million, a 25.6 percent gain compared Pirelli & C. Real Estate to a Euro 117 million in 2004) continue to reflect the significant Pirelli & C. Ambiente increase in fees for Fund and Asset Management activities Information Systems and the improved profitability of Service Provider activities. Proforma Data Furthermore, the expansion of Franchising activities continued; Equity Investments held by Directors, Statutory the number of affiliates rose to 1,020, in line with programs. Auditors and General Managers Pirelli & C. Ambiente Holding, the company established Stock options plans early in 2005 to bolster the Group’s presence in the sector of Corporate Governance environmental protection and sustainable development, reported Pirelli & C. S.p.A. - sales of approximately Euro 62 million in 2005 associated mainly Summary Data with the sale of low-impact environmental fuel Gecam™ - Shareholders’ Resolutions Il Gasolio Bianco. Important revenues for Pirelli Ambiente Holding in 2005 from the Gasolio Bianco During the year, the company started marketing anti-particulate sales. filters to reduce emissions from diesel-powered vehicles. In the sphere of sources of renewable energy and energy recovery, work continued on the production of quality fuel from solid urban waste (CDR-P). Through the agreement signed in the United Kingdom with ReEnergy, the positive impact of which will be seen in 2006, the company will be able to assess the development potential of the business in one of the most interesting markets in Europe for using CDR-P to partially replace primary fossil fuels in thermoelectric power stations and cement kilns. Work also continued to clean up and reclaim contaminated sites on the basis of experience matured in the real estate and industrial sectors.

Major events in 2005

The major events which occurred in 2005 are described below:

Corporate • On January 28, 2005, an agreement was signed among the shareholders of Olimpia S.p.A. (Pirelli & C. S.p.A., Edizione Finance International S.A., Hopa S.p.A., Banca Intesa S.p.A. and Unicredito Italiano S.p.A.) amending and integrating the pacts stipulated by them in 2003. The integration to the agreement, in particular, gives the shareholders the right – always to the extent that the total does not exceed, taking into account also the shares already held by Olimpia

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and its shareholders, the ownership threshold of 30 percent of Telecom Italia S.p.A. share capital – Introduction to purchase Telecom Italia S.p.A. ordinary shares in the quantities described: The Group Pirelli & C. S.p.A. 300 million shares 2005 economic and Ediz. Finance International SA/Ediz. Holding S.p.A. 100 million shares ﬁnancial review Hopa S.p.A. 100 million shares Ī Major events in 2005 Banca Intesa S.p.A. 100 million shares Consolidated Financial Unicredito Italiano S.p.A. 100 million shares Statement Pirelli Labs The Olimpia shareholders also agreed to amend certain understandings concerning the increase Subsequent events premium to which Hopa S.p.A. would be entitled in the event of the spin-off of Olimpia. In Outlook for the current particular, the parties have established an all-inclusive amount of Euros 208 million in the event the year spin-off occurs as a result of a deadlock or the pact is not renewed at its expiration date of May 8, Tyres Sector 2006. Pirelli Broadband Solutions • On March 17, 2005, the share capital increase effected by Pirelli & C. S.p.A. and voted by the Pirelli & C. Real Estate extraordinary shareholders’ meeting of January 21, 2005 came to a totally successful conclusion. Pirelli & C. Ambiente All 1,517,672,178 new ordinary shares were subscribed at the price of Euros 0.70 each, for a total Information Systems equivalent amount of Euros 1,062,370,524.60, without the need for the intervention of the Proforma Data underwriting syndicate promoted, arranged and conducted by Banca Caboto S.p.A. (Intesa Group), Equity Investments held by Directors, Statutory JPMorgan, MCC S.p.A. – Capitalia Banking Group, Mediobanca S.p.A. and UBM. Auditors and General The resources raised by the capital increase were designated for the subscription of the Olimpia Managers S.p.A. capital increase for Euros 2 billion, with the objective being both to raise the investment in Stock options plans Telecom Italia S.p.A. and to neutralize the diluting effect consequent to the announced Telecom Corporate Governance Italia merger. In particular, Pirelli & C. subscribed to its share of the increase (50.4 percent) and Pirelli & C. S.p.A. - the shares of the increase that were not subscribed to by the banks (16.8 percent), with an outlay Summary Data of Euros 1,344 million. After this transaction, Pirelli & C.’s investment in Olimpia went to 57.7 Shareholders’ Resolutions percent. The new share capital of Pirelli & C. S.p.A. now amounts (taking into account the additional increases due to requests to exercise Pirelli & C. ordinary share warrants 2003-2006 presented during 2005 and during the ﬁrst few months of 2006) to Euros 2,764,505,154.52 and consists of 5,316,356,066 shares of par value Euros 0.52 each, for 5,181,591,637 ordinary shares and 134,764,429 savings shares.

• During 2005, Pirelli Finance Luxembourg S.A., a wholly-owned subsidiary of Pirelli & C., purchased 49,557,885 Telecom Italia S.p.A. ordinary shares on the market (equal to 0.4 percent of ordinary share capital) at an average price per share of Euros 2.56 for a total outlay of Euros 127 million.

• On October 18, 2005, Pirelli & C. S.p.A. purchased from Deutsche Bank AG, under the bookbuilding offering launched by the Bank and reserved for institutional investors, 13,690,319 RCS MediaGroup S.p.A. ordinary shares, equal to about 1.87 percent of the ordinary share capital of the company for an equivalent amount of approximately Euros 59 million. After this transaction, Pirelli & C. S.p.A.’s stake in RCS MediaGroup S.p.A. ordinary share capital is equal to about 4.81 percent at an average carrying price of approximately Euros 3.3 per share.

• On November 29, 2005, Pirelli & C. S.p.A. and Miotir S.p.A. reached an agreement for the sale of 6,305,926 Gemina shares (entirely conferred to the Gemina S.p.A. Voting Trust and equal to 1.73 percent of ordinary share capital) owned by Pirelli at a price of Euros 2 per share. The shares were ﬁrst offered to the current members of the trust. The agreement stated that Miotir S.p.A. was committed to purchasing not only its own portion but also the shares that might not be purchased by the other shareholders in the trust. The shares were then sold in December at the terms established in the agreement.

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• On December 20, 2005, Pirelli & C. S.p.A. renegotiated its committed revolving credit line of Euros Introduction 1 billion arranged in December 2003 with Barclays Capital BNP Paribas, HSBC Bank plc, The Group JP Morgan plc and The Royal Bank of Scotland plc, the mandate lead arrangers. 2005 economic and The new agreement calls for the extension of the terms of the loans from 2008 to 2010 with the financial review right, on the part of the lending institutions, to further extend the term to 2012. The margin on any Ī Major events in 2005 amounts drawn down are half of the original terms and is now equal to 50 basis points. Consolidated Financial The agreement will contribute toward optimizing the financial structure of Pirelli & C. S.p.A., Statement Pirelli Labs both from the standpoint of costs and term of the facility. Subsequent events Outlook for the current year Tyres Sector Tyres Sector • During the first half, Pirelli and Continental started up steelcord Pirelli Broadband manufacturing at the Slatina (Romania) factory of the company Solutions Cord Romania, the joint venture in which Pirelli holds an 80 Pirelli & C. Real Estate percent stake and Continental a 20 percent interest. Pirelli & C. Ambiente A total investment of Euros 40 million will be made at the new Information Systems factory over an extended number of years and will allow Cord Proforma Data Romania to meet the growing demand for this important Equity Investments held by Directors, Statutory component of tyres in the area of East Europe, which today is Auditors and General almost twice the supply. Production of steelcord began in 2005 Managers Cord Romania will enable Pirelli to strengthen its position on the in the Slatina plant (Romania). Stock options plans European market of steelcord and add to the supply produced by Corporate Governance the plants at Figline Valdarno (Italy), Merzig (Germany) and Izmit Pirelli & C. S.p.A. - (Turkey). Summary Data The investment falls under the company’s strategy to expand its operations in Romania which, Shareholders’ Resolutions by the end of 2006, will lead to the start-up of a new enormous plant for the manufacture of high performance car tyres at Slatina in order to satisfy the strong growth in demand from East European markets. • In October 2005, the new Pirelli radial truck tyre factor at Yanzhou, in the Chinese province of Shandong, was inaugurated following the signing of the cooperation agreement announced in June 2005 between Pirelli and Roadone Tyre Co. Ltd. and executed on July 29, 2005, after approval was received from the relevant authorities. The factory covers an area of 500 thousand square meters and employs about 750 persons; it has an initial annual production capacity of about 0.6 million pieces which, when fully operational, will become about 1.2 million pieces. The production of the Yanzhou factory is intended for the Chinese market and other markets in Southeast Asia and Australia. Pirelli will operate in China through a 60 percent-controlled company with Roadone Tyre, which is headed by the Chinese Yinhe Group.

Pirelli Broadband Solutions • On October 3, 2005, Marconi and Pirelli Broadband Solutions announced that a cooperation agreement had been signed for the supply of next-generation network transmission solutions to telecommunications operators. Under the terms of the agreement, Marconi will provide its customers, as part of its comprehensive portfolio of photonics products, City8TM, the Pirelli Broadband Solutions is active CDWM Metro Access System multiservice platform: this is an in broadband access and second- innovative and carrier-class platform capable of addressing the generation photonics. most critical issues relating to metro and access areas. The Pirelli City8TM platform is supported by Marconi’s ServiceOn Network Management System which can remotely

14 Preliminary information Directors’ Report Sustainability Report Consolidated Financial Statements

manage an entire telecommunications network, thus increasing Introduction efficiency and reducing operating costs. The Group Thanks to the integration of the Pirelli platform in the Marconi 2005 economic and solution, operators will be able to eliminate bottlenecks in financial review network sections and more efficiently manage the flow of Ī Major events in 2005 broadband traffic. Furthermore, Pirelli’s CDWM technology Consolidated Financial makes it possible to multiply the band in the metro area, thus Statement Pirelli Labs reducing operating costs. The City 8™ optical system created by Pirelli Broadband Solutions. Subsequent events Outlook for the current Pirelli Environment year Tyres Sector • In April 2005, Pirelli Ambiente, the Pirelli Group’s new environmental pool, Pirelli Broadband developed an innovative system to treat exhaust gases that will reduce the fine Solutions dust emissions generated by diesel engines by approximately 90 percent. The technology Pirelli & C. Real Estate is based on filters made of porous silicon carbide, a material which has unique properties in terms Pirelli & C. Ambiente of heat resistance and sudden changes in temperature. The capacity of the new Pirelli filters to Information Systems reduce dramatically the finer dust emissions from diesel engines was demonstrated by tests Proforma Data conducted by the ENI Tecnologie laboratories and by the European Commission’s JRC Research Equity Investments held Center at Ispra. by Directors, Statutory Auditors and General • In December, Pirelli Ambiente Tecnologie received the “Environmentally Friendly Innovation Managers Award 2005” recognition for its development of antismog filters. Stock options plans Corporate Governance Pirelli & C. S.p.A. - Summary Data Real Estate activities Shareholders’ Resolutions • On July 19, 2005, the Diomira reserved closed-end fund was set up, seeded with 19 buildings from Enpam for a value of about Euros 149 million. The offer, for Euros 70 million, was entirely placed with qualified investors, including the Pirelli RE and Lehman Brothers joint venture for investments in the residential sector. Pirelli RE participates in the fund with an approximate 32 percent interest.

• On July 28, 2005, after sealing the agreement on June 20, 2005, the Pirelli RE-Lehman Brothers joint venture together with Roev Italia executed the purchase of Castello (ex-Immobiliare Serico), a company in the BPU Banca Group and owner of 150 mainly residential properties, for Euros 150 million. The properties were transferred to the Diomira fund in December 2005.

• On May 6, 2005, the Pirelli RE and Deutsche Bank Real Estate Global Opportunities joint venture joined with the Borletti family and Investitori Associati concluded its ﬁrst transaction, formalizing the purchase of Rinascente S.p.A. from Euroﬁnd Textile S.A. for Euros 888 million, after receiving formal approval from the antitrust authority. The Pirelli RE - DB Real Estate joint venture has a 50 percent interest in the transaction, while the remaining 50 percent is shared by Investitori Associati and the Borletti family. At December 31, 2005, Pirelli RE holds 20 percent of Rinascente UPIM and of Tamerice Immobiliare, the companies to which the commercial activities and properties of Rinascente S.p.A. were transferred.

• On April 29, 2005, the Pirelli RE and Morgan Stanley Real Estate Funds (MSREF) joint venture signed a binding agreement with The Pirelli RE headquarters in Milano Glenbrook Operae for the purchase of a portfolio of buildings, Bicocca.

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mainly for office use, for a total value of Euros 255 million. Introduction At December 31, 2005, the deeds of purchase to 124 buildings The Group were executed for about Euros 252 million. 2005 economic and ﬁnancial review • On December 23, 2005, Pirelli RE signed a binding agreement Ī Major events in 2005 with Valtur for the purchase of four tourist resorts for a total of Consolidated Financial Euros 103 million located at Marilleva, Pila and Nicotera. Over Statement the next two years, the value of these structure will be The residences of Progetto Bicocca. Pirelli Labs Increasing in 2005 the activities of Subsequent events appreciated by an investment of about Euros 12 million. Pirelli Group in the real estate. Outlook for the current year • On December 28, 2005, 561 buildings worth about Euros 486 Tyres Sector million and corresponding to a part of the real estate properties Pirelli Broadband of the Telecom Italia Group were contributed to the closed-end Solutions Pirelli RE Fund – Raissa Fondo Comune di Investimento Pirelli & C. Real Estate Immobiliare. This fund is held under a joint venture 65 percent Pirelli & C. Ambiente controlled by Morgan Stanley Real Estate Funds and in which Information Systems Pirelli RE has a 35 percent stake. The newly-established Fund is Proforma Data expected to receive a total of 900 properties from the Telecom Equity Investments held Italia Group worth about Euros 790 million. by Directors, Statutory Auditors and General Managers • During 2005, in execution of the agreement signed in 2004 Stock options plans between Pirelli RE and Morgan Stanley Real Estate Funds Corporate Governance (MSREF) regarding non-performing loan activities, the following Pirelli & C. S.p.A. - transactions were carried out: Summary Data - the sale, on March 24, 2005, by Pirelli RE, of the 100 percent Shareholders’ Resolutions stake in Pirelli RE Credit Servicing to SIB (ex-Servizi Immobiliari Banche S.p.A.) and the sale, by MSREF, of 47 percent of SIB to Pirelli RE. The two companies specialized in the management of non-performing loans were subsequently merged, creating one of the leading operators in Italy in this sector. The new company resulting from the merger (named Credit Servicing) is indirectly held by MSREF (mainly through FONSPA – Istituto di Credito Fondiario e Industriale S.p.A.) for a 53 percent interest and by Pirelli RE for a 47 percent stake, with a call option by Pirelli RE for 53 percent of the company exercisable from January 2007 and a put option by MSREF exercisable from January 2008; - set-up of the company Asset Management NPL, in which Pirelli RE has a 75 percent stake and MSREF a 25 percent stake, that manages non-performing loan portfolios currently owned by the two Groups;

• On December 30, 2005, Pirelli RE and the Corporate Credit group of Morgan Stanley were awarded a portfolio of non-performing loans by BNL composed of loans guaranteed by residential, hotel and industrial properties with an asset value of about Euro 345 million. At the same time, a portion of the portfolio was sold to Deutsche Bank for Euros 102 million.

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Consolidated Financial Statements Introduction The Group The highlights of the consolidated financial statements for the year ending December 31, 2005 can be 2005 economic and summarized as follows: financial review Major events in 2005 (in millions of euros) Ī Consolidated Financial 12/31/2005 12/31/2004 Statement Net sales 4,546 3,967 Pirelli Labs Gross operating profit (1) 568 470 Subsequent events % of net sales 12.5% 11.8% Outlook for the current Operating profit (1) 355 269 year % of net sales 7.8% 6.8% Tyres Sector Share of earnings (losses) of equity investments 267 156 Pirelli Broadband Operating profit incl. share of earnings (losses) of equity invest. 622 425 Solutions Financial income (expenses) (144) (121) Pirelli & C. Real Estate Income taxes (129) (87) Pirelli & C. Ambiente Net income from continuing operations 349 217 Information Systems % of net sales 7.7% 5.5% Proforma Data Net income from discontinued operations 50 87 Equity Investments held Total net income 399 304 by Directors, Statutory Net income attributable to Pirelli & C. S.p.A. 327 251 Auditors and General Earnings per share (in euros) 0.066 0.065(2) Managers Shareholders' equity 5,614 3,841 Stock options plans Net equity attributable to Pirelli & C. S.p.A. 5,205 3,502 Corporate Governance Equity per share (in euros) 0.979 1.011 Net financial (liquidity)/debt position 1,177 1,601 Pirelli & C. S.p.A. - of which assets held for sale 456 Summary Data Capital expenditures 234 211 Shareholders’ Resolutions R&D expenditures 174 171 Employees (number at period-end) 26,827 37,154 of which assets held for sale 12,364 Factories (number) 24 74 of which assets held for sale 52 Pirelli & C. shares outstanding at December 31, 2005 ordinary shares (number in millions) 5,180.7 3,327.5 savings shares (number in millions) 134.8 134.8 Total shares outstanding at December 31, 2005 5,315.5 3,462.3 (1) Includes, in 2004, the gain on the sale of IPRs of the Telecom Submarine activities (Alcatel agreement) for Euros 14 million. (2) Takes into account the capital increase effected in 2005 (adjustment factor = 0.89).

For a more meaningful understanding of the performance of the Group in its various sectors of business, the following economic data and the net ﬁnancial position are provided by business sector.

(in millions of euros) 12/31/2005 Tyres Broadband Environment Real Estate Other Total Net sales 3,633 112 62 700 39 4,546 Gross operating profit (loss) 518 (6) (2) 93 (35) 568 % of net sales 14.3% 12.5% Operating profit (loss) 329 (7) (4) 84 (47) 355 % of net sales 9.1% 7.8% Share of earnings (losses) of equity investments (1) - - 102 166 (1) 267 Operating profit (loss) incl. share of earnings (losses) of equity invest. 328 (7) (4) 186 119 622 Financial income (expenses) (33) (1) - 1 (111) (144) Income taxes (97) - - (40) 8 (129) Net income (loss) from continuing operations 198 (8) (4) 147 16 349 % of net sales 5.5% 7.7%

Net ﬁnancial (liquidity)/debt position 237 7 1 31 901 1,177

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(in millions of euros) 12/31/2004 Introduction Tyres Broadband Environment Real Estate Other Total The Group Net sales 3,253 63 2 586 63 3,967 2005 economic and Gross operating profit (loss) 452 (8) (2) 50 (22) (2) 470 financial review % of net sales 13.9% 8.5% 11.8% Operating profit (loss) 275 (8) (2) 39 (35) (2) 269 Major events in 2005 % of net sales 8.5% 6.7% 6.8% Ī Consolidated Financial Share of earnings (losses) of equity investments (2) - - 94 64 (3) 156 Statement Operating profit (loss) Pirelli Labs incl. share of earnings (losses) of equity invest. 273 (8) (2) 133 29 425 Subsequent events Financial income (expenses) (31) (4) - 15 (101) (121) Outlook for the current Income taxes (75) - - (31) 19 (87) 217 year Net income (loss) from continuing operations 167 (12) (2) 117 (53) % of net sales 5.1% 20.0% 5.5% Tyres Sector Pirelli Broadband Net financial (liquidity)/debt position 214 27 (2) 40 866 1,145 Solutions Net financial position of discontinued operations 456 Pirelli & C. Real Estate Total net financial (liquidity)/debt position 1,601

Pirelli & C. Ambiente (1) Valuation of Olimpia S.p.A. by the equity method shows earnings of Euros 152 millions (Euros 7 million in 2004). Information Systems (2) Includes the gain on the sale of the IPRs of the Submarine Telecom activities (Alcatel agreement) for Euros 14 million. (3) Proforma Data Includes the gain on the sale of Pirelli RE shares for Euros 56 million. Equity Investments held Net sales by Directors, Statutory Auditors and General Net sales amount to Euros 4,546 million and record an increase of 14.6 percent compared to the prior Managers year (Euros 3,967 million). Stock options plans Excluding the foreign exchange effect (+3.7 percent) and the change in the scope of consolidation Corporate Governance due to addition of the company Pirelli & C. Ambiente Tecnologie (+1.4 percent), the effective change Pirelli & C. S.p.A. - is equal to +9.5 percent. Summary Data Shareholders’ Resolutions Volumes + 4.2% Prices/mix + 5.3% CENTRAL OCEANIA, Change on a comparable basis + 9.5% AND AFRICA AND ASIA ITALY Foreign exchange effect + 3.7% SOUTH AMERICA Change in scope of consolidation + 1.4% Total change + 14.6%

The distribution of net sales by geographical area is as follows:

(in millions of euros) 2005 2004 Geographical Area Europe: Italy 1,439 31.65% 1,249 31.48% NORTH AMERICA OTHER EUROPEAN Other European countries 1,628 35.81% 1,416 35.69% COUNTRIES North America 320 7.04% 245 6.19% Central and South America 774 17.03% 730 18.40% Group sales in 2005 by geographical area. Oceania, Africa and Asia 385 8.47% 327 8.24% 4,546 100% 3,967 100%

Operating profit Operating profit in 2005 is equal to Euros 355 million, representing 7.8 percent of net sales compared to Euros 269 million in the prior year (6.8 percent of net sales). The change in operating profit can mainly be attributed to:

Operating proﬁt 2004 269 Tyres Sector 54 (1) Pirelli Broadband Solutions 1 Pirelli Real Estate 45 Other (14) (2) 86 Operating proﬁt 2005 355

(1) Of which the difference from the translation of foreign currency ﬁinancial statements is Euros 27 million (2) Of which -Euros 14 million refers to the sale of IPRs to Alcatel in 2004.

18 Preliminary information Directors’ Report Sustainability Report Consolidated Financial Statements

Share of earnings (losses) of equity investments Introduction The Group The share of the earnings (losses) of equity investments is an earnings balance of Euros 267 million 2005 economic and compared to a earnings balance of Euros 156 million in the prior year. The caption also includes the financial review share of earnings of the investment in Olimpia S.p.A., accounted for by the equity method, for Euros Major events in 2005 152 million (Euros 7 million in 2004). Ī Consolidated Financial The adjustment made to the Telecom Italia S.p.A. shares held by Olimpia in its portfolio did not have Statement an impact on Olimpia’s earnings contribution since the carrying amount, in transparency, for Pirelli Pirelli Labs (equal to about Euros 4 per share), is in any case lower than Olimpia’s post-adjusted share carrying Subsequent events Outlook for the current amount (about Euros 4.2 per share). year It should be pointed out that the financial statements of Olimpia, drawn up in accordance with Tyres Sector IAS/IFRS, included in the consolidated financial statements of the Group, comprise the valuation Pirelli Broadband of the investment in Telecom Italia S.p.A. by the equity method. Solutions The item also includes writedowns of investments for Euros 22 million and the earnings (losses) Pirelli & C. Real Estate Pirelli & C. Ambiente of the companies in the real estate sector valued using the equity method, which amount to earnings Information Systems of Euros 102 million ( Euros 94 million in 2004). Proforma Data Equity Investments held Net income from continuing operations by Directors, Statutory Auditors and General Net income from continuing operations is equal to Euros 349 million (after financial expenses of Managers Euros 144 million and after income tax expenses of Euros 129 million) compared to Euros 217 Stock options plans million in the prior year (after financial expenses of Euros 121 million and after income tax expenses Corporate Governance of Euros 87 million). Pirelli & C. S.p.A. - Summary Data Shareholders’ Resolutions Net income Net income amounts to Euros 399 million in 2005 (after net income from discontinued operations of Euros 50 million) compared to net income of Euros 304 million in the prior year (after net income from discontinued operations of Euros 87 million). The net income attributable to Pirelli & C. S.p.A. is Euros 327 million compared to the net income attributable of Euros 251 million in 2004.

Shareholders’ equity Consolidated shareholders’ equity went from Euros 3,841 million at December 31, 2004 to Euros 5,614 million at December 31, 2005. Details of the increase are as follows:

(in millions of euros) Effect of the adoption of IAS 32/39 at January 1, 2005 137 Translation differences 180 Net income for the year 399 Dividends to third parties paid by: (149) - Pirelli & C. S.p.A. (113) - Pirelli & C. Real Estate S.p.A. (32) - Other Group companies (4) Pirelli & C. capital increase (net of costs incurred) 1,048 Exercise of Pirelli & C. S.p.A. warrants 1 Exercise of Pirelli & C. Real Estate S.p.A. stock options 8 Change in Olimpia valuation 78 Fair value adjustment of available-for-sale financial assets 106 Net actuarial gains/losses on employee benefits (59) Consolidation effect of Tyres joint venture in China 21 Other changes 3 Change in net financial position 1,773

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Shareholders’ equity attributable to Pirelli & C. S.p.A. at December 31, 2005 is equal to Euros 5,205 Introduction million (Euros 0.979 per share). This in an increase from Euros 3,502 million at December 31, 2004 The Group (Euros 1.011 per share). 2005 economic and financial review Major events in 2005 Net financial position Ī Consolidated Financial Statement The net financial position of the Group went from a debt position of Euros 1,601 million at December Pirelli Labs 31, 2004 (of which Euros 456 million refers to the Cables and Systems activities) to Euros 1,177 Subsequent events million at December 31, 2005. Outlook for the current year The change in the net financial position can be explained by the following detailed analysis of cash Tyres Sector flows: Pirelli Broadband Solutions (in millions of euros) Pirelli & C. Real Estate Foreign exchange effect 35 Pirelli & C. Ambiente Free cash flow 343 Information Systems Financial income (expenses) (80) Proforma Data Income taxes (129) Equity Investments held Proceeds from the sale of Cables & Systems activities 490 by Directors, Statutory Deconsolidation of Cables & Systems net financial position at 6/30/2005 715 Auditors and General Net flows Cables & Systems activities first half 2005 (259) Managers Impact of capital increase received/subscribed (282) Stock options plans - Olimpia capital increase (1,344) Corporate Governance - Pirelli & C. capital increase 1,062 Pirelli & C. S.p.A. - Purchase of Telecom Italia shares and call options (139) Summary Data Purchase of RCS shares (59) Shareholders’ Resolutions Dividends paid (149) Joint venture in China (Tyres sector) (59) - Investment (30) - Change in the scope of consolidation (29) Other changes (3) 424

Employees On a comparable consolidation basis (without considering the businesses sold in 2005), there are 26,827 employees at December 31, 2005 (including 3,102 with temporary contracts) compared to 24,790 at December 31, 2004 (including 2,721 with temporary contracts). This is a total increase of 2,037 concentrated in the Tyres business owing to the growth of volumes and the expansion of operations in Romania and China.

Capital expenditures Capital expenditures total Euros 234 million. The ratio of capital expenditures to depreciation is 1.19. Capital expenditures are principally concentrated in the Tyres Sector and directed to the development of innovative processes, the increase in production capacity for the premium tyre range and the launch of new products.

R&D expenditures R&D expenditures borne by the Group and completely expensed to income went from Euros 171 million in 2004 to Euros 174 million in 2005. R&D as a percentage of net sales is 3.8 percent.

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Pirelli Labs Introduction The Group In 2005, new collaboration began with Georgia Tech, a prestigious 2005 economic and American university research institute specialized in electronics financial review and optical technologies. The five-year research agreement was Major events in 2005 signed with the aim of developing new broadband technologies Consolidated Financial Statement mainly for the American telecommunications market. Ī Pirelli Labs Pirelli Labs signed an agreement Subsequent events Under the agreement, researchers at Pirelli and Georgia Tech will with the prestigious American research Outlook for the current particularly study a new generation of integrated optical systems institute Georgia Tech. year based on nanotechnologies and cutting-edge solutions for Tyres Sector residential access to broadband and for applications on flexible Pirelli Broadband optical systems and high-capacity home networking solutions. Solutions Atlanta will thus become the new North American headquarters of Pirelli & C. Real Estate Pirelli Labs, which will operate alongside the Pirelli Group’s Pirelli & C. Ambiente advanced research center, founded in 2001 by the Pirelli Group at Information Systems Milano-Bicocca and specialized in broadband access and second- Proforma Data generation photonics. Equity Investments held by Directors, Statutory Auditors and General Under the agreement, there will be a “visiting scientist” from Pirelli Labs working at Georgia Tech’s Electronic Design Center, where Managers A nanostructure. Nanotechnologies Stock options plans special laboratories will be built, and also the joint use by Pirelli operate on 1millionth mm dimensions. Corporate Governance and Georgia Tech of the clean rooms at Pirelli Labs, the hi-tech Pirelli & C. S.p.A. - labs devoted to the research and production of optical components Summary Data for telecommunications based on nanotechnologies (dimensions of Shareholders’ Resolutions 0.0001 mm), which occupy about 5,000 m2 of the Pirelli Labs facilities. Atlanta will also host the new American headquarters of the Pirelli Group which already has an important industrial operation in Georgia at the MIRS technology tyre factory at Rome, and the headquarters of Pirelli Broadband Solutions, the new company which develops and markets the inventions of Pirelli Labs.

Cooperation continued with Italian and international partners such as the Massachusetts Institute of Technology, CNR, the Milan Polytechnic University and Olivetti I-Jet. Intensive and proﬁtable cooperation between Pirelli Labs and Telecom Italia Lab on joint projects continues.

Pirelli Labs Materials Innovation Research projects with a short-term impact focused on two main spheres: research for the tyres sector and joint projects with Telecom Italia.

With regard to tyres, methods were developed to obtain elastomers containing functional units which are particularly suited to being used in UHP compounds since they enhance their interaction with ﬁllers. Research continued on nanocomposites with a polymeric matrix The CCM system is studying nanocomposites to produce innovative to extend the range of applications and consolidate their use in high performance tyre compounds. particular types of compounds.

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These results were achieved thanks to ever-more sophisticated control of CCM (Continuous Introduction Compound Mixing) technology, the reliability of which has been more than adequately demonstrated. The Group Thanks to this technology, a research program has begun aimed at using microstructured fillers 2005 economic and which cannot be processed using conventional technologies. financial review Major events in 2005 With regard to cooperation with Telecom Italia, the fields of research involved the study of Consolidated Financial innovative materials suitable for use in radio-frequency devices for telecommunications applications. Statement In particular, antennas were developed made of dielectric materials which have interesting Ī Pirelli Labs Subsequent events properties. The antennas are made using technologies which are compatible with reduced industrial Outlook for the current costs and will be further developed for the mobile telephone and WI-FI sectors. year Research is also being conducted into devices based on innovative ceramic materials with the aim of Tyres Sector creating advantages for radio base stations in terms of capacity and coverage in the mobile telephone Pirelli Broadband sector. Solutions Pirelli & C. Real Estate In 2005, the Telemedicine Project produced the first prototype of very high-resolution remote Pirelli & C. Ambiente cardiographs. This work, which is being conducted with very prominent international partners, will Information Systems give specialists a completely new tool for controlling the basic medical parameters of non- Proforma Data hospitalized patients without requiring them to alter their normal lifestyle. Equity Investments held by Directors, Statutory Auditors and General With regard to research activities with medium-term impact, the two main projects involved the Managers Distributed Sensor Network (DSN) and the project to provide components for Fuel Cells. Stock options plans Corporate Governance With regard to the Distributed Sensor Network project, a technological platform has been developed Pirelli & C. S.p.A. - with hardware and software for exploiting and operating sensor systems transmitted via innovative Summary Data special wireless networks, with hi-tech networking services. The numerous potential applications of Shareholders’ Resolutions these systems include field testing in the sector of agrometereology and the development of innovative proprietary sensor systems, which is at the final development stage. The application will be used for monitoring air quality and road traffic. If properly integrated into these networks it will become possible to exploit its potential for new systems and services, in particular in the sustainable mobility sector. Negotiations are currently in progress to reach a cooperation agreement with one of the most important companies on the market in the field of monitoring environmental pollution.

With regard to Fuel Cells, development focused on SOFC (Solid Oxide Fuel Cells) and the field of PEM (Polymer Electrolyte Membrane). In the field of SOFC-type fuel cells: the results achieved in the field of ceramic materials have found application in the sphere of the cooperation agreement signed with the prestigious Canadian body, the Alberta Research Council (ARC). The aim is to combine the technology for miniaturizing fuel cells developed by ARC with innovative materials developed by Pirelli Labs. In the field of PEM fuel cells, the membrane developed by Pirelli Labs, unlike other products on the market, in addition to not being made of fluorinated polymers is able to work with high concentrations of methanol. These characteristics have attracted much interest from companies which are active in the global fuel Pirelli Labs are cooperating with cells market. Samples of the membranes were supplied to these Alberta Research Council in the sphere companies so that they could assess the possibility of using them of fuel cells. in the main applications for portable electronics.

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In addition to testing, an agreement is currently being worked Introduction out with a major world player in this field. The Group In the field of hydrogen fuel cells, the technological 2005 economic and development of a membrane was completed and a technical financial review and economic assessment was begun of the scale-up Major events in 2005 to produce the material. Consolidated Financial Statement Ī Pirelli Labs Subsequent events Pirelli Labs Optical Innovation Outlook for the current year Work at the labs focusing on applications for Tyres Sector telecommunications concentrated on three main areas: Pirelli Broadband photonics nanotechnologies, optical systems and devices Solutions for access networks. Pirelli & C. Real Estate Pirelli & C. Ambiente In the field of photonics nanotechnologies, the engineering phase Information Systems and the transfer to production was completed of the tunable laser Proforma Data for application in long-distance and urban optical networks and Equity Investments held transport networks, marketed by Pirelli Broadband Solutions. by Directors, Statutory Prototype of optical Triplexer device for Development continued of the integrated optical triplexer use in Fiber-to-the-home. Auditors and General device for “Fiber to the Home” and resulted in a first series Managers Stock options plans of prototypes which will be evaluated by American customers Corporate Governance for the first large-scale application, scheduled for 2007. Pirelli & C. S.p.A. - Significant results were obtained for the feasibility of the optical Summary Data traffic routing device known as OADM as a fundamental Shareholders’ Resolutions component for the flexible optical network which operators will begin to install in 2007/2008.

Development began of a new integrated device, the dispersion compensator, to be used in conjunction with laser transmitters. It will thus be possible to create optical connections Pirelli Labs Optical Innovation is without distributed compensators for sections of cable developing ADSL terminals for of about 300/450 km, thus significantly reducing the cost of broadband access with ever more transport infrastructures in city areas. increased performance. In the field of optical systems, work continued on the development of “coarse” wavelength division multiplexing systems, which find application in the transport of voice, data and video traffic in regional networks. The development of this kind of system, which, in 2005, was installed on a large scale in Italy and in many European countries as well as North America, has made it possible to augment performance and reduce costs so that it is very competitive on the telecommunications market.

Development also continued of an optical broadband distribution system for corporate and residential LANs, the main advantage of which is that it simpliﬁes connections between the ﬁber and the optical transceivers. In the sphere of devices for access networks, development was completed of a new-generation ADSL terminal unit with improved performance in terms of access speed (20 Mbit/s), which integrates the functionality of transmitting WI-FI at high speed. The device will be installed by Telecom Italia in 2006.

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Development was also completed of a new-generation product to transmit telecom signals using Introduction residential power lines with a capacity of about 50 Mbit/s. This product is currently undergoing trials The Group at Telecom Italia. 2005 economic and Development began of a highly sensitive reception device for WI-FI transmission with the aim of financial review making the wireless transmission of video signals more reliable by using real-time streaming from the Major events in 2005 access terminal to the set-top-box. Consolidated Financial In the sphere of home networking, research began to develop a high capacity (2.5 Gbit/s) wireless Statement Pirelli Labs solution with radio transmission using millimeter waves (60 GHz). Ī Subsequent events Development continued of a new-generation set-top-box incorporating a high level of electronic Outlook for the current components, designed to accept the latest video codes and high-definition television broadcasting. year The product is scheduled to be supplied to Telecom Italia in mid-2006. Tyres Sector Pirelli Broadband Solutions Pirelli & C. Real Estate Subsequent events Pirelli & C. Ambiente Information Systems • On February 6, 2006, Olimpia S.p.A. and the shareholders Pirelli Proforma Data & C. S.p.A., Edizione Finance International S.A., Edizione Holding Equity Investments held by Directors, Statutory S.p.A., Banca Intesa S.p.A. and Unicredito Italiano S.p.A. sent Auditors and General Hopa S.p.A. the statement rescinding from the agreement signed Managers among the parties in 2003. Therefore, at the expiration date Stock options plans (May 8, 2006), this agreement will not be renewed. Corporate Governance Pirelli & C. S.p.A. - • On February 14, 2006, the Pirelli & C. S.p.A. board of directors Summary Data voted to undertake a course of action that would lead to the best Shareholders’ Resolutions way of increasing the value of the tyres division (“Pirelli Tyres”), including its listing on the Electronic Trading Market of Borsa At the beginning of 2006 an Italiana, with the understanding that Pirelli & C. S.p.A. would still announcement was made about the hold the majority of the shares of Pirelli Tyres. project for the listing of Pirelli Tyres. The performance of the most important markets and segments in which the Tyres Sector of the Group operates continues to show a favorable economic trend, especially in the premium range of products where the Pirelli brand enjoys the acknowledged position of world leadership. This constitutes the premise for a further growth by Pirelli Tyres over and above that posted in the last few years. In addition to the project to increase the value of Pirelli Tyres, the board of directors also approved a plan to further concentrate resources in the strategic businesses of the Group by disposing of financial equity investments for an equivalent amount of about Euros 400 million at present value, equal to about a half of this portfolio. The strengthening of the economic and equity position as a result of these transactions will allow the Group to fully focus on its various core businesses.

• On March 1, 2006, Pirelli Broadband Solutions, the company of the Pirelli Group which specializes in the sector of broadband access and second-generation photonics products announced that it will supply the new optical component known as the triplexer to the American market. The new component will enable telecom operators to offer “triple-play” services via optical ﬁber networks with a considerable competitive advantage. The triplexer, designed internally by Pirelli Labs for the American market, is a product based on integrated photonics technology, which makes it possible to concentrate, inside the same component, the possibility of using light to transmit and receive voice, data and video simultaneously, with a single optical ﬁber, to and from the computer, the television and the telephone at the user’s home. This new solution will also make it possible for American telecom

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operators to offer television content with a high standard of quality via optical fiber at an Introduction extremely low cost. The competitive advantage derives from the fact that this system uses The Group integration technology similar to that used in the field of microelectronics, making it possible to 2005 economic and mass-produce the triplexer on silicon wafers using a highly automated process. financial review In the United States, the diffusion of optical fiber to the home is growing rapidly. Currently the Major events in 2005 market is worth several billion dollars a year and is destined to expand further in the future. Consolidated Financial Statement Pirelli Labs • On January 12, 2006, after winning the bid for the purchase of a residential property portfolio in Ī Subsequent events Berlin at the price of Euros 72.5 million, which ended on October 14, 2005, ownership was formally Outlook for the current transferred to Tizian Wohnen 1 and Tizian Wohnen 2 – holdings of the subsidiary P&K Real Estate, year in which Pirelli RE has a 60 percent stake in share capital. The properties purchased were part of Tyres Sector the Corpus Immobiliengruppe property portfolio. Pirelli Broadband Solutions • On January 30, 2006, the board of directors of Pirelli RE SGR approved the interim management Pirelli & C. Real Estate accounts at December 31, 2005 of Tecla Fondo Uffici, Berenice Fondo Uffici and Olinda Fondo Pirelli & C. Ambiente Shops and passed resolutions on the following: Information Systems Proforma Data - for Tecla Fondo Uffici, for the second half of 2005, the payment of dividends of Euros 21.92 per Equity Investments held share (equal to 80 percent of distributable income) with a semiannual yield of 4.6 percent. by Directors, Statutory Considering the full-year 2005, the dividend yield is equal to 9.3 percent, above the annual target Auditors and General dividend yield of 5.5 percent indicated at the time of placement. Also taking into account the Managers previous years, the Fund has had an average annual yield of 8.6 percent on dividends paid alone Stock options plans since its placement; Corporate Governance Pirelli & C. S.p.A. - - for Olinda Fondo Shops, for the second half of 2005, the Summary Data payment of dividends of Euros 19.54 per share (equal to 80 Shareholders’ Resolutions percent of distributable income) with a semiannual yield of 3.9 percent. Considering the full-year 2005, the dividend yield is equal to 7.3 percent, above the annual target dividend yield of 5.5 percent indicated at the time of placement. Also taking into account the previous years, the Fund has had an average annual yield of 6.7 percent on dividends paid alone since its placement; The complex Bicocca Village in Milan, of Olinda Fondo Shops. - for Berenice Fondo Uffici, with a mid-July 2005 placement, for the second half of 2005, the payment of dividends of Euros 15.05 per share (equal to 86 percent of distributable income) with a yield of 3 percent which corresponds to an annualized yield of 6.3 percent, above the annual target dividend yield of 4.75 percent indicated at the time of placement.

With regard to the closed-end unlisted reserved property investment funds, the annual dividend yield for Cloe Fondo Uffici was 15.3 percent, above the target dividend yield of 9.7 percent “Il 16” is one of the most recent indicated at placement. For Teodora, operating only since mid- Pirelli RE initiatives in the Grande October 2005, the annualized dividend yield is 10.3 percent, Bicocca Project. above the target dividend yield of 7.5 percent indicated at the time of placement. For the subscribers of Clarice Light Industrial, the annual dividend yield is in line with the target yield of 9 percent indicated at the time of placement.

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• On February 20, 2006, Pirelli RE and Merrill Lynch signed a Introduction binding agreement to set up a joint venture (with a 35 percent The Group stake by Pirelli RE and a 65 percent stake by Merrill Lynch) for 2005 economic and the investment of Euros 1.5 billion in the hotel tourism sector in financial review Italy over the next five years. Major events in 2005 Consolidated Financial Statement Pirelli Labs Subsequent events Outlook for the current year Detail of the Pirelli Tyre headquarters at Milano-Bicocca. Ī Outlook for the current year The strategy undertaken by the Group to focus on segments with Tyres Sector high added value allow the Group to forecast a further Pirelli Broadband improvement in results for 2006, unless external extraordinary Solutions events occur which cannot be foreseen at this time. Pirelli & C. Real Estate Pirelli & C. Ambiente In particular, with regard to the industrial activities, Pirelli Tyres again expects to report a higher Information Systems growth in 2006 than the world market, partly as a result of focusing on the premium segments Proforma Data in the Consumer area and in markets under rapid development in the Industrial area. Equity Investments held The increase in energy and raw material costs should be compensated by a better price/mix so that by Directors, Statutory the operating result will be higher overall than in 2005, unless events intervene of a nonrecurring Auditors and General nature. Managers Stock options plans For Pirelli Broadband Solutions, strong growth in the access market is again expected, Corporate Governance with confirmation also at an international level, and the introduction of new photonics products based Pirelli & C. S.p.A. - Summary Data on optical devices using nanotechnology. Overall, the company should record a growth of around 30 Shareholders’ Resolutions percent and the operating result is expected to improve and approach breakeven. As for the prospects of Pirelli Real Estate for the current year, a further growth is expected in the operating result inclusive of the share of earnings (losses) of equity investments, in line with the three-year 2006-2008 business plan.

John Malcovich and Naomi Campbell starring “The Call”, the ﬁrst Pirelliﬁlm in 2006 on Internet.

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Introduction Tyres Sector The Group 2005 economic and The highlights of the consolidated financial statements at financial review December 31, 2005 of the Tyres Sector can be summarized as follows: Major events in 2005 (in millions of euros) Consolidated Financial 12/31/2005 12/31/2004 Statement Net sales 3,633 3.253 Pirelli Labs Gross operating profit 518 452 Subsequent events % of net sales 14.3% 13.9% Operating profit 329 275 CENTRAL AND OCEANIA, Outlook for the current % of net sales 9.1% 8.4% SOUTH AMERICA AFRICA AND ITALY year Financial income (expenses) (34) (33) ASIA Ī Tyres Sector Income taxes (97) (75) Pirelli Broadband Net income 198 167 % of net sales 5.5% 5.1% Solutions Net financial (liquidity)/debt position 237 214 Pirelli & C. Real Estate Capital expenditures 208 190 Pirelli & C. Ambiente R&D expenditures 146 144 Information Systems Employees (number at year-end) 23,673 21,513 Proforma Data Factories (number) 24 22 Equity Investments held by Directors, Statutory Net sales NORTH AMERICA OTHER EUROPEAN COUNTRIES Auditors and General Net sales for the year 2005 amount to Euros 3,633 million, with an Managers increase of 11.7 percent compared to the prior year. The trend in Tyres: 2005 sales by geographical area Stock options plans and product category. Corporate Governance volumes is positive with an increase of 1.8 percent in addition to the good performance of the price/mix (+5.6 percent) and the positive Pirelli & C. S.p.A. - MOTORCYCLE STEELCORD/ Summary Data foreign exchange difference (+4.3 percent). TYRES OTHER TYRES Shareholders’ Resolutions The distribution of net sales is as follows:

Geographical Area 2005 2004 Italy 13% 13% Other European countries 40% 43% North America 9% 8% South America 25% 23% Africa/Asia/Paciﬁc 13% 13%

Product category 2005 2004 Car tyres 62% 62% Truck tyres 28% 28% TRUCK TYRES CAR TYRES Motorcycle tyres 8% 7% Steelcord/Other tyres 2% 3%

Operating profit Operating profit is Euros 329 million (9.1 percent of net sales) compared to Euros 275 million in the prior year (8.4 percent of net sales). The good trend in volumes and the price/mix, as well as the positive contribution of exchange rates, have more than offset the increase in both raw material costs and labor costs. Details of the positive change of Euros 54 million in the operating profit compared to 2004 can be summarized as follows:

(in millions of euros) Operating proﬁt 2004 275 Foreign exchange effect 27 Prices/mix 87 Volumes 39 Production factors per unit cost (88) Efficiencies 6 Depreciation (6) Other (11) (*) 54 Operating proﬁt 2005 329 (*) Of which Euros 8 million refers to the accruals for lay-offs and disputes with former employees made during the last quarter.

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Net income Introduction The Group Net income in 2005 is Euros 198 million after financial expenses of 2005 economic and Euros 34 million, in line with the prior year, and income tax financial review expenses of Euros 97 million, compared to Euros 75 million in 2004. Major events in 2005 Consolidated Financial Statement Net financial position Pirelli Labs The net financial position at December 31, 2005 is a net debt Subsequent events position of Euros 237 million. This is an increase compared to the Outlook for the current year end of the prior year due principally to the investment made in the Pirelli Tyres report operating profit Ī Tyres Sector factory in China (Euros 59 million) and the payment of dividends of Euros 329 million in 2005. Pirelli Broadband to the parent company of Euros 120 million compared to Euros 85 Solutions million in the prior year. Pirelli & C. Real Estate Pirelli & C. Ambiente Information Systems Employees Proforma Data Equity Investments held There are 23,673 employees at December 31, 2005 including 2,243 employees with temporary by Directors, Statutory contracts and 715 temp employees. Auditors and General Compared to December 31, 2004, there was a total increase of 2,160 employees, of whom 200 were Managers management and permanent staff (due to the consolidation of the work force of Drahtcord Saar Stock options plans Germany, the joint venture set up in China, the start up of the factories in Romania and the transfer Corporate Governance Pirelli & C. S.p.A. - of employees from Corporate Brazil) and 1960 blue-collars (due to Drahtcord Saar Germany, the joint Summary Data venture in China, the factories in Romania and recruiting in Brazil). Shareholders’ Resolutions At December 31, 2005, the work force (excluding employees with temporary contracts) may be analyzed as follows:

2005 2004 Senior executives 0.9% 0.9% Staff 21.5% 22.4% Blue-collar 77.6% 76.7%

The organizational development activities during 2005 involved both the areas already included in the scope of consolidation and the new operations in China and Romania. With regard to the first areas, projects were launched to recruit and develop human resources. In the commercial sphere a project was launched called “Running the Market”. The aim is to define career patterns which are consistent with the new challenges provided by the market, design and distribute training packages which will develop critical areas of competence in our industry and bring in young people with talent selected from all over Europe who are highly motivated to work in the world of business and achieve significant professional growth. Within the industrial sphere, on the other hand, a project was launched to re-define the necessary characteristics of the professional manager based on the changes which have taken place in the competitive environment. This project involves the definition of a leadership model to aim at and the distribution of training modules to key managers in the industrial world of Pirelli Tyres. Support for the new activities involved extensive selection activities (the number of staff increased from 15 to 46 employees during 2005) and training in Romania both for the Steel Cord factory (already operational) and the Car factory (still at the start-up phase) with the aim of increasing the competence of local personnel and thus reaching the quality standards required for Pirelli production.

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In China, following the setting up of the joint venture with a local Introduction partner, an organizational model for running the company was The Group defined, together with the operational role of Pirelli personnel. 2005 economic and Communication and training initiatives were launched with the aim financial review of ensuring a sufficient level of integration with the rest of the Major events in 2005 company, while taking into consideration the specific nature of the Consolidated Financial local environment. Statement Pirelli Labs Subsequent events With regard to industrial relations, labor contracts were defined in The result of Pirelli Tyres in 2005 Outlook for the current various countries with the aim of maintaining the real cost of labor can be attributed to the focus on the premium segments. year and increasing competitiveness by intervening with regard to Ī Tyres Sector flexibility and productivity. Pirelli Broadband Solutions Pirelli & C. Real Estate Capital expenditures Pirelli & C. Ambiente Information Systems During 2005, capital expenditures amounted to Euro 208 million, an Proforma Data increase of 10 percent compared to the prior year, with a ratio of Equity Investments held 1.1 to depreciation and equal to 5.7 percent of net sales of the by Directors, Statutory Tyres Sector. Auditors and General Capital expenditures in factories represent 91 percent of the total. Managers This is in line with the Group’s strategy and market demand. Stock options plans The capital investments were employed in the development of Corporate Governance innovative processes, expansion of production capacity in the Pirelli & C. S.p.A. - high-performance segment and the introduction of new products. Summary Data The Bahia factory in Brazil increased its production capacity in 2005. Shareholders’ Resolutions Car: in the sphere of innovative processes, the production capacity of the MIRS (Modular Integrated Robotized System) process was increased in Germany, the U.S.A. and the U.K., both by installing new lines with higher productivity and by optimizing existing lines. With regard to traditional processes, conversion of the production capacity of “high-performance” products and the revamping of existing machinery continued. With the aim of meeting the increased market demand, a greater boost was given to production in low-cost geographical areas: in particular, construction work began on a new factory at Slatina in Romania and work continued to increase capacity in Turkey, Argentina and at the new factory at Bahia (Brazil) by installing automatic processes.

Heavy Truck All Steel: in line with Group strategy, measures were implemented to increase production in the low-cost areas of Brazil, Egypt and Turkey through goal-oriented “de-bottlenecking” action. In particular, production began at the new All Steel plant at Gravatai in Brazil. In the ﬁeld of innovative processes, production was increased at the factory at Settimo Torinese for the new Amaranto product line using the innovative SATT (Spiral Advanced Technology for Truck) technology derived from MIRS technology. Production of the new Amaranto line for trucks was increased in 2005 Furthermore, the strategy to renew the product lineup and extend in the Settimo Torinese plant. programs to improve efficiency and quality in all the Group factories continued.

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Steel Cord: the expansion plan moved forward, especially in Brazil, together with activities Introduction to develop prototypes for new products, particularly in Italy. The Group Production began at the new plant at Slatina in Romania. 2005 economic and financial review Major events in 2005 Research & Development Consolidated Financial R&D expenditures amount to Euro 146 million, equal to 4 percent of net sales. Traditionally this Statement activity has focused on the development of new high-performance products (e.g. Run-Flat, SUV Pirelli Labs and motorcycle tyres), by exploiting technological components and very advanced know-how Subsequent events which are the result of intensive research in the areas of materials, design, profiles, tread patterns Outlook for the current and processes. year Ī Tyres Sector Pirelli Broadband To sustain improvement and innovation of the product portfolio, research is under way to find Solutions innovative solutions through the study and application of nanotechnologies. On the one hand, Pirelli & C. Real Estate these new technologies have made it possible to increase the level of product performance and, Pirelli & C. Ambiente on the other, opened up the possibility of using new types of materials. In 2005, work continued Information Systems to innovate production processes by applying spin-offs from MIRS technology to traditional Proforma Data processes. Equity Investments held by Directors, Statutory For Pirelli Tyres, 2005 was a Year of Innovation which saw the tangible results of research Auditors and General projects in the sphere of the tyre of the future. In May, at the event called ‘Technology in Revolution’, Managers Pirelli was able to present and perform tests on track and road of the latest generation of Run-Flat Stock options plans Corporate Governance tyres. Its product lineup is now complete and open to application on SUVs, while the new Pirelli & C. S.p.A. - technological systems (X-Pressure, Safety Wheel System, Cyberwheel and Cybertyre), created with Summary Data the aim of achieving tyres which are ever-more intelligent and interactive, improve both safety and Shareholders’ Resolutions car performance.

Car manufacturers have conﬁrmed their trust in Run-Flat technology. In 2005, Pirelli invested in ever-closer cooperation with car manufacturers with a view to further enhancing the range. New products were introduced for SUVs and the range for UHP was extended to 19” and 20”, resulting in Pirelli obtaining prestigious homologations (e.g. from Audi, BMW, Cadillac and Volvo).

The latest generation of Pirelli run-ﬂat tyres was launched on may 2005 at the French circuit of Le Castellet.

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Consumer Market Introduction The Group The Consumer market includes the Car and Motorcycle Tyre 2005 economic and Business Units and the share of sales of the two B.U.s made financial review Major events in 2005 through proprietary stores of the Sector. Consolidated Financial Consumer sales increased by more than 11 percent compared to Statement 2004 to more than Euro 2.5 billion in 2005. Pirelli Labs Subsequent events Sales of Original Equipment for Cars reflected the consolidation A Ford Edge equipped Scorpion STR. Outlook for the current of positions in Europe and South America and growth in the Pirelli growth of original equipment continues in the U.S.A. year NAFTA area where the work of expanding the Pirelli quota on Ī Tyres Sector Ford, GM and Daimler Chrysler models continued. Pirelli Broadband In Europe, the positions acquired with the main European car Solutions manufacturers remained unchanged, and there were increases Pirelli & C. Real Estate in sales to the leading manufacturers in the high-performance Pirelli & C. Ambiente Information Systems vehicle segments (Alfa Romeo, Audi, Bentley, BMW, Ferrari, Proforma Data Maserati, Mercedes, Jaguar, Land Rover, Peugeot, Porsche, Saab, Equity Investments held Volvo and VW). by Directors, Statutory In South America, there was an increase in sales compared to Auditors and General the prior year, in line with the positive market trend, to all the Managers Mercosur manufacturers (Fiat, Ford, GM, Honda, Peugeot, Stock options plans Toyota and VW). Corporate Governance The portfolio of homologations is in continual expansion: Pirelli & C. S.p.A. - the P Zero products (Rosso, Nero, Corsa) for top cars, the P6 and Summary Data P7 for Europe and South America and the P6 Four Seasons for the Shareholders’ Resolutions NAFTA area contributed to the consolidation of the top positioning of the Pirelli trademark in the automotive sphere. The positive trend reported in 2004 on the SUV lines (Scorpion Zero and Scorpion STR) continues. Finally, the Run-Flat segment again reported growth, driven by the successes of BMW and the first homologation from Audi, Volvo and Cadillac which selected Pirelli’s MIRS technology for models equipped with this kind of tyre. The production capacity of MIRS was strengthened, with the installation of new, highly flexible lines in the U.K. and the U.S.A., which can manufacture tyres with a diameter of up to 28".

Car tyre sales to the Replacements channel reported an increase Pirelli Sottozero winter tyres achieved in 2005 compared to the prior year in all the main market areas. excellent results in German magazine’s In Europe, the market grew marginally but with very different specialized tests. dynamics in different segments: there was positive growth in the Winter, SUV, HP/UHP and Run-Flat segments and negative growth in the other segments. In South America, demand had trends similar to that in Europe, while higher-than-average growth was reported in North America, the Paciﬁc area and Japan. The leadership of Pirelli products in terms of technology and performance was rewarded by numerous victories in all the segments in comparative tests conducted by the specialized Press. In the Ultra-High Performance segment, the P Zero Nero and P Zero Rosso dominated the tests of specialized journals in Europe, while, in the High Performance segment, the victor was the P6, whereas the P7 had won in the prior year.

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In the Winter segment, the Snowsport, Sottozero and Scorpion Introduction Ice&Snow dominated all the tests. The Group With regard to racing, in 2005, Pirelli confirmed its commitment 2005 economic and to the race track and rallying. In competitions held on the race financial review track, Pirelli supplied numerous teams participating in the Major events in 2005 international FIA GT Championships and the Le Mans Endurance Consolidated Financial Series (LMES), and lent support to the presence of Maserati in the Statement American Le Mans Series (ALMS). Synergy with this brand Pirelli Labs The Maserati/Pirelli duo dominated Subsequent events continued during the Maserati Europa and Brazil trophies, the 2005 FIA GT Championship. Outlook for the current and active cooperation continued with Ferrari for the Ferrari year Challenge worldwide. The situation at the end of the season was Ī Tyres Sector more than positive: with the Ferrari 550 Maranello of BMS-Scuderia Pirelli Broadband Italia, Pirelli won the team and driver titles of the LMES in the GT1 Solutions category; it won the Marche (Maserati) and Team (Vitaphone Pirelli & C. Real Estate Racing) titles; with Maserati and Corvette, Pirelli triumphed in Pirelli & C. Ambiente eight of the eleven races in the FIA GT Championship and won Information Systems various places on the winner’s platform in America with the Panoz Proforma Data Esperante and the Maserati MC12. Equity Investments held by Directors, Statutory In the World Rally Championship last year, Pirelli supplied tyres to Auditors and General three of the official teams: Subaru, Peugeot and Mitsubishi. It thus Managers participated in five victories (three with Solberg’s Subaru in Sweden, Mexico and Great Britain and two with Grönholm’s Peugeot in Japan Stock options plans The Subaru/Pirelli driven by Solberg is Corporate Governance and Finland) and came second and third in the drivers’ competition. always competitive in the World Rally Pirelli & C. S.p.A. - Pirelli also won national rally titles in Italy, the U.K., Poland, Championship. Summary Data Austria, Hungary, France, Australia and New Zealand. Shareholders’ Resolutions In the Motorcycle segment, sales of the Pirelli and Metzeler brands increased in 2005, despite the presence of lower market growth than in the prior year. In the replacements channel, more significant growth and higher market share were recorded in North and South America, Oceania and Japan, whereas in Europe, the market share remained unchanged. There was a positive sales trend in the Original Equipment channel, especially in Italy and Brazil, and Pirelli obtained important homologations of the Diablo Corsa on the Honda CBR 1000 RR and the Yamaha R1 SP and of the Dragon Supercorsa Pro on the MV Agusta F4 and the Triumph 675. Excellent results were generated by the success of new products such as the Diablo Strada and the Dragon Supercorsa Pro sold under the Pirelli and Lasertec brand and from the oversize ME880 Marathon sold under the Metzeler brand. At the year end, Pirelli presented its new products for All Terrain Vehicles (ATV) which range from the Rut Buster for the multi-use segment, the Mud Wiser for muddy terrain and the Race Rail for racing applications. Other new products included the Scorpion MX Hard, Mid and Soft off-road line, and the eXTra for cross racing. With regard to Metzeler, the new products introduced at the end of 2005 include the Sportec M3 in the Supersport segment and the 6 Days Extreme in the enduro competition segment. The development of the last product derives straight from the race Pirelli motorcycle racing tyres achieved track and from victory in all three categories of the 2005 World top performance. Enduro Championship.

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In addition to these championships won with the Metzeler brand, Introduction Pirelli continues to carry off motocross titles. It won another The Group victory in the World MX1 Championship and the World Sidecar 2005 economic and Cross Championship, and a significant victory in the U.S. Arena financial review Cross Championship. As far as speed is concerned, Pirelli won in Major events in 2005 the 24-hour race at Le Mans and in the North West 200. In addition, Consolidated Financial as Official Tyre Supplier for the World Superbike and Supersport Statement Pirelli Labs Championships, Pirelli contributed to the definitive re-launch of the Subsequent events two championships by continuously improving the performance of Outlook for the current its products, ensuring absolute reliability in terms of safety and year equal treatment for all the teams and drivers. Pirelli’s reputation at Ī Tyres Sector these championships also led to its participation as the Official Pirelli Broadband Tyre Supplier for the Canadian Superbike Championship and the Solutions British and Australian Superstock Championships. Pirelli & C. Real Estate There were also many victories in various classes and categories at Pirelli tyres drove to victory again Pirelli & C. Ambiente national level, confirming the high level of performance of Pirelli in the World Cross Championship 2005. Information Systems and Metzeler tyres. Proforma Data Equity Investments held by Directors, Statutory Auditors and General Industrial Market Managers Stock options plans The Industrial Market includes the Industrial Vehicles Business Unit, together with the share of Corporate Governance sales made through proprietary stores in the sector, and the Steelcord Business Unit, for the share of Pirelli & C. S.p.A. - sales made to third parties. Summary Data Shareholders’ Resolutions Industrial sales grew by almost 13 percent over 2004 to Euros 1.1 billion in 2005.

In the market for Truck Tyres, in the Replacements channel, there was a contraction of demand in South America and Europe, partly offset by the Original Equipment channel – especially in South America – and by substantial growth in China, South-East Asia, the Middle East and Africa.

Pirelli is the Official Tyre Supplier of the World Superbike Championship.

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The market was aided by greater demand for the metallic radial Introduction tyre which is gradually replacing conventional tyres. The Group There were two main investments: in Brazil, a new plant was 2005 economic and opened to produce radial truck tyres at Gravatai and, in China, financial review in August, the acquisition of a new factory was completed for Major events in 2005 producing radial truck tyres, located in Shandong, with an initial Consolidated Financial investment of US$ 90/95 million and a production capacity of Statement Pirelli Labs 0.6 million pieces per year. Subsequent events Product innovation led to an extension of the new Amaranto range Sales in the Industrial Market increased Outlook for the current on the Mediterranean and Latin American markets, using SATT by 9 percent in 2005. year technology, leading to the introduction of the TH85 and the Ī Tyres Sector extension of the FH85. Pirelli Broadband The level of service and the quality of products resulted in Solutions important acknowledgements from vehicle manufacturers, Pirelli & C. Real Estate including Iveco’s “Best World Supplier” award, Ford Mondo’s Pirelli & C. Ambiente “World Excellence Award” and Ford Brazil’s “Supplier of the Year”. Information Systems Finally, many victories and placings were obtained by Pirelli truck Proforma Data tyres in rally and raid competitions. Mounted on Iveco or Equity Investments held by Directors, Statutory Mercedes-Benz trucks, standard Pirelli tyres triumphed at the Baja Auditors and General Aragòn (in Spain), the Tunisia Rally, and they performed well for Managers drivers Biasion and Alen in the 2005 Dakar Rally. Stock options plans Pirelli performed well in the Paris-Dakar Corporate Governance The world demand for Steelcord increased by 9 percent over raids in 2005 and 2006. Pirelli & C. S.p.A. - the year (in tons), driven by the rapid expansion of the Summary Data Chinese market where consumption increased by more Shareholders’ Resolutions than 30 percent. Growth was also strong in South America and Eastern Europe, supported by the phenomenon of the relocation of the production capacity of some tyre manufacturers. The demand of mature markets (North America and Western Europe) consequently contracted while demand remained constant in Japan and South Korea. The increase in production capacity was concentrated in low-cost areas and recovered the delays in demand reported during the last two years. Prices followed the pattern of the price of steel, which increased significantly compared to the prior year. The technological evolution of the product range resulted in the spread of new, highly resistant cords produced using steel and special treatments. During 2005, production increased significantly in the Sumarè plant in Brazil and at mid-year, the fifth steelcord production unit was opened at Slatina in Romania, in a joint venture with Continental.

Outlook for the current year In 2006, the Tyres Sector again expects to report an increase in net sales which will be higher than that forecast for the world tyre market, thanks partly to concentration on the premium segments of the Consumer Market and on rapidly developing markets in the Industrial market. The increase in the costs of energy and raw materials should be compensated by improvements in the price/mix so that the operating proﬁt will be higher overall than in 2005, unless events occur of a nonrecurring nature. A decision has been made to start the project for the listing of Pirelli Pneumatici S.p.A. on the Electronic Trading Market of Borsa Italiana, with the understanding that Pirelli & C. S.p.A. will retain the majority of the shares of the company. Pirelli Pneumatici S.p.A. is head of all the foreign companies of the sector currently controlled by Pirelli Tyre Holding N.V.. Compatible with the market conditions, this project is expected to be completed by the end of summer 2006.

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Introduction Pirelli Broadband Solutions The Group 2005 economic and The highlights of the financial statements at December 31, 2005 of Pirelli BroadBand Solutions financial review can be summarized as follows: Major events in 2005 Consolidated Financial (in millions of euros) Statement 12/31/2005 12/31/2004 Pirelli Labs Net sales 112 63 Subsequent events Gross operating loss (6) (8) % of net sales n.s. n.s. Outlook for the current Operating loss (7) (8) year % of net sales n.s. n.s. Tyres Sector Financial income (expenses) (1) (4) Ī Pirelli Broadband Net loss (8) (12) Solutions % of net sales n.s. n.s. Pirelli & C. Real Estate Net financial (liquidity)/debt position 7 27 Pirelli & C. Ambiente Employees (number at year-end) 122 79 Information Systems Proforma Data Equity Investments held Net sales by Directors, Statutory Auditors and General Net sales for the year 2005 amount to Euros 112 million compared to Euros 63 million in 2004. They Managers consist entirely of products for broadband access. Stock options plans The positive trend in sales is driven by the sales of ADSL access products, which show good Corporate Governance prospects for development. In 2005, the company’s leadership position in this field was consolidated Pirelli & C. S.p.A. - in Italy with the acquisition of new customers, in particular, thanks to the launch of new VoIP Summary Data services using Pirelli solutions. Shareholders’ Resolutions

Operating result

The operating result is a proﬁt for broadband access activities which were hurt by the start-up of second-generation photonics products so that the total was an operating loss of Euros 7 million.

The change in the operating loss can be summarized as follows:

(in millions of euros) Operating loss 2004 (8) Prices/mix (1) Volumes 6 Efficiencies (4) 1 Operating loss 2005 (7)

Employees

There are 122 employees at December 31, 2005. This is an increase compared to December 31, 2004, concentrated in the Engineering and Sales functions.

Broadband Access The Broadband market showed excellent development prospects from which the company beneﬁted by acquiring contracts and orders. 2005 saw the consolidation of market leadership in Italy, both through the acquisition of new customers as a result of the launch of the new VoIP services based on Pirelli solutions, and through the consolidation of its positions with existing customers. Marketing also began to interest the ﬁrst foreign operators and the company assumed an important

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role at the highest levels of the sector, playing an active part Introduction in the definition of the standards, solutions and services The Group which leading global operators will bring to the market. 2005 economic and During the year, commercial activities concentrated on financial review presenting PBS solutions on the global market and identifying Major events in 2005 potential commercial and technological partners with whom Consolidated Financial to penetrate emerging markets and develop innovative solutions Statement Pirelli Labs in the sphere of Broadband technology. Subsequent events Work continued on the development of the PMP Outlook for the current (Pirelli Management Platform) which will enable PBS to year introduce itself to the Broadband Access market, not only Tyres Sector with traditional products, but also with a portfolio of Ī Pirelli Broadband integrated solutions for operators, so that the functions Solutions of remote management and automatic provisioning can Pirelli & C. Real Estate be added to second-generation Access Gateways, thus Pirelli & C. Ambiente improving the quality of service of operators and consequently Information Systems lowering their operating costs. The AGV3 gateway, from the Discus Proforma Data product range. Development potential Equity Investments held is high for Pirelli Broadband Solutions in the broadband access market. by Directors, Statutory Auditors and General New Photonics Products Managers In recent years, the communications market has undergone a phase Stock options plans of rapid development especially in the “metro” area. After years of Corporate Governance investments in the development of communications based on huge Pirelli & C. S.p.A. - Summary Data backbones, attention is now being concentrated – partly as a result Shareholders’ Resolutions of the strong penetration of the offering of broadband services – on metropolitan areas, where the demand for traffic is increasing exponentially. The activities of PBS, through products developed by Pirelli Labs, is now geared to introducing products to the market which are destined to alleviate and resolve the bottlenecking problems present in urban areas. Versatility and low costs are the key In the sphere of optical systems, qualification has been completed features of Pirelli Broadband Solutions’ optical systems. of a Coarse WDM optical system called City8TM which was introduced to the market in August and was received enthusiastically by customers. This product, the distinctive features of which are its versatility and low cost, will mainly be used in urban networks to support the introduction of new services, such as IPTV, or to strengthen already-existing broadband networks in cities. In the first five months of marketing the product, more than 500 pieces of City8TM were produced and delivered, and were installed mainly in Italy and France. A pilot City8TM system was also installed in the U.S.A., for an important cable operator. It is hoped that this installation will be the springboard for greater business opportunities on the North American market. The most important aspect of this activity was that the first sales in the last four months of 2005 marked Pirelli’s definitive return to the second-generation photonics market.

In the sphere of optical components based on nanotechnologies, development of the Tunable Laser for application in transmission systems for metropolitan optical and transport networks was concluded. Furthermore, pilot production began at the Arnad site which will make it possible to obtain qualiﬁcation and to begin marketing the product in the ﬁrst half of 2006. Samples of the product have already been evaluated positively by customers, some of whom have already begun to integrate the electronics within their systems.

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Another success in the sphere of optical components is the continued development and Introduction encouraging results of the Triplexer, a low-cost integrated optical chip for Fiber-To-The-Home The Group applications. At the beginning of 2006, the first laboratory samples will be used in demonstrations 2005 economic and at important customers’ premises. financial review Major events in 2005 Consolidated Financial Outlook for the current year Statement In the current year there is again expected to be strong growth in the access market, with Pirelli Labs confirmation also at an international level, and new photonics products based on nanotechnologies Subsequent events will be introduced. Overall, the company should report growth of approximately 30 percent and the Outlook for the current operating result is expected to improve and approach breakeven. year Tyres Sector Ī Pirelli Broadband Solutions Pirelli & C. Real Estate Pirelli & C. Ambiente Information Systems Proforma Data Equity Investments held by Directors, Statutory Auditors and General Managers Stock options plans Corporate Governance Pirelli & C. S.p.A. - Summary Data Shareholders’ Resolutions

Broad band: considerable developments in 2006 for the Photonic based on nanotechnologies.

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Introduction Pirelli & C. Real Estate The Group 2005 economic and Pirelli Real Estate S.p.A. is a management company which manages real estate investment funds and ﬁnancial review companies owning properties and non-performing loans in which it invests by acquiring minority Major events in 2005 stakes; these are the fund management and asset management businesses. It also provides these and Consolidated Financial other clients with every type of specialist real estate service (the service provider business) both Statement directly and through the franchising network. Pirelli Labs Subsequent events In 15 years of constant growth, Pirelli Real Estate S.p.A., formerly Milano Centrale, has established a Outlook for the current reputation as one of the leading operators in the Italian real estate market, introducing a new year business model and professional standards from the most highly evolved markets. Tyres Sector Pirelli Broadband Solutions Today, the Pirelli RE brand is recognized for its tradition and reliability: the main factors behind its Ī Pirelli & C. Real Estate success lie in the experience and focusing skills of management and the experience gained in large- Pirelli & C. Ambiente scale operations. Information Systems Proforma Data Pirelli RE’s mission can be summarized as follows: Equity Investments held • to create value for the shareholders through a system of dealings with the outside community by Directors, Statutory geared to satisfying all the company’s stakeholders; Auditors and General Managers • to establish itself as the main benchmark of the Italian real estate market; Stock options plans • to export its successful model to Central and Eastern European countries; Corporate Governance • to innovate real estate products through a quality response that meets the needs of the ﬁnal users Pirelli & C. S.p.A. - and investors alike; Summary Data Shareholders’ Resolutions • to create and disseminate a state-of-the-art culture in the real estate sector; • to orient corporate behavior so that it focuses on the aspects of “corporate social responsibility”.

With operating headquarters in the most important metropolitan areas of the domestic real estate markets, in Milan, Rome and Naples, and a qualified network of agents, the Group is able to operate efficiently throughout Italy. The recent openings of offices in Berlin and Warsaw symbolize the first steps for expansion in Central and Eastern Europe. The ability to offer itself as the one source for the entire real estate cycle (valuation, purchase, management, appreciation and sale of assets) and the high degree of know-how in various areas of real estate operations, have led the Group to attract the most important international investment funds, as a first approach seeking investment opportunities and later also as institutional investments and retail, interested in a core product. The Group’s activities are conducted through specific business The Eastgate Park project at Portogruaro, units which make it possible to effectively and efficiently supervise near Venezia, managed by Fondo Spazio the various product lines in terms of Funds and Asset Management Industriale. which guide the development of all the stages of the process, taking advantage of the specialist work directly of the service companies (service providers) and indirectly through the franchising network.

Major events in 2005 A new series of important transactions was carried out by the Pirelli RE group: • important purchases of luxury real estate portfolios for Euros 2,727.4 million;

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• restructuring of the sector for the management and the Introduction investment in non-performing loans and the acquisition of The Group portfolios for Euros 456.3 million; 2005 economic and financial review • sales to third parties for Euros 2,451.2 million and contributions Major events in 2005 to core funds for Euros 750 million as a result of work to increase the value of the assets of the Fund & Asset Management The Malaspina project at Pioltello, Consolidated Financial near Milano, is managed by Pirelli RE Statement activities; through the “Asset Management Pirelli Labs • Pirelli RE SGR successfully continued its fund management Portafogli and Sviluppo Residenze” structure. Subsequent events activities relating to the core portfolios. Other real estate Outlook for the current investment funds came under its mangement: part of the year Tyres Sector property portfolio of FIP “Fondo Immobili Pubblici” and the Pirelli Broadband property portfolio of Teodora (both managed on behalf of third Solutions parties) in addition to the Berenice Fund, the third listed fund Ī Pirelli & C. Real Estate with seeded properties. Apart from the above-mentioned funds, Pirelli & C. Ambiente the Diomira Fund and the closed-end Pirelli RE Fund – Raissa Information Systems Fondo Comune di Investimento Immobiliare were launched; Proforma Data these are reserved funds with portfolios for the trading of Equity Investments held residential and commercial properties; by Directors, Statutory Auditors and General • plans were drawn up in 2005 and finalized in the early months 2006 to expand into Central Managers and Eastern Europe by forming joint ventures with prime partners in Poland and in Germany Stock options plans and exporting the successful business model long adopted in Italy. Pirelli RE has entered Corporate Governance into agreements with the Kronberg group, the benchmark operator on the German market, Pirelli & C. S.p.A. - and with Bank Pekao (Unicredit Group), which is active on the Polish market through its Summary Data involvement in major residential developments in Warsaw. This signals the first step towards Shareholders’ Resolutions expanding into those European markets with the most attractive growth prospects in the residential sector; • in keeping with the market’s new demand for investments differentiated according to the property’s different stage in the industrial cycle, Pirelli RE Opportunities SGR, obtained authorization to operate in December 2005 as Italy’s first asset management company specializing in speculative real estate funds: in fact, Spazio Industriale has already been launched as a short-term speculative fund specializing in the light industrial/logistics sector; • the Group’s corporate funding needs were optimized after obtaining a five-year revolving credit facility for Euros 450 million syndicated on the international market. The interest of the Italian and international financial sector in the Pirelli RE group was confirmed by the fact that that the amount subscribed to this facility was for a higher amount than that requested; • Pirelli RE Franchising strengthened its operations in the distribution of real estate services in the retail market; at December 31, 2005, there were 1,020 affiliated agencies of which 500 were already operational; • fees for fund-asset management and services continued to grow as a proprotion of th overall result, representing 44 percent at the end of 2005, compared to 23 percent in 2004. This was accompanied by the diminishing importance of ventures involving the investment of capital and their associated gains: the Group’s results therefore continued to stabilize, as also demonstrated by the higher proportion of the core component to the total assets managed (from 26 percent at December 31, 2004 to 38 percent at December 2005); • the service provider companies reported growth in revenues and the operating result. The latter rose by 20 percent with a ROS of 18 percent (16 percent in 2004).

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Economic review Introduction The Group The highlights of the income statement are presented below. In reading these figures, it should be 2005 economic and pointed out that the aggregate revenues (which, under IAS/IFRS, are basically equivalent to the financial review aggregate value of production net of acquisitions, used in previous financial statements) and the Major events in 2005 operating result including the share of earnings (losses) of equity investments, because of the type of Consolidated Financial business conducted by the Group, are the most important indicators expressing, respectively, the Statement business volumes managed and the trend in results at the operating level. Pirelli Labs Subsequent events (in millions of euros) Outlook for the current 2005 2004 year Aggregate revenues 3,507.2 2,714.0 Tyres Sector Consolidated revenues 700.2 586.2 Pirelli Broadband Operating profit including the share of earnings (losses) of equity investments (*) 186.1 133.0 Solutions Net income - attributable to the parent company 145.4 117.1 Ī Pirelli & C. Real Estate (*) Includes income from real estate funds of Euros 3.5 million in 2005 and Euros 0.2 million in 2004. Pirelli & C. Ambiente Information Systems Proforma Data Aggregate revenues grew 29 percent and amount to Euros 3,507.2 million compared to Euros 2,714 Equity Investments held million in 2004 due to the increase in sales to third parties. by Directors, Statutory Auditors and General Consolidated revenues are Euros 700.2 million compared to Euros 586.2 million in 2004, with an Managers increase of 19 percent. Stock options plans Operating profit including the share of earnings (losses) of equity investments is a profit of Corporate Governance Euros 186.1 million, with an increase of 40 percent compared to Euros 133 million in the prior year Pirelli & C. S.p.A. - Summary Data (+18 percent compared to 2004 under Italian GAAP). The increase is due to the combined effect of Shareholders’ Resolutions the improvement in the operating profit and in the income from equity investments. As for the composition by activity segment, capital activities account for 56 percent compared to 77 percent in 2004 while specialist services, fund and asset management fees and franchising constitute 23 percent last year and 44 percent in 2005. The net income attributable to the parent company is Euros 145.4 million, compared to Euros 117.1 million in 2004, with a growth of 24 percent.

The 2 projects winner of the competition launched by Pirelli RE for one building in the ex-Ansaldo area: the Archea Associati project.

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Balance sheet and financial review Introduction The Group (in millions of euros) 2005 economic and 12/31/2005 12/31/2004 financial review Fixed assets 410.7 375.7 Major events in 2005 - including equity investments in funds and investment companies 303.3 241.5 Consolidated Financial Net working capital 215.9 204.6 Statement Net invested capital 626.6 580.3 Pirelli Labs Shareholders' equity 552.1 491.9 Subsequent events - of which attributable to the parent company 535.4 485.5 Provisions and contributions 44.0 48.2 Outlook for the current Net financial (liquidity)/debt position 30.5 40.2 year - of which loans by shareholders (262.0) (209.8) Tyres Sector Total net invested capital financed 626.6 580.3 Pirelli Broadband Net financial (liquidity)/debt position before loans by shareholders 292.5 250.0 Solutions Gearing ratio, financial position before loans by shareholders 0.53 0.51 Ī Pirelli & C. Real Estate Pirelli & C. Ambiente Information Systems Shareholders’ equity attributable to the parent company at December 31, 2005 is Euros 535.4 million Proforma Data Equity Investments held compared to Euros 485.5 million at the end of 2004 with an increase of Euros 49.9 million. by Directors, Statutory The change is substantially due to the combined effect of a reduction in the distribution of dividends Auditors and General (Euros -68.3 million), the reclassification of treasury shares to shareholders’ equity (Euros -48.5 Managers million), an increase in the income for the year (Euros +145.4 million) and an increase as a result of Stock options plans the exercise of stock options (Euros +23.6 million). Corporate Governance Pirelli & C. S.p.A. - The net financial position at December 31, 2005 shows a net debt position of Euros 30.5 million. Summary Data This is an improvement compared to Euros 40.2 million at December 31, 2004 (Euros 29.4 million at Shareholders’ Resolutions September 30, 2005). The adjusted net financial position (expressed before loans made by shareholders to minority-owned companies) is a net debt position of Euros 292.5 million, compared to Euros 250 million at December 31, 2004 (Euros 257.8 million at September 30, 2005). The gearing ratio is 0.53 compared to 0.51 at December 31, 2004 (0.53 at September 30, 2005). Fixed assets total Euros 410.7 million at December 31, 2005 compared to Euros 375.7 million at the

The Michael Maltzan Architecture project.

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end of 2004. This is an increase of Euros 35 million. The increase is principally due to the net Introduction increase of investments in funds, junior notes and investment companies (Euros 61.8 million) The Group countered by a reduction due to the reclassification of treasury shares to shareholders’ equity 2005 economic and at the beginning of the period (Euros 32.9 million). financial review Major events in 2005 Net working capital is equal to Euros 215.9 million, compared to Euros 204.6 million at the end Consolidated Financial of 2004 with an increase of Euros 11.3 million. The increase is principally due to the reduction Statement in trade payables (Euros 72.4 million) offset by a considerable reduction in property inventories Pirelli Labs (Euros 63.3 million). Subsequent events Outlook for the current year Outlook for the current year Tyres Sector Pirelli Broadband With regard to the outlook for the current year, the Group expects to see a further increase in the Solutions operating profit including the earnings (losses) of equity investments, in line with the three-year Ī Pirelli & C. Real Estate 2006-2008 plan. Pirelli & C. Ambiente Information Systems Proforma Data Equity Investments held by Directors, Statutory Auditors and General Managers Stock options plans Corporate Governance Pirelli & C. S.p.A. - Summary Data Shareholders’ Resolutions

Pirelli RE operates in the urban recover project of the ex-Lanerossi area at Schio, near Vicenza.

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Introduction Pirelli & C. Ambiente The Group 2005 economic and The highlights at December 31, 2005 of Pirelli & C. Ambiente can be summarized as follows: financial review Major events in 2005 (in millions of euros) Consolidated Financial 12/31/2005 12/31/2004 Net sales 62 2 Statement Gross operating loss (2) (2) Pirelli Labs % of net sales n.s. n.s. Subsequent events Operating loss (4) (2) Outlook for the current % of net sales n.s. n.s. year Financial income (expenses) - - Tyres Sector Income taxes - - Pirelli Broadband Net loss (4) (2) Solutions % of net sales n.s. n.s. Pirelli & C. Real Estate Net financial (liquidity)/debt position 1 (2) Ī Pirelli & C. Ambiente Employees (number at period-end) 43 14 Information Systems Proforma Data The process to reorganize the companies of the Group in the Equity Investments held environmental sector continued during 2005. At the end of the by Directors, Statutory Auditors and General month of December 2004, Pirelli & C. Ambiente Holding S.p.A. Managers integrated the activities of Pirelli & C. Ambiente S.p.A., a company Stock options plans operating in the field of renewable energy sources from waste and Corporate Governance in the sector of environmental redevelopment, and Cam Tecnologie Pirelli & C. S.p.A. - S.p.A. (now Pirelli & C. Ambiente Tecnologie S.p.A.), a company Summary Data previously controlled by Camfin and a producer of low-impact Shareholders’ Resolutions environmental fuel Gecam™ - Il Gasolio Bianco (The White Diesel). Pirelli & C. Ambiente S.p.A., on July 1, 2005, then contributed the operations relating to environmental redevelopment to the subsidiary Pirelli & C. Ambiente Bonifiche S.r.l. (ex-Progetto Ambiente Gamma S.r.l.). The contribution price was fixed at Euros 0.13 million and paid through a capital increase of the same amount subscribed to entirely by Pirelli & C. Ambiente S.p.A.. Subsequently, Pirelli & C. Ambiente S.p.A. sold the entire investment in Pirelli & C. Ambiente Bonifiche S.r.l. to Pirelli & C. Gecam™, the low-impact environmental fuel - Gasolio Bianco - was also Ambiente Holding S.p.A. at the carrying amount. launched in France with excellent results.

On December 28, 2005, the company paid Euros 2.2 million to Pirelli & C. Ambiente S.p.A. to partially cover the loss of the current year. Under the current structure, Pirelli & C. Ambiente Holding S.p.A. (Pirelli & C. 51 percent, Camﬁn 45.3 percent and Centrobanca Sviluppo Impresa SGR 3.7 percent) own 100 percent of the shares of the companies Pirelli & C. Ambiente S.p.A., Pirelli & C. Ambiente Boniﬁche S.r.l. and Pirelli & C. Ambiente Tecnologie S.p.A..

Pirelli & C. Ambiente S.p.A. closed the year with a loss of Euros 2.5 million, compared to a loss of Euros 2.2 million in 2004.

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During the year, the company continued to develop its activities Introduction in the field of renewable energy sources by producing, through The Group the associate I.D.E.A. Granda S.Cons.R.L., a quality fuel (CDR-P) 2005 economic and derived from solid urban waste for the subsequent start of financial review renewable energy development through the replacement Pirelli & C. Ambiente has signed an Major events in 2005 agreement with the Re Energy Group to of primary fossil fuels in existing plants. On November 18, 2005, produce CDR-P in U.K. Consolidated Financial a contract was signed for the concession of the patent rights Statement Pirelli Labs and know-how to the company ReEnergy Group plc. The contract Subsequent events was finalized in January 2006 upon receipt of the agreed Outlook for the current consideration of about GBP 2 million. year The result for the year of Pirelli & C. Ambiente, with regard to the Tyres Sector renewable energy sector, was a loss of Euros 2.4 million compared Pirelli Broadband to a loss of Euros 2 million in 2004. Solutions The operations of the environmental redevelopment sector were Pirelli & C. Real Estate sold to the subsidiary Pirelli & C. Ambiente Bonifiche S.r.l. Ī Pirelli & C. Ambiente (ex-Progetto Ambiente Gamma S.r.l.) on July 1, 2005. The result The antismog filters developed by Pirelli Information Systems for the year of the environmental redevelopment sector was Proforma Data Ambiente Tecnologie received the a loss of Euros 0.1 million, compared to a loss of Euros 0.2 million “Environmentally Friendly Innovation Equity Investments held in 2004. Award 2005” from Legambiente and by Directors, Statutory Regione Lombardia. Auditors and General Managers Pirelli & C. Ambiente Bonifiche S.r.l. began its activities on July Stock options plans 1, 2005 following the acquisition of the business segment from Corporate Governance Pirelli & C. Ambiente S.p.A. and ended the year 2005 basically with Pirelli & C. S.p.A. - a breakeven. Summary Data Shareholders’ Resolutions The company Pirelli & C. Ambiente Tecnologie S.p.A. (ex-Cam Tecnologie S.p.A.) reported a pre-tax loss of Euros 1.1 million compared to a pre-tax loss of Euros 1.3 million last year. In 2005, the return of economic equilibrium in emulsions, in fact, only partly compensated the use of the resources necessary to carry forward the strategy of product diversification pursued by the company. To this end, additional emphasis was placed on activities related to the development, fine-tuning and sale of diesel engine after-treatment filtering systems to reduce exhaust gas emissions from “heavy” diesel engines. In the second half of the year, in fact, 110 filtering systems were invoiced (90 of which were sold to ATM Milano) for a total of approximately Euros 0.5 million. The subsidiary GECAM FRANCE, engaged in the manufacture and marketing of Gecam on the French market, basically posted a breakeven in 2005 compared to a loss of Euros 0.2 million in 2004. This improvement, due to the growth of volumes marketed which rose from about 4 million liters in 2004 to 12.5 million liters in 2005, will allow the company to reach economic equilibrium as early as the first few months of 2006.

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Introduction Information Systems The Group 2005 economic and The Information Systems of the Pirelli Group are operated and financial review coordinated through Share Service Center S.c.r.l., a company Major events in 2005 owned 50 - 50 by Pirelli and Telecom Italia S.p.A.. Consolidated Financial Statement • Architectures & Infrastructures Pirelli Labs Subsequent events As a result of the sale by Pirelli of the operations of the Energy Outlook for the current and Telecom Cables and Systems sectors (now Prysmian), year in the second half of the year, efforts were made to activate Tyres Sector and conclude all the necessary segregation of infrastructure The home page of Pirelli China’s Pirelli Broadband services (short term actions) and to define methods and action website. Solutions plans to achieve the first physical worldwide segregation between Pirelli & C. Real Estate Pirelli and Prysmian, both in terms of telecommunications and Pirelli & C. Ambiente distributed information (APIS). Ī Information Systems Proforma Data Equity Investments held In the sphere of SAP, work continued to consolidate applications by moving the SAP HR by Directors, Statutory applications of the U.K.. All the Pirelli SAP environments have been moved from the Data Center Auditors and General at Tacito to the one at Cesano Maderno. Managers In the case of the SAP One Client environment at Pirelli Tyres, the transfer of the system also Stock options plans constituted an opportunity to introduce the Real Application Cluster architecture to SAP Corporate Governance environments for the first time. This new technology will not only ensure greater availability Pirelli & C. S.p.A. - of the application, but will also make it possible to operate more effectively to improve the Summary Data performance of the system. Shareholders’ Resolutions

In the sphere of the Pirelli Group, work continued to coordinate and integrate the data transmission network. In particular, as a result of the good results obtained from MPLS technology, its use was also extended onto a European level. The release of the new WAN connection with China for the start-up of the new Pirelli Tyre operations was particularly important, together with activation of connectivity with Internet.

Finally, the Voice Over IP solution was used successfully to make telephone connections between Milan and the whole area of South America.

The process of migrating from Windows 2000 to Windows 2003 on the server of the APIS infrastructure was completed. The spread of Windows XP client side has reached approximately 14,000 users in about 30 countries in the standard APISxp solution. This includes the start-up of the standard architecture and relative services in China and Romania for the Tyres business. Consistent with the extension of some data transmission lines, some e-mail systems which were formerly resident in peripheral sites were focused on Milan. The ﬁrst tests were conducted on the 2003 version of MS Exchange and yielded positive results. The migration plan will be deﬁned in 2006.

• Pirelli Corporate For the Pirelli Group, activities focused mainly on the duplication and segregation of the Administration, Finance and Human Resources systems for Prysmian (also in their various national ramiﬁcations), in order to allow it to be completely separate from Pirelli. In the areas of Administration and Finance, other important activities involved the alignment of Group’s accounting systems with new international principles (IAS).

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Pirelli’s websites continued to attract an increasing number of visitors. Activities mainly involved Introduction the hi-tech maintenance of on-line systems, through work on the home-page, to route traffic onto The Group the numerous sites, onto Local Sites, and onto Cal 2006 and PirelliFilm. Most of the work involved 2005 economic and copying the Internet sites in order to separate the Pirelli sites from the Prysmian sites. financial review Major events in 2005 With regard to the Pirelli Portal, on the other hand, numerous areas were designed and released, Consolidated Financial Statement in addition to the activities to separate the Pirelli portal from the Prysmian portal and the completion Pirelli Labs of the upgrade to SAP EP6. Subsequent events Outlook for the current In the area of Pirelli e-commerce: the B2B systems continued to show a growth trend, both in the year number of users and services. This was the result of further growth in the trend to replace printed Tyres Sector invoices and shipping documents with a computer equivalent and the automation of procedures Pirelli Broadband (Complaints and B2Fleet). Solutions Pirelli & C. Real Estate In Pirelli’s area of e-procurement, the roll-out of the solution to the facility area of Pirelli Real Estate Pirelli & C. Ambiente was completed. This involved 200 more users and the complete digitalization of the purchasing Ī Information Systems Proforma Data process and expenditures authorization through workflow. The systems show a constant growth Equity Investments held trend in terms of the number of transactions and the number of users. by Directors, Statutory Auditors and General The most recent achievements include: Managers - the Common System Kernel for HR; Stock options plans - the modules for Segment Reporting (IAS 14) and accruals for costs and financial income and Corporate Governance expenses for Pirelli Real Estate; Pirelli & C. S.p.A. - - completion of the pilot project for the Optical Archive: introduced as part of the broader initiative Summary Data Shareholders’ Resolutions of the Tyres Sector called “One Supplier”, the aim of which is to improve efficiency in the process of registering and archiving purchase invoices; - the launch of a pilot project to eliminate paper consumption with the process to replace the mandatory books required in the Tyres Sector by electronic copies in the computer archive.

• Pirelli Tyres Activities focused on aspects of the geographical extension of the One-business/One-Client platform, the enhancement of Sell-Side solutions, the development of new applications in the Supply Chain area with the SCVT (Supply Chain Value Targeting) initiative, and, in Purchasing, with the PVT (Purchasing Value Targeting) and One-Supplier initiatives. Work continued to achieve the geographical and functional extension of Datawarehouse solutions.

In particular: • The One-business/One-client initiative was extended to Europe and LATAM. In Europe, the countries involved during the year included Turkey, Greece, Poland and Hungary. For LATAM, after Brazil, the initiative was extended to Chile, Mexico, Colombia, Argentina and Venezuela. The start-up of Romania Steelcord and Romania Tyres (with MM and FI modules) and China Truck were particularly important. Still within the sphere of SAP, the AMS (Application Maintenance Services) service, which is already active for IT and European Branches, was also extended to the U.K., Germany, Spain and Turkey. • With regard to Sell-Side, as far as the B2Fleet application is concerned, the roll-out was completed in Italy, Germany and Belgium. For the e-Crm solution, in Spain, the new TyreLIFE procedure for operating an insurance policy for tyres was released. The Contact Center solution was extended to Australia, North America and Switzerland.

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• With regard to the SCVT (Supply Chain Value Targeting) initiative, the new Direct Delivery process Introduction was activated on a European scale as was the new Track & Trace solution for managing The Group international transportation on land and at sea using the SAP Event Manager. 2005 economic and The new Cost-kit application for managing international transportation costs was released financial review worldwide. With the activation of the One-business/One-client platform, the NetPlanner and Major events in 2005 NetPots applications were activated for LATAM. With regard to the integration with new third-party Consolidated Financial logistics sites the countries involved were Australia, Switzerland and France. Statement Pirelli Labs • In the sphere of Purchasing, the PVT (Purchasing Value Targeting) program focused on the Subsequent events development and deployment of initiatives for the various product segments. Some of the most Outlook for the current important events included the solution developed for the integration and electronic exchange of year documents using the HUB Rubber Network, the release in Italy, Germany, Spain, the U.K. and Tyres Sector Turkey of the centralized management of contracts for raw materials based on the concept of PAN Pirelli Broadband Solutions European Supplier, and the homologation of raw materials. Finally, the Vendor Rating solution was Pirelli & C. Real Estate completed. Pirelli & C. Ambiente • The activities of the One-Supplier initiative focused on the new paperless solution for recording Ī Information Systems invoices from Italian suppliers. Another important achievement was the worldwide implementation Proforma Data on the e-procurement platform of the Budget Marketing procedure for the purchase of Marketing Equity Investments held services and materials and for the purchases of Intercompany Services in Italy. by Directors, Statutory Auditors and General • Important achievements in the sphere of industrial systems include the completion of the pilot Managers scheme in Spain and the extension in Germany of the MRP (Material Resource Planning) Stock options plans application using the SAP platform. In the sphere of the PCS (Production Control System), during Corporate Governance the year, the installation in Spain of the Kanban component for semifinished parts and Forklift Pirelli & C. S.p.A. - Germany was completed. In the case of SMS (Specification Management System), activities were Summary Data Shareholders’ Resolutions concentrated in Turkey, where the system was activated for both Tyre and Steelcord facilities. • In the area of R&D, activities concentrated on the release in Italy of the TTM (Tyre Test Management) application for managing outdoor test activities, and on extending the integration of SAP with the RMQ (Raw Material Quality) application worldwide. With regard to the One Lab initiative, the Compound, Chemical Lab, Mixing Lab and Physical Lab components were released at sector level.

• Pirelli BroadBand Solutions In the Systems business, work continued to consolidate the SAP ERP environment for the newly formed company Pirelli Broadband Solutions.

During the year, the following activities were worthy of note: • Implementation of the Product Lifecycle Management automation system through the development of a workﬂow of the approval process of an ECR (Engineering Change Request). Development of a dedicated interface for integrated planning management of goods arrival, goods receiving and stock movements. • Implementation of Vendor rating and reporting for assessing suppliers. • Management ﬂow of the new type of MAS products. Within the sphere of the plan to separate from the cables business, it was also decided to separate the SAP environments by creating a new application dedicated to PBS and PLABS.

• Pirelli Real Estate The information systems of Pirelli Real Estate supported the expansion of the business in the sectors of Franchising and Fund Management and extended its coverage to other Group companies.

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The main projects completed in 2005 are as follows: Introduction The Group • For the Agency network, important implementations were made with regard to the “Frazionamenti 2005 economic and e cantieri” and “Giava” applications. A special application was developed for managing real estate financial review leasing. Important integration was achieved between the agency system of real estate valuations Major events in 2005 and the application relative to non-performing property loans. Consolidated Financial • For Tertiary Asset Management, the Business Plans were issued for the acquisition of new Statement Portfolios and Office Development. Pirelli Labs Subsequent events • Franchising: work continues to complete S.I. with the release of the CRM-SAP integration, the B2B Outlook for the current function on the GIS system and Phase 1 of Real Estate Leasing Management. year Tyres Sector • Management Tableau de Bord: new Tableau de Bord were issued for NAV, Finance and the Pirelli Broadband Three-year Plan. Moreover, all the Tableau de Bord prior to the adoption of IAS were revised. Solutions • Development of the MPF information system for the management of the outsourcing of the Pirelli & C. Real Estate Pirelli & C. Ambiente Telecom Italia Facility. Ī Information Systems • Development of the Tableau de Bord of Quality for the Facility. Proforma Data Equity Investments held • For Property, the billing process was reviewed and the existing procedure was revised considerably by Directors, Statutory paper invoices were replaced by invoices in a pdf format. The anticipated and achieved objectives Auditors and General were: the invoice and the MAV addressed in a single envelope, the compensation of interest on Managers security deposits in the invoice and the relative management of automatic receipts, the automatic Stock options plans control by company and lease contract so that proper movements in the accounts (Revenues and Corporate Governance Advances) and types of documents issued could be assured. The control prevents user error and Pirelli & C. S.p.A. - resolves all financial statement problems found up to now. Summary Data Shareholders’ Resolutions • For SGR1, the constant increase in the number of funds managed was making the management of the information system at Unione Fiduciaria particularly costly. Insourcing was decided using new specific functionalities for this management in SAP, acquiring and managing in-house products specialized for the management of anti-money laundering and reports to Banca d’Italia and integrating them with SAP and directly managing the transmission of information to the Trustee Bank. This system went live on July 1, 2005 with the migration of the funds to it that existed at that time. The Berenice, Diomira and Teodora Funds were then added for a total of seven funds managed at the end of the year. • The new “SGR Opportunities” was created with its funds, Raissa and Spazio Industriale. The insourcing mentioned above created immediate added value with the creation of the new SGR (of the speculative type) because it was used to reduce the set-up times and the costs for implementation and management.

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Introduction Proforma Data The Group 2005 economic and Proforma consolidated financial data assuming the line-by-line consolidation financial review of Olimpia S.p.A. Major events in 2005 Consolidated Financial Proforma consolidated financial data at December 31, 2005 of Pirelli & C. S.p.A. is presented below, Statement Pirelli Labs assuming the consolidation line-by-line of Olimpia S.p.A.. Subsequent events Proforma adjustments Outlook for the current Consolidated Elimination of Olimpia Olimpia Total Proforma year finan. statements Olimpia S.p.A. S.p.A. consolid. proforma consolidated Tyres Sector 12/31/2005 net result line-by-line entries adjustments finan. statem. Pirelli Broadband Pirelli & C. attributable to consolid. (2) 12/31/2005 Solutions (in millions of euros) S.p.A. (1) Pirelli & C. Pirelli & C. Pirelli & C. Real Estate IAS/IFRS S.p.A. S.p.A. (3) Pirelli & C. Ambiente Condensed income statement Information Systems Net sales 4,546 - 4,546 Ī Proforma Data Operating profit 355 (1) - (1) 354 Equity Investments held Financial income (expenses)/ valuation by Directors, Statutory adjustments to financial assets 123 (152) 253 101 224 Auditors and General Income taxes (129) -- -(129) Managers Net income from continuing operations 349 (152) 252 - 100 449 Stock options plans Net income from discontinued operations 50 50 Corporate Governance Total net income 399 (152) 252 - 100 499 Pirelli & C. S.p.A. - Net income - attributable to Pirelli & C. S.p.A. 327 (152) 152 - - 327 Summary Data Reclassified balance sheet Shareholders’ Resolutions Shareholders’ equity 5,614 (152) 7,424 (4,493) 2,779 8,393 - of which shareholders’ equity - attributable to Pirelli & C. S.p.A. 5,205 (152) 4,488 (4,336) - 5,205 Net financial (liquidity)/debt position 1,177 - 3,490 - 3,490 4,667 (1) Pirelli & C. S.p.A. consolidated financial statements (investment in Olimpia S.p.A. accounted for by the equity method with Olimpia accounting for Telecom Italia by the equity method). (2) In the financial statements of Olimpia, the writedowns which it made are not considered, since the carrying amount, in transparency for Pirelli (equal to about Euros 4 per share) is in any case lower than that of Olimpia post-adjusted (Euros 4.2 per share). (3) Proforma data (line-by-line consolidation of Olimpia S.p.A.).

The proforma consolidated financial data has been prepared using: • the financial statements of Olimpia S.p.A. at December 31, 2005, adjusted to conform with IAS/IFRS, wherein the investment in Telecom Italia is accounted for by the equity method (in financial statements prepared in accordance with IAS/IFRS); • the consolidated financial statements of Pirelli & C. S.p.A. at December 31, 2005 (prepared in accordance with IAS/IFRS) wherein Olimpia S.p.A. is accounted for, in turn, by the equity method.

The principal proforma adjustments included in the above table are as follows: • in the column “Elimination of Olimpia S.p.A. net result attributable to Pirelli & C. S.p.A.”: elimination of the income statement and balance sheet effects of valuing Olimpia S.p.A. by the equity method in the Pirelli & C. S.p.A. consolidated ﬁnancial statements at December 31, 2005; • in the column “Olimpia S.p.A. line-by-line consolidation”: inclusion of the assets, liabilities, costs and revenues resulting from the ﬁnancial statements at December 31, 2005 of Olimpia S.p.A., prepared in accordance with IAS/IFRS consistent with the Pirelli Group, attributing the share of net equity and results of operations to the minority interest. It should be pointed out that the forward purchase of 124,129,937 Telecom Italia ordinary shares, concluded by Olimpia in 2001, was accounted for at original cost as an increase in the investment in Telecom Italia with a contra-entry to the relative payable account;

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• in the column “Olimpia S.p.A. consolidation entries”, the carrying amount of the Olimpia S.p.A. Introduction investment in the Pirelli & C. S.p.A. financial statements was eliminated against the underlying The Group share of the accounting net equity. 2005 economic and For purposes of this representation, the difference between the carrying amount of the Olimpia financial review S.p.A. investment in the Pirelli & C. S.p.A. consolidated financial statements and the underlying Major events in 2005 share of net equity (Euros 240 million for Pirelli & C. S.p.A.’s share equal to 60.4 percent and Consolidated Financial Euros 397 million for the entire amount) was directly deducted from shareholders’ equity (with a Statement Pirelli Labs contra-entry to the carrying amount of the Telecom Italia investment). Subsequent events Outlook for the current A comparison of shareholders’ equity and net debt between the consolidated financial statements of year Pirelli & C. S.p.A. and the proforma consolidated financial data of Pirelli & C. S.p.A. at December 31, Tyres Sector 2004 and at December 31, 2005 is presented below, assuming: Pirelli Broadband Solutions • the line-by-line consolidation of Olimpia S.p.A.; Pirelli & C. Real Estate • the line-by-line consolidation of both Olimpia S.p.A. and the Telecom Italia group. Pirelli & C. Ambiente Information Systems (in millions of euros) Shareholders’ equity Net debt Net debt/ Shareholders’ equity - Ī Proforma Data IAS/IFRS Shareholders’ equity attributable to Equity Investments held Pirelli & C. S.p.A. by Directors, Statutory 12/31/2005 12/31/2004 12/31/2005 12/31/2004 12/31/2005 12/31/2004 12/31/2005 12/31/2004 Auditors and General Pirelli & C. S.p.A. Group: Managers consolidated data 5,614 3,841 1,177 1,601 0.21 0.42 5,205 3,502 Stock options plans Pirelli & C. S.p.A. Group: Corporate Governance proforma consolidated Pirelli & C. S.p.A. - data with Olimpia S.p.A. Summary Data consolidated line-by-line 8,393 6,355 4,667 5,175 0.56 0.81 5,205 3,502 Shareholders’ Resolutions Pirelli & C. S.p.A. Group: proforma consolidated data with Olimpia S.p.A. and the Telecom Italia group consolidated line-by-line 32,029 25,307 44,525 38,037 1.39 1.50 5,205 3,502

Preliminary information Directors’ Report Sustainability Report Consolidated Financial Statements

Introduction Equity Investments held by Directors, Statutory The Group Auditors and General Managers 2005 economic and ﬁnancial review Pursuant to article 79 of Consob Regulation approved by resolution No. 11971 dated May 14, 1999, Major events in 2005 Consolidated Financial the following information is provided as regards the equity investments held in the company Pirelli & Statement C. S.p.A., and its subsidiaries, by the Directors, Statutory Auditors and General Managers, as well as Pirelli Labs spouses, not legally separated, and minor children, either directly or through subsidiaries, trustee Subsequent events companies or individual persons, resulting from the shareholders’ register at December 31, 2005, Outlook for the current from notices received or other information acquired from the same Directors, Statutory Auditors and year General Managers. Tyres Sector Pirelli Broadband Name Company in which No. of shares No. of shares No. of shares No. of shares Solutions investment held held at prior purchased/ sold held at Pirelli & C. Real Estate year-end subscribed current Pirelli & C. Ambiente year-end Information Systems Tronchetti Provera Marco Pirelli & C. 8,280 5,484 13,764 Proforma Data Pirelli & C. (indirect ownership) 884,521,171 (1) 516,766,250 (1) 77,688,146 (1) 1,323,599,275 (2) Ī Equity Investments held Pirelli & C. (indirect ownership) 1,217,398 1,217,398 by Directors, Statutory Pirelli Ambiente Holding (1) Auditors and General (indirect ownership) 10,478,000 10,478,000 Managers Pirelli Alberto Pirelli & C. 21,375 8,550 29,925 Puri Negri Carlo Alessandro Pirelli & C. 40,000 26,500 66,500 Stock options plans Pirelli & C. Real Estate S.p.A. 449,500 449,500 Corporate Governance Buora Carlo Pirelli & C. 68,688 68,688 Pirelli & C. S.p.A. - Ligresti Giulia Maria Pirelli & C. Real Estate S.p.A. 10 (3) 10 Summary Data Moratti Massimo Pirelli & C. 7,540,465 4,010,962 11,551,427 Shareholders’ Resolutions Pirelli & C. (indirect ownership) 27,173,082 (4) 10,254,650 (4) 37,427,732 Pirelli & C. (indirect ownership) 11,328,318 (4) 11,328,318 Presutti Ennio (6) Pirelli & C. 40,000 40,000 Sozzani Vincenzo (6) Pirelli & C. - Ordinary 87,106 48,733 135,839 Pirelli & C. - Savings 598 598 De Conto Claudio Pirelli & C. 53,916 1,342 55,258 Gobbi Luciano Pirelli & C. 150,000 150,000 Guatri Luigi Pirelli & C. 133,332 (3) 53,322 (3) 186,654

(1) Shares held through Camfin S.p.A. (2) Shares held through Camfin Partecipazioni S.r.l. (3) Shares held through spouse (4) Shares held through CMC (5) Shares in the name of Istifid as a trustee (6) In office until April 28, 2005

Stock Option plans

The information previously provided in accordance with Consob communication No. 11508 dated February 15, 2000 has been included in the notes to the consolidated ﬁnancial statements, as required by IAS/IFRS.

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Introduction Corporate Governance The Group 2005 economic and Introduction financial review Major events in 2005 A good system of Corporate Governance puts the Board of Directors at the center of the enterprise Consolidated Financial as the main body delegated to manage the Company in the interests of the shareholders. On the basis Statement of this system, a proper practice for disclosure of the choices and formative processes of corporate Pirelli Labs decisions must be established, along with an effective internal control system and rigorous Subsequent events monitoring of potential conflicts of interest. There must also be solid principles of conduct governing Outlook for the current interactions with related parties. year These benchmarks are firmly inscribed in the system of values Pirelli has established for the Tyres Sector definition, preparation and adoption of codes, principles and procedures regulating corporate life. Pirelli Broadband Solutions In 2005, these codes, principles and procedures were carefully reviewed and, where necessary, Pirelli & C. Real Estate updated to account for legislative and regulatory innovations, changes in the international best Pirelli & C. Ambiente practices, and developments in the Company’s operations. Information Systems At the meeting on November 11, 2005, the Board of Directors, in order further to valorize the role of Proforma Data independent directors (currently 10 out of a total of 20), decided to introduce the role of Lead Equity Investments held Independent Director, identified as the Chairman of the Committee for Internal Control and by Directors, Statutory Corporate Governance, Carlo Secchi. Auditors and General At the same meeting, the Board of Directors, exercising the powers it has been granted via the Managers bylaws pursuant to the law and in accordance with the statutory obligation to facilitate participation Stock options plans in corporate life, minimizing the related costs and charges, modified Article 7 (General Meeting) of Ī Corporate Governance the Company bylaws. In order to intervene in the Company’s general meetings, it is now sufficient Pirelli & C. S.p.A. - Summary Data that the intermediary concerned gives notice of this intention without the shareholder needing to Shareholders’ Resolutions produce any certification. In the course of the financial period, finally, the system of slate voting for the election of Board members was fully applied, introduced with a decision at the general meeting on May 11, 2004 and made applicable thanks to the Board of Directors’ members resigning for that purpose on March 22, 2005. The minority was therefore able to appoint four directors, equal to a fifth of the total number.

Pirelli & C. has adhered to the Code of Self-Discipline drawn up by the Committee for Corporate Governance of the Listed Companies (the “Code”) since it was issued. In compliance with the Instructions accompanying the Rules of the markets operated by Borsa Italiana and accounting for the indications contained in the Guidelines for the Preparation of the Report on Corporate Governance published by Borsa Italiana and in the Handbook on Corporate Governance Reports published by Assonime, the remainder of this report describes the main features of the Company’s corporate governance system and how it functioned during the year.

GOVERNANCE STRUCTURE

1. Board of Directors

1.1 The role of the Board of Directors Efficient and correct corporate governance requires the Board of Directors to have an active role in strategic guidance of the Company as well as in the effective control of management, with the power to set policies for the entire administration and to intervene directly in a variety of decisions. At Pirelli & C., the principle that the Board of Directors has the general power (as well as the duty) to manage the Company’s activities pursuing the ﬁnal and primary objective of creating value for shareholders is particularly established. Pursuant to Article 11 of the bylaws, the Board is responsible for the operation of the business

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and to this end has the broadest possible management powers, except for matters that are Introduction reserved to the shareholders’ meeting by law or the bylaws. The Group In practice, the Board of Directors exercises its powers in accordance with Article 1.2 of the 2005 economic and Code, that is, it: financial review - examines and approves the Company’s strategic, organizational, business and financial plans Major events in 2005 and the corporate structure of the group it heads; Consolidated Financial - delegates powers to the managing directors and the executive committee (if established) and Statement Pirelli Labs revokes them; it specifies the limits of such delegated powers, the manner in which they are to Subsequent events be exercised and their frequency, as a general rule, not less than once every three months, Outlook for the current with which such bodies must report to the Board on the activity performed in the exercise of year the powers delegated to them; Tyres Sector - determines, after examining the remuneration committee proposals and consulting the Board Pirelli Broadband of Statutory Auditors, the remuneration of the managing directors and of those directors who Solutions are entrusted with particular duties and, where the shareholders’ meeting has not already done Pirelli & C. Real Estate so, allocates the total amount to which the directors are entitled among the members of the Pirelli & C. Ambiente Board of Directors and the executive committee (if established); Information Systems - supervises the company’s general performance, with special reference to conflicts of interest, Proforma Data paying particular attention to the information received from the executive committee Equity Investments held by Directors, Statutory (if established), the managing directors and the internal control and corporate governance Auditors and General committee and periodically comparing the results achieved with those planned; Managers - examines and approves transactions having a significant impact on the company’s profitability, Stock options plans assets and liabilities or financial position, with special reference to transactions with related Ī Corporate Governance parties; Pirelli & C. S.p.A. - - checks the adequacy of the general organizational and administrative structure established Summary Data by the managing directors for the Company and the group; Shareholders’ Resolutions - reports to the shareholders at shareholders’ meetings. In addition, the exclusive tasks carried out by the Board include: - preparation and adoption of Company rules of corporate governance and definition of the Group’s corporate governance guidelines; - establishment of the supervisory body, pursuant to Legislative Decree 231 of June 8, 2001; - assessment and approval of periodic reports.

1.2 The composition of the Board of Directors The Company’s Board of Directors, as established by the bylaws, consists of not less than seven and not more than 23 members. The Board of Directors, in office up to April 28, 2005, consisted of the following 20 members (of which eight fulfilled the requirements for independence): Marco Tronchetti Provera (Chairman), Alberto Pirelli (Deputy Chairman), Carlo Alessandro Puri Negri (Deputy Chairman), Carlo Buora (Managing Director), Carlo Acutis, Gilberto Benetton, Carlo De Benedetti, Gabriele Galateri di Genola, Giuseppe Gazzoni Frascara, Mario Greco, Georg F. Krayer, Giulia Maria Ligresti, Massimo Moratti, Luigi Orlando, Giovanni Perissinotto, Giampiero Pesenti, Ennio Presutti, Carlo Secchi, Vincenzo Sozzani and Frank Vischer. As mentioned in the introduction to this report, in order immediately to apply the system of slate voting, provided by Article 10 of the bylaws, by means of which the minority - in cases where at least two slates are presented - is guaranteed nomination of one-fifth of the board members, all of the directors, during the Board meeting of March 22, 2005, resigned their positions as of the shareholders’ meeting of April 28, 2005, one year prior to the natural expiry of their mandates. By means of the adoption of slate voting, the minority was therefore able to appoint four directors, equal to one-fifth of the total number. Two lists were presented, one by the participants in the Pirelli & C. S.p.A. Share Block Syndicate and the other by various savings management companies. The slates proposers made the candidates’ profiles available so that the candidates’ personal and professional characteristics, as well as some candidates’ qualifications as

53 Preliminary information Directors’ Report Sustainability Report Consolidated Financial Statements

independents, were made known prior to voting. The curricula vitae presented when the slates Introduction were filed were promptly published on the Company’s website (www.pirelli.com), where they The Group remain available. 2005 economic and financial review The aforementioned meeting of April 28, 2005 established the duration of the entire Board of Major events in 2005 Directors as lasting for three financial periods (and therefore until approval of the profit and loss Consolidated Financial account on December 31, 2007) and determined the number of Board of Directors’ members as Statement being 20, currently consisting of the following1: Pirelli Labs Subsequent events Marco Tronchetti Provera Chairman Outlook for the current Alberto Pirelli Deputy Chairman year Tyres Sector Carlo Alessandro Puri Negri Deputy Chairman Pirelli Broadband Carlo Buora Managing Director Solutions Carlo Acutis Pirelli & C. Real Estate Carlo Angelici Member of the Internal Control and Corporate Pirelli & C. Ambiente Governance Committee Information Systems Proforma Data Gilberto Benetton Equity Investments held Franco Bruni Member of the Internal Control and Corporate by Directors, Statutory Governance Committee Auditors and General Carlo De Benedetti Managers Gabriele Galateri di Genola Stock options plans Ī Corporate Governance Mario Garraffo Pirelli & C. S.p.A. - Dino Piero Giarda Summary Data Berardino Libonati Chairman of the Remuneration Committee Shareholders’ Resolutions Giulia Maria Ligresti Massimo Moratti Giovanni Perissinotto Giampiero Pesenti Member of the Remuneration Committee Aldo Roveri Member of the Remuneration Committee Carlo Secchi Member of the Internal Control and Corporate Governance Committee Paolo Vagnone

Leopoldo Pirelli is Honorary Chairman of the Company. Carlo Angelici, Franco Bruni, Mario Garraffo and Aldo Roveri were minority candidates. Two of the members of the Board are executive directors as defined in Article 2.1 of the Code: the Chairman, Marco Tronchetti Provera, and the Managing Director/General Manager, Carlo Buora. Article 3.1 of the Code defines independent directors as those who: a) do not entertain, directly or indirectly or on behalf of third parties, nor have recently entertained business relationships with the company, its subsidiaries, the executive directors or the shareholder or group of shareholders who controls the company in a significant manner able to influence their independent judgment; b) neither own, directly or indirectly or on behalf of third parties, a quantity of shares enabling them to control the company or exercise a significant influence over it nor participate in shareholders’ agreements to control the company;

1 The members have been able to express themselves, in accordance with best international practices, with separate voting with respect to: (i) determination of the number of members of the Board of Directors; (ii) nomination of the directors by means of voting on the two slates presented; (iii) determination of the duration of the Board of Directors’ mandate; and (iv) determination of the compensation due the directors.

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c) are not close relatives of executive directors of the company or of persons in the situations Introduction referred to in points a) and b). The Group On the basis of the above definition, the Board has agreed that 10 of the remaining 18 directors 2005 economic and (Carlo Acutis, Carlo Angelici, Franco Bruni, Carlo De Benedetti, Mario Garraffo, Dino Piero financial review Giarda, Berardino Libonati, Giampiero Pesenti, Aldo Roveri and Carlo Secchi) can be considered Major events in 2005 independent, while the other 6 (Gilberto Benetton, Gabriele Galateri di Genola, Giulia Maria Consolidated Financial Ligresti, Massimo Moratti, Giovanni Perissinotto and Paolo Vagnone) can be considered Statement Pirelli Labs non-executive. Subsequent events Alberto Pirelli and Carlo Alessandro Puri Negri, in view of the executive positions they hold, Outlook for the current respectively, at Pirelli Pneumatici S.p.A. and Pirelli & C. Real Estate S.p.A., are considered not to year be independent. Tyres Sector It is pointed out that all of the directors qualifiable as independent are also qualifiable as Pirelli Broadband indipendents according to the requirements provided by Legislative Decree 58/1998, as modified Solutions by Law 262/2005 on savings, for the statutory auditors. Pirelli & C. Real Estate A table at the end of this chapter shows the positions which the Company’s directors hold as Pirelli & C. Ambiente director or member of the board of statutory auditors in other listed companies in Italy and Information Systems abroad, in financial, banking and insurance companies, and in other large companies. Proforma Data Equity Investments held by Directors, Statutory 1.3 Lead Independent Director Auditors and General As referred to in the introduction to this report, at its meeting of November 11, 2005, the Board Managers of Directors, in order further to valorize the role of the 10 independent directors, decided to Stock options plans introduce the role of Lead Independent Director. The Lead Independent Director, identified as the Ī Corporate Governance Chairman of the Committee for Internal Control and Corporate Governance, Carlo Secchi, will be Pirelli & C. S.p.A. - the point of reference and co-ordination for the independent directors’ requests and Summary Data contributions. Shareholders’ Resolutions The Lead Independent Director will be able, among other things, to convene – autonomously or at the request of other directors – meetings of independent directors only (known as independent directors’ executive sessions) for the discussion of matters deemed to be of interest from time to time with respect to the functioning of the Board of Directors and to management of the Company. So far, during 2006, one independent directors’ executive session has been held.

2. Shareholders’ meetings

How shareholders’ meetings work The shareholders’ meetings, which may be held in Italy in places other than the Company’s registered office, must be called within 120 days, or in special circumstances within 180 days, of the close of the fiscal year; if the meeting is called within 180 days, the directors must give the reason for the delay in their report on operations. In addition to the law and the bylaws, business in meetings is governed by the Rules of Proceeding for Shareholders’ Meetings, which were approved by the shareholders’ meeting held on May 11, 2004 and are attached hereto; they are also available on the Internet at www.pirelli.com. Shareholders’ meetings are chaired, in the following order, by the Chairman of the Board of Directors, a Deputy Chairman or a Managing Director; if there are two or more Deputy Chairmen or Managing Directors, they are chaired by the senior in age. In the absence of such persons, shareholders’ meetings are chaired by another person chosen by the shareholders with the favorable vote of the majority of the capital represented at the meeting. The Chairman of the meeting – among other things – verifies that the meeting has been duly convened; checks the identity of the persons present and their right to attend, including by way of proxies; verifies that there is a quorum; and directs the proceedings, with the faculty to change

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the order of the items on the agenda indicated in the notice convening the meeting. Introduction The Chairman also takes appropriate action to ensure orderly discussion and voting, defining the The Group procedures and verifying the results. 2005 economic and The decisions of the meeting are recorded in minutes signed by the Chairman and the Secretary financial review or the notary public. Major events in 2005 The minutes of extraordinary shareholders’ meetings must be prepared by a notary public Consolidated Financial nominated by the Chairman of the meeting. Statement Pirelli Labs Subsequent events Outlook for the current 3. The Board of Statutory Auditors year Tyres Sector The Company’s bylaws provide that the Board of Statutory Auditors consists of three statutory Pirelli Broadband auditors and for there to be two alternates. In order to allow minority shareholders to elect one Solutions statutory auditor and one alternate, Article 16 of the bylaws provides for use of the slate system, Pirelli & C. Real Estate with one statutory auditor and one alternate elected from the slate that obtains the second Pirelli & C. Ambiente largest number of votes (the minority slate). The other two statutory auditors and the other Information Systems alternate are elected from the slate that obtains the largest number of votes (the majority slate). Proforma Data Shareholders may present slates who, alone or together with others, hold at least 2 per cent of Equity Investments held the share capital entitled to vote at the ordinary shareholders’ meeting, subject to their proving by Directors, Statutory ownership of the necessary number of shares not later than two days before the date set for the Auditors and General Managers shareholders’ meeting at the first call. Each shareholder may present or participate in the Stock options plans presentation of only one slate. Ī Corporate Governance In accordance with Article 14.1 of the Code, Article 16 of the bylaws requires that the slates, Pirelli & C. S.p.A. - signed by the persons who present them, be deposited at the Company’s registered office at least Summary Data ten days before the date set for the shareholders’ meeting at the first call and made available to Shareholders’ Resolutions anyone who requests a copy. The slates must be accompanied by a curriculum vitae for each candidate and the declarations in which the candidates individually accept their candidacy and attest, on their own responsibility, that there are no grounds for ineligibility or incompatibility, and that they meet the requirements prescribed by law and the bylaws. Slates presented in violation of the above rule are considered null. Subject to ineligibility, each candidate may appear only on one slate. In addition, persons may not be elected if they do not satisfy the legal requirements for membership of a board of statutory auditors or are already statutory auditors in more than five companies listed on the Italian regulated markets other than subsidiaries of Pirelli & C. S.p.A. Slates must be divided into two sections: one for candidates for the position of statutory auditor and the other for candidates for the position of alternate. The first candidate in each section must be selected from among persons entered in the register of statutory auditors who have worked on statutory audits for a period of not less than three years. Each person entitled to vote may vote for only one slate. Additionally, according to the Company’s bylaws, the chairmanship of the Board of Statutory Auditors is to be given to the statutory auditor at the top of the slate which obtains the largest number of votes. This clause will not be applied when the Board of Statutory Auditors is next re-nominated.2 In the event of death, resignation or disqualification of a statutory auditor, he or she is replaced by the alternate elected on the same slate. If the Chairman of the Board of Statutory Auditors is replaced, the other statutory auditor elected on the same slate takes the Chair (see the note at the end of this paragraph); if it is not possible to proceed in the manner described above, a shareholders’ meeting is called to fill the vacancy or vacancies by means of a resolution approved by a relative majority of the votes cast. When the shareholders’ meeting has to appoint statutory auditors and/or alternates to bring the

2 The chairmanship of the Board is to be given to the member of the Board of Auditors taken from the minority slate, when existing; see paragraph 8 in the following section.

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board up to full complement as provided for above or in conformity with applicable law, it Introduction proceeds as follows: if statutory auditors elected from the majority slate are to be replaced, the The Group appointment is made with the favorable votes of a relative majority without being tied to a slate; 2005 economic and if, instead, statutory auditors elected from the minority slate are to be replaced, the shareholders’ financial review meeting replaces them with the favorable votes of a relative majority, choosing where possible Major events in 2005 from among the candidates on the slate from which the statutory auditor to be replaced was Consolidated Financial elected. Statement Pirelli Labs In appointing statutory auditors who for any reason are not appointed pursuant to the Subsequent events procedure specified above, the shareholders’ meeting votes according to the majorities Outlook for the current required by law. year Statutory auditors whose term of office has expired may be re-elected. Tyres Sector Participation in meetings of the Board of Statutory Auditors may – if the Chairman or his Pirelli Broadband substitute verifies the necessity – be by means of telecommunication techniques that permit Solutions participation in the discussion and equality of information for all those taking part. Pirelli & C. Real Estate Pirelli & C. Ambiente The Board of Statutory Auditors has a central role in the Company’s corporate governance Information Systems system. In particular, the Board has the duty to supervise: Proforma Data Equity Investments held - compliance with applicable law and the bylaws; by Directors, Statutory - conformity with the principles of correct management; Auditors and General - the adequacy of the organizational structure for the matters falling within its sphere of Managers competence, the adequacy of the internal control system and that of the administrative and Stock options plans Ī Corporate Governance accounting system and the latter’s reliability in correctly representing transactions; Pirelli & C. S.p.A. - - the adequacy of the instructions the Company imparts to subsidiaries on the obligations Summary Data concerning the communication of price-sensitive information3. Shareholders’ Resolutions The Board of Statutory Auditors performs its duties by exercising all the powers authorized by law and by being able to count on a constant flow of detailed information from the Company, in addition to that obtained during the Board of Directors’ meetings. In carrying out its tasks, the Board of Statutory Auditors, besides attending all the meetings of the Board of Directors and the shareholders’ meetings, participates in the meetings of the Remuneration Committee and the Internal Control and Corporate Governance Committee.

4. Composition of the share capital

On April 18, 2006 the share capital of Pirelli & C. S.p.A. was equal to Euros 2,764,715,575.44, divided into 5,316,760,722 shares with a par value of Euros 0.52 each, of which 5,181,996,293 were ordinary shares and 134,764,429 non-convertible savings shares. The foregoing data take into consideration shares deriving from requests for exercise of Pirelli & C. 2003-2006 ordinary share warrants (hereafter referred to as “warrants”) presented in full on March 13, 2006 (the share capital as of the date of approval of this report amounts to Euros 2,764,555,822.60). The share capital may increase further, up to a nominal maximum of Euros 2,819,827,565.88 by means of the issuing of a maximum of 105,984,597 ordinary shares for: - the possible exercise of 207,034,990 warrants issuance pursuant to the resolution approved by the shareholders’ meeting of May 7, 2003 on the basis of 4 warrants for one Pirelli & C. ordinary share at a price per share of Euros 0.52 (equal to the par value). The share capital indicated above already accounts for the exercise of 1,354,820,336 warrants; - the issuance of up to 54,225,850 ordinary shares with a par value of Euros 0.52 each at a price of Euros 1.15 per share, with a premium of Euros 0.63 per share, for the possible exercise of

3 Now “conﬁdential.”

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options granted to senior and junior managers of the Company and its subsidiaries and their Introduction subsidiaries as part of the “Pirelli to People” and “Group Senior Executives” stock-option The Group plans set up by Pirelli S.p.A. in 2001. 2005 economic and financial review To the best of the Company’s knowledge, no legal or natural person can exercise control Major events in 2005 pursuant to Article 93 of the Legislative Decree 58/1998. Consolidated Financial Statement Participants in the Pirelli & C. S.p.A. Block Share Syndicate, the purpose of which is to ensure Pirelli Labs Pirelli & C. share structure stability and uniformity in corporate management policy, are listed at Subsequent events the end of this chapter, along with an extract from the agreement’s text, and are also available on Outlook for the current the Company’s website: www.pirelli.com. year Tyres Sector Pirelli Broadband Information on the implementation of the code Solutions Pirelli & C. Real Estate 1. Board of Directors Pirelli & C. Ambiente Information Systems Proforma Data 1.1 Election of directors Equity Investments held Pursuant to Article 7 of the Code and Article 10 of the bylaws (already in compliance with by Directors, Statutory the nomination procedures introduced by a recent law, 262/2005, which requires a maximum Auditors and General quorum of 2.5% of the capital with voting rights for the presentation of slates and that at least Managers one director be nominated by the minority slate having obtained the greatest number of votes4), Stock options plans the Board of Directors is renewed using the slate system, which, if more than one slate is Ī Corporate Governance presented, allows minority shareholders to elect a fifth of the directors. Pirelli & C. S.p.A. - The slates presented by shareholders, signed by the persons who introduced them, must be Summary Data Shareholders’ Resolutions deposited at the Company’s registered office at least ten days prior the date set for the shareholders’ meeting at the first call and made available to anyone on request. Each shareholder may present or participate in the presentation of only one slate and each candidate may appear on only one slate, upon pain of ineligibility. Only shareholders who, alone or together with others, hold at least 2 per cent of the share capital entitled to vote at the ordinary shareholders’ meeting, may present slates, subject to their proving ownership of the necessary number of shares not later than two days prior the date set for the shareholders’ meeting at the first call. Declarations in which the candidates individually accept their candidacy and attest, on their own responsibility, that there are no grounds for ineligibility or incompatibility, and that they meet the requirements prescribed by law and the bylaws, must be deposited together with the slates within the time limit specified above. The declarations must be accompanied by a curriculum vitae for each candidate, with an indication, where appropriate, of the fact that the candidate qualifies as independent.

1.2 Meetings of the Board of Directors The bylaws do not provide for a minimum frequency of Board of Directors meetings. It is, however, the practice for the Board to convene on June 30 to examine the preliminary data, the budget project and the quarterly and biannual reports. As a general rule, at the end of the last Board meeting of each financial period, the market is informed of the timing of major company events (that is, Board and shareholders’ meetings) planned for the following financial period. Any changes are promptly communicated to the market. In November 2005, the Company distributed a schedule for five meetings in 2006. The schedule confirms the advance publication, also in 2006, of the budget documentation and the biannual report (making it possible, among other things, to take advantage of the exemption from the drawing up of the fourth 2005 quarterly report and of the second 2006 quarterly report).

4 See paragraph 8 in the following section.

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The Board meetings may take place by means of telecommunication, enabling participation of all Introduction parties concerned, with equal information, in the debate. The Group The Board of Directors meetings are convened by means of letter, telegram, fax or e-mail sent at 2005 economic and least five days prior (or, in the case of emergency, at least six hours prior) to the meetings. Each financial review director and statutory auditor in office is called to the meetings. Major events in 2005 In 2005, eight Board meetings were held, of which six were held subsequent to April 28, 2005. Consolidated Financial More than 76% of all the directors appointed on April 28, 2005 attended on average and more Statement Pirelli Labs than 81% of the independent directors. Subsequent events Apart from exceptional cases, the directors were provided with the documentation needed to Outlook for the current express an informed opinion on the items on the agenda reasonably in advance of meetings. year Three Board meetings have already been held in 2006 and at least another four are planned. Tyres Sector Pirelli Broadband 1.3 Directors’ remuneration Solutions In addition to reimbursement for expenses incurred in performing their duties, directors receive Pirelli & C. Real Estate annual fees determined by the shareholders’ meeting (Article 14 of the bylaws). Pirelli & C. Ambiente The meeting of April 28, 2005 decided “to establish a maximum of ¤1,200,000 as the total annual Information Systems compensation to the Board of Directors pursuant to Art. 2389, paragraph 1, of the Civil Code, an Proforma Data Equity Investments held amount to be distributed among its members in conformity with decisions taken in this regard by by Directors, Statutory the Board.” Auditors and General Considering the fees paid to members of the exiting Board of Directors (equal to ¤50,000 for Managers each director), the Board of Directors, at the same meeting held on April 28, 2005, established Stock options plans the distribution of the compensation as follows: Ī Corporate Governance - euros 50,000 annually for each of the 20 members of the Board of Directors; Pirelli & C. S.p.A. - Summary Data - euros 25,000 annually for each of the members of the Committee for Internal Control and Shareholders’ Resolutions Corporate Governance; - euros 20,000 annually for each member of the Committee for Remuneration, with the right being reserved to use the residual amount (euros 65,000) in the future to give the Board a margin of organizational flexibility, including for the adoption of any new governance solutions. Remuneration for directors given particular tasks is established, as proposed by the Committee for Remuneration, by the Board of Directors upon consultation with the Board of Statutory Auditors. At the present time, this applies to only one member, the Chairman and the Managing Director, having renounced the variable part of their compensation for the 2005 financial period. Information on the remuneration of the directors entrusted with special powers can be found in a chart in the notes to the financial statements for 2005. Lastly, it should be noted that there are no stock-option plans for either the executive or the non-executive directors5.

1.4 Delegated powers In light of and in accordance with the new corporate regulations established by Legislative Decree 6/2003, the Chairman and the Managing Director were equally recognized as the Company’s legal representatives, each being authorized to carry out any act pertinent to corporate activity in its various manifestations. In addition, the limits to the powers conferred – in line with those decided upon in the previous mandate (reference is made to the previous annual report on corporate governance) – were qualiﬁed as limits within the relationship between the Board’s delegating body and the parties delegated.

5 Deputy Chairman Carlo Alessandro Puri Negri and Managing Director Carlo Buora are exceptions in this respect. The former has stock options as the General Manager of Pirelli & C. Real Estate S.p.A. and the latter as General Manager of Pirelli & C. S.p.A.

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Furthermore, the Chairman, Marco Tronchetti Provera, was confirmed as having the following Introduction organizational functions: The Group - relations with shareholders and the information provided to them; 2005 economic and financial review - coordination of the Managing Directors’ activities; Major events in 2005 - formulation, in agreement with the Managing Directors, of the general strategies and Consolidated Financial development policy for the Company and the Group, to be submitted to the Board of Directors Statement together with extraordinary corporate actions; Pirelli Labs Subsequent events - proposals, to be submitted to the Board of Directors in agreement with the Managing Outlook for the current Directors, for the appointment of members of the General Managers’ Departments and, after year consulting the Remuneration Committee, for their compensation; Tyres Sector - chairmanship of the managing committees with strategic functions; Pirelli Broadband Solutions - all forms of communication to the market, with the right to delegate to the managing directors, Pirelli & C. Real Estate in accordance with what is provided by the procedure for the management and communication Pirelli & C. Ambiente to the market of privileged information, as approved by the Board on March 13, 2006; Information Systems - the right to acquire from the Managing Directors and the management of the Group all the data Proforma Data and information considered necessary to carry out the above-mentioned functions. Equity Investments held by Directors, Statutory Powers pertinent to their positions have been granted, subject to certain limits, to Claudio De Auditors and General Conto, General Manager of Administration and Control, Luciano Gobbi, General Manager of Managers Finance, and Francesco Gori, General Manager of the Tires Sector.6 Stock options plans Less broad powers have been granted to other managers of the Company to be used in their Ī Corporate Governance individual spheres of competence. Pirelli & C. S.p.A. - As in the past, in 2005 the Chairman, the Managing Director, the General Managers and the Summary Data Managers used their delegated powers only for the ordinary management of the Company’s Shareholders’ Resolutions activities (in regard to which the directors were periodically informed) and submitted the transactions which were more important from an operational or financial perspective to the Board of Directors. In fact, delegation does not mean the assignment of exclusive powers but is rather the solution adopted by the Company to ensure, in terms of the Board’s organization, the best degree of operational flexibility, both within the Company and in relation to third parties.

1.5 Provision of information to the Board of Directors Pursuant to Article 11 of the bylaws (which incorporates the prescriptions of Article 150.1 of Legislative Decree 58/1998), the Board of Directors and the Board of Statutory Auditors are kept informed, inter alia by the persons with delegated powers, about the performance of the Company, its prospects and the transactions of greatest significance for its profitability, financial position or assets and liabilities effected by the Company or its subsidiaries; in particular, such persons report any transactions in which they have an interest, for their own account or on behalf of third parties, or that are influenced by the person, if any, who performs management and coordination activities. Such reports are made promptly and at least once every three months, on occasion of the Board of Directors meetings (and the Executive Committee, if established) or by means of a written communication. In order to foster the orderly organization of the flow of information, in July, 2002 the Company adopted a procedure (included at the end of this section and available on the Company’s website at www.pirelli.com) with the rules to be followed to ensure compliance with the above-mentioned Article 150 with regard to the activities of the executive directors, both in exercising their delegated powers and in carrying out the transactions approved by the Board of Directors.

6 Analogous powers had been granted to the General Manager of the Cables and Systems Sector, Valerio Battista, who resigned in July 2005 when the sector was transferred.

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1.6 Rules of conduct for transactions with related parties Introduction The Company has also established the rules of conduct (included at the end of this section and The Group available on the Company’s website at www.pirelli.com) for transactions with related parties, 2005 economic and including intra-group business. The aim of the rules is to guarantee substantial and procedural financial review fairness and transparency by involving the Board of Directors in the related decisions. Major events in 2005 In fact, under the rules, the Board of Directors is required to give advance approval of Consolidated Financial Statement transactions with related parties, including intra-group transactions, apart from those of a Pirelli Labs customary nature and those to be concluded at arms-length conditions. To this end, a provision is Subsequent events made for the Board to be adequately informed of all the relevant aspects: the nature of the Outlook for the current relationship, the manner of carrying out the transaction, the economic and other conditions, year the evaluation procedures used, the rationale for the transaction and the Company’s interest Tyres Sector in its implementation and the associated risks. If the related party is a director or a party related Pirelli Broadband via a director, the director in question may only provide clarifications and must leave the meeting Solutions when the motion is examined and put to a vote. Depending on the nature, value and other Pirelli & C. Real Estate aspects of related-party transactions, the Board may be assisted by one or more outside experts Pirelli & C. Ambiente Information Systems in order to prevent contracts from being concluded at inappropriate conditions. According to the Proforma Data circumstances, such experts express an opinion on the economic and/or legal and/or technical Equity Investments held aspects of the transaction. by Directors, Statutory Auditors and General Managers 2. Committees Stock options plans Ī Corporate Governance 2.1 The Remuneration Committee Pirelli & C. S.p.A. - Summary Data The Board has established the Remuneration Committee from among its members, charged with Shareholders’ Resolutions fact-finding and advisory functions. In particular, this committee: a) formulates proposals for the remuneration of the Managing Directors (the variable part of which, when existing, is connected to the economic results achieved by the Group and, in some cases, to the achievement of specific objectives) and the directors who are entrusted with particular duties and, on the basis of indications provided by the Managing Directors, proposals for determining the remuneration of the Company’s senior management; b) conducts preliminary examinations of proposals for the adoption of stock-option plans.

The Committee may also request the assistance of external consultants. The Remuneration Committee meets whenever its chairman deems it to be desirable or a meeting has been requested by another member of the committee or by a Managing Director. The rules for calling meetings, for their due constitution and for decision-making are the same as those established in the bylaws for the meetings of the Board of Directors. The Board of Statutory Auditors and, when considered appropriate, other Company representatives participate in the Committee meetings. In full compliance with what is provided by Art. 8.1 of the Code, the Committee for Remuneration consists exclusively of non-executive and independent directors: Berardino Libonati (Chairman), Giampiero Pesenti and Aldo Roveri (until April 28, 2005, the Committee consisted of Ennio Presutti, as Chairman, and of Luigi Orlando and Giampiero Pesenti). In 2005 the Remuneration Committee held three meetings. The Committee examined and proposed for Board approval the retribution packages for executive directors and for the general managers, agreeing with the criteria followed in order to determine them.

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2.2 The Internal Control and Corporate Governance Committee Introduction The Board has established the Internal Control and Corporate Governance Committee The Group from among its members, charged with fact-finding and advisory functions. In particular, 2005 economic and this committee: financial review a) assists the Board of Directors in establishing the guidelines for the internal control system Major events in 2005 and periodically verifying its adequacy and effective working, so as to ensure that the risks Consolidated Financial facing the Company are managed appropriately; Statement Pirelli Labs b) evaluates the work plan prepared by the persons responsible for internal control, from whom Subsequent events it receives periodic reports; Outlook for the current c) assesses, together with the Company’s financial officers and the external auditors, year the appropriateness of the accounting standards applied and their homogeneousness for the Tyres Sector purpose of preparing the consolidated financial statements; Pirelli Broadband d) evaluates the proposals made by external auditors in order to be awarded the appointment, Solutions the audit plan and the results set out in the auditors’ report and in the letter of suggestions; Pirelli & C. Real Estate e) reports to the Board of Directors at least once every half year, on the occasion of the Pirelli & C. Ambiente approval of the draft of annual financial statements and the half-yearly report on the activity Information Systems performed and the adequacy of the internal control system; Proforma Data f) performs the additional tasks that may be assigned to it by the Board of Directors, Equity Investments held by Directors, Statutory particularly in regards to relations with the external auditors; and Auditors and General g) monitors compliance with the rules of corporate governance and their periodic updating Managers and compliance with the rules of conduct adopted by the Company and its subsidiaries. Stock options plans The Committee may also request the assistance of external consultants. This committee normally Ī Corporate Governance meets before the Board of Directors meetings are called for approval of the draft annual financial Pirelli & C. S.p.A. - statements, the half-yearly report and the quarterly reports; it also meets whenever its chairman Summary Data deems it to be desirable or a meeting has been requested by another member of the committee Shareholders’ Resolutions or by a Managing Director. The rules for calling meetings, for their due constitution and for decision-making are the same as those established in the bylaws for the meetings of the Board of Directors. The members of the Board of Statutory Auditors, the head of the Committee for Internal Control and if deemed necessary other company representatives participate in the meetings of the committee. In full compliance with what is provided by Art. 10 of the Code, the Committee consists exclusively of independent directors: Carlo Secchi (Chairman), Carlo Angelici and Franco Bruni (until April 28, 2005, the Committee consisted of Giuseppe Gazzoni Frascara, as Chairman, and of Ennio Presutti and Carlo Secchi). In 2005, the Committee for Internal Control and Corporate Governance met five times. All of its members, with the exception of one absence at one meeting, participated in all of the meetings. Also during 2005, the individual charged with internal control submitted four reports on his work to the Committee. In 2005, the committee contributed significantly to implement the Company’s corporate governance mechanisms, take part in the related analyses and in the drafting and updating of the relevant documents. In addition, the Committee participated in the process intended to improve implementation procedures concerning operations with related parties and was regularly informed on implementation of Organizational Model 231. The committee also monitored the work of the Internal Audit Department and in particular reviewed the report on the implementation of the Audit Plan. The same Committee examined and approved the audit plan prepared by the Internal Audit Department for the 2006 financial period. Finally, the Committee examined the task proposals received from the auditing Company, PricewaterhouseCoopers S.p.A.

Lastly, the Committee for Internal Control and Corporate Governance and the Board of Directors, taking into account the comments of the Board of Statutory Auditors, judged the internal control system to be adequate.

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2.3 Committee for the Nomination of Directors Introduction The Board of Directors has decided not to establish a nomination committee charged with The Group putting forward proposals for the position of director, since at present the conditions envisaged 2005 economic and by the Code for its establishment do not exist, because of the current ownership structure and, financial review above all, the statutory provision for the slate system, in view of the transparency this Major events in 2005 mechanism ensures the selection of candidates. Consolidated Financial Statement Pirelli Labs Subsequent events 3. Handling of confidential information Outlook for the current year 3.1 Disclosure of documents and information Tyres Sector In compliance with Article 6 of the Code, the Chairman of the Board of Directors is Pirelli Broadband directly responsible for dealing with confidential information, especially that which Solutions is of a price sensitive7 nature. Pirelli & C. Real Estate The release of documents and information concerning the Company and its subsidiaries Pirelli & C. Ambiente Information Systems is handled – always in agreement with the Chairman – by the Secretary to the Board Proforma Data and the Corporate Secretary for disclosures to the authorities and shareholders; Equity Investments held by the External Relations Department for communications to the press; and by the Investor by Directors, Statutory Relations Department for communications to the financial market. Auditors and General Managers The Chairman and the persons referred to above are able to consult at all times in the event of Stock options plans an urgent need to disclose documents or information. Ī Corporate Governance The Board of Directors, at its meeting of March 13, 2006, also approved a procedure for the Pirelli & C. S.p.A. - Summary Data management and communication to the market of privileged information in compliance with the Shareholders’ Resolutions relative regulation on market abuse and established a register (operative as of April 1, 2006) of persons having access to privileged information. The adoption of the new procedure is the most evident result of the work done by the working group set up by the Company to assess the consequences of the national regulation (Community Law 2004) implementing the Community Directive on Market Abuse. Both the Committee for Internal Control and Corporate Governance and the Board of Statutory Auditors were regularly updated on the working group’s activity, and agreed with its results. The text of the procedure may be consulted at www.pirelli.com.

3.2 Insider dealing The Company’s current Code of Conduct relative to insider dealing was adopted at the end of December 2002. It established obligations on conduct and information inherent to operations on financial instruments issued by Group companies and carried out by persons who, due to their positions, have access to important information. The current Code is to be considered as terminated as of April 1, 2006. As of that date, a specific new regulation issued by CONSOB will take effect, in implementation of Legislative Decree 58/1998, as modified by the law on market abuse. Pursuant to the law, directors and statutory auditors, among others, of the issuing company will be obliged to disclose to the market any insider dealing operations, as will “persons who carry out administrative, control and management functions in a quoted issuing company, as well as managers who have regular access to privileged information […] and have the power to take management decisions that may affect the evolution and future prospects of the quoted issuing company.” The Company opted to identify these managers as its Managing Directors.

7 now “conﬁdential”

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4. Internal control Introduction The Group The internal control system of Pirelli & C. and the group it heads is designed to ensure the 2005 economic and provision of correct information and adequate cover of all the group’s activities, with special financial review reference to those that are considered to be potentially at risk. Major events in 2005 It has developed as a process intended to achieve substantial and procedural fairness, Consolidated Financial transparency and accountability by ensuring that transactions and, more generally, business- Statement related activities are efficient and can be known and verified, that accounting and operational Pirelli Labs Subsequent events data are accurate, that applicable laws and regulations are complied with, and that the assets of Outlook for the current the business are safeguarded, not least with a view to prevent the perpetration of fraud against year the Company and financial markets. Tyres Sector The cardinal rules of the Company’s internal control system are: Pirelli Broadband i. separation of roles in the performance of the principal activities involved in each operating Solutions process; Pirelli & C. Real Estate ii. traceability and constant visibility of decisions; Pirelli & C. Ambiente iii. decision-making on an objective basis. Information Systems Responsibility for the internal control system lies with the Board of Directors, which lays down Proforma Data the guidelines for the system and periodically verifies that it is adequate and working effectively. Equity Investments held To this end, the Board refers to the Committee for Internal Control and Corporate Governance as by Directors, Statutory Auditors and General well as to the Internal Audit Department. This department is functionally responsible to the Managers Committee for Internal Control and Corporate Governance and hierarchically responsible to the Stock options plans Chairman of Pirelli & C. S.p.A., including for activity carried out within the context of subsidiary Ī Corporate Governance companies. Its principal task is to assess the adequacy and functionality of control-, risk- Pirelli & C. S.p.A. - management and corporate-governance processes throughout the entire Group by means of Summary Data autonomous assurance and consultancy. The work of the Internal Audit Department is carried Shareholders’ Resolutions out in accordance with its mandate and is shared with the Committee for Internal Control and Corporate Governance, relative to the following aspects: • mission; • objectives and responsibilities (independence, complete access to information, activity framework, results communication); • improvement in the quality of internal audits; • principles of professional ethics; • reference professional standards. There is also a planning and control system that focuses on individual sectors and operating units and produces a detailed monthly report for the General Managers, so that they have a useful tool with which to monitor specific activities. In order to foster compliance with the strategies and guidelines adopted by the parent company, the relevant General Managers and senior executives sit on the boards of directors of the largest subsidiaries. The internal control system described above has been further strengthened by the introduction of an organizational model that the Board of Directors approved on July 31, 2003. Intended to ensure the creation of a system responding to the specific requirements deriving from the entry into force of Legislative Decree 231/2001 on the administrative liability of companies for criminal offences committed by their employees, the model consists of a set of principles and procedures arranged in a pyramid that, starting from the base, can be summarized as follows: • Group Code of Ethics, which formulates the general principles (transparency and fairness) inspiring the conduct of business. It indicates the objectives and the values informing business activity in relation to the main stakeholders with which Pirelli & C. S.p.A. interacts on a daily basis: the shareholders, the financial market, customers and staff. • General principles of internal control, which qualify the internal control system and the field of application, which extends uniformly across the various organizational levels;

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• Lines of conduct, which set out specific rules for dealings with representatives of Introduction governmental bodies. The rules are framed in both the positive (“to be done”) and the negative The Group (“not to be done”) and translate the principles established by the Group Code of Ethics into 2005 economic and operational terms. financial review • Internal control checklists, which set out the main phases of each process, list the specific Major events in 2005 checks to be performed with a view to prevent any criminal offence, and specify the reports Consolidated Financial Statement to be transmitted to the Oversight Committee to draw the attention to situations of possible Pirelli Labs non-compliance with the procedures established in the organizational model. Subsequent events The organizational model will be reviewed periodically in light of experience in its application Outlook for the current and changes in the legal framework established by Legislative Decree 231/2001, with particular year reference to risks connected to the regulation on market abuse. The functioning of the model Tyres Sector and compliance with it are monitored by an ad hoc Oversight Committee composed of Carlo Pirelli Broadband Secchi, independent director and chairman of the Internal Control and Corporate Governance Solutions Committee, Paolo Francesco Lazzati, member of the Board of Statutory Auditors, and Sergio Pirelli & C. Real Estate Romiti, head of the Internal Audit Department. Its composition ensures that the Committee Pirelli & C. Ambiente Information Systems includes the different professional skills that contribute to the control of the Company’s Proforma Data operations. Equity Investments held The Oversight Committee is charged with making recommendations to the Board of Directors by Directors, Statutory for it to adapt the organizational model to changes in the legal framework, the nature of the Auditors and General Company’s business activities and the ways they are conducted. It reports to the Board of Managers Directors, the Internal Control and Corporate Governance Committee and the Board of Statutory Stock options plans Auditors on the checks performed and their results. Ī Corporate Governance The shareholders’ meeting of April 28, 2005 fixed the annual gross fee payable to each member Pirelli & C. S.p.A. - Summary Data of the Oversight Committee at Euros 10,000. Shareholders’ Resolutions With reference to unlisted Italian Group companies, the oversight committee has been adapted by adopting the technical and operational solution that, while respecting the mandate and the powers reserved to that body by law, is appropriate to the size and organizational context of each company. Lastly, a disciplinary system has been introduced to sanction non-compliance with the measures indicated in the organizational, operational and control systems. Finally, it should be pointed out that the Internal Audit Department of Pirelli & C. provides, when requested by the supervisory bodies of Group companies, operative assistance in the management and analysis of information flows established pursuant to Art. 6, paragraph 2, point d), of Legislative Decree 231/2001, as well as in implementation of specific audits on the basis of data received through the aforementioned information flows.

5. Relations with institutional investors and other shareholders

In line with its tradition of transparency and fairness, the Company actively promotes relations with shareholders, institutional investors and with financial analysts within the proper limits of their respective roles and periodically organizes meetings with representatives from the Italian and international financial communities. In March 1999, the Company established an Investor Relations Department to foster continuous dialogue with the financial market. The Investor Relations Department, which reports directly to Managing Director Carlo Buora, is headed by Alberto Borgia and has its own section in the Company’s website at www.pirelli.com. In this section of the website, investors can find every document of interest, in English as well as Italian, related to financial reporting (for example, the annual financial statements and the half-yearly and quarterly reports) and the Company’s corporate governance system (for example, the Rules of conduct for transactions with related parties, the Procedure for satisfying the

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requirements of Article 150.1 of Legislative Decree 58/1998, the procedure for the management Introduction and communication to the public of privileged information, the Insider Dealing Code and the The Group minutes of shareholders’ meetings). The section also gives access to press releases distributed 2005 economic and by the Company and the documentation that the Company makes available to the financial financial review community in presentations and/or meetings and information on the Company’s share capital Major events in 2005 and shareholders (including the publication of shareholders’ agreements). Consolidated Financial Statement Pirelli & C. was one of the first companies in Italy and Europe to publish specific inserts in the Pirelli Labs mass media as well as one of the first to set up a kit on its website for small investors. Subsequent events Investor queries may be sent to: e-mail: [email protected]; tel.: +39.0264422949; fax: +39.0264424686. Outlook for the current year Tyres Sector 6. Shareholders’ meetings Pirelli Broadband Solutions It is the Company’s constant policy to use shareholders’ meetings to communicate information Pirelli & C. Real Estate on the Company and its prospects to the shareholders. Obviously, it does this in accordance Pirelli & C. Ambiente Information Systems with the rules governing confidential information and, where necessary, simultaneously Proforma Data communicates the same information to the market. Equity Investments held The Company carefully considers the choice of the place, date and time for convening by Directors, Statutory shareholders’ meetings, to facilitate the participation of the shareholders. All the directors Auditors and General and all the members of the Board of Statutory Auditors make every possible effort to attend Managers the meetings, especially those directors whose positions permit them to make an important Stock options plans contribution to the discussion. Ī Corporate Governance In addition, as indicated in the introduction to this report, on November 11, 2005 the Board Pirelli & C. S.p.A. - Summary Data of Directors, exercising the powers granted to it by the bylaws pursuant to the law and in Shareholders’ Resolutions accordance with the statutory obligation to facilitate participation in corporate life, minimizing the related costs and charges, modified Article 7 (General Meeting) of the Company bylaws. In order to intervene at general meetings of the Company, it is now sufficient that the party concerned gives notice of this intention without needing to produce any certification. Two general meetings were held during 2005. The first, on January 21, 2005, in addition to approving in ordinary session the reduction of the number of directors from 22 to 20, following the resignations of Maurizio Romiti and Giovanni Ferrario, decided, in extraordinary session, on an increase in capital payment offered as an option to Company shareholders, concluded successfully in March 2005. The second general meeting, held on April 28, 2005, in addition to approving the 2004 financial period profit and loss account, decided on the following: (i) the re-nomination of the Board of Directors (as fully described in this report); (ii) the compensation to be granted to the supervisory body (established pursuant to Legislative Decree 231/2001), established as euros 10,000 annually per member; (ii) the nomination of the auditing company, confirming PricewaterhouseCoopers S.p.A. as the Group’s auditor for the 2005-2007 three-year period; and (iv) the renewal, for a further 18 months, of the authorization to acquire Company shares. In addition, a special meeting of savings shareholders was held in January of this year and confirmed Giovanni Pecorella as common representative of the shareholders.

7. Board of Statutory Auditors

The shareholders’ meeting of May 7, 2003 elected the following Board of Statutory Auditors (with effect from August 4, 2003): Luigi Guatri (Chairman), Roberto Bracchetti and Paolo Francesco Lazzati. Franco Ghiringhelli and Sebastiano Guido were appointed as alternates. The election was held using the slate voting system. The only slate was presented by the

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members of the Pirelli & C. blocking shareholders’ agreement. The Company considers the Introduction authority and reputation of the candidates proposed as a possible reason why no alternative slate The Group was presented by the minority shareholders. 2005 economic and In 2005, the Board of Statutory Auditors met 5 times (the Board also participated in financial review all Committee meetings and Company general meetings). Major events in 2005 The current Board remains in office until the profit and loss account is approved on Consolidated Financial Statement December 31, 2005 and the next general meeting must therefore decide on its re-nomination. Pirelli Labs In this regard, as also described in paragraph 3, in the “Governance Structure” section and in Subsequent events paragraph 8 below, the provisions introduced by Law 262/2005 will be observed for the Outlook for the current nomination of the Chairman of the Board, in exception to the specific statutory regulation. year Tyres Sector Pirelli Broadband 8. Law 262/2005 Solutions Pirelli & C. Real Estate On December 23, 2005, Law 262/2005, laying down the “Provisions for the protection of savings Pirelli & C. Ambiente and for the regulation of financial markets,” was approved. This law, which entered force on Information Systems 12 January 2006, introduced, among other things, new regulations on corporate governance. Proforma Data Some of the new legislative regulations, such as slate voting, the percentage of owned capital Equity Investments held necessary in order to present slates, the requirements for honorableness and independence by Directors, Statutory Auditors and General applied to statutory auditors and directors, are already in compliance with the current corporate Managers governance system adopted by the Company, as also described in other sections of this report. Stock options plans Other provisions in the Law require, on the other hand, bylaw adjustments. Some of these Ī Corporate Governance adjustments are necessarily subject to the issuing by the authorities of the implementing Pirelli & C. S.p.A. - measures while others are immediately applicable. These include the provision relative to Summary Data nomination of the Chairman of the Board of Statutory Auditors, reserved to the minority slate Shareholders’ Resolutions by Law 262/2005, as opposed to what is currently provided by Article 16 of Pirelli & C.’s corporate bylaws that, on the contrary, grant such nomination to the head of the majority slate. For this reason, when the Board of Statutory Auditors is re-nominated as part of the agenda fir the next general meeting, the statutory provision referred to will not be applied by the Company, and therefore: - the current statutory system for election by means of voting on competitive slates will be applied, while the holding of the position of statutory auditor in more than five other quoted companies outside the Group will be retained as a reason for ineligibility; - the statutory clause relative to nomination of the Chairman of the Board of Statutory Auditors will not be applied. Finally, it is pointed out that, at the April general meeting, what is provided by Article 2400, as referred to in the previous paragraph, will be applied, as a result of which “as of when the nomination is made and before the position is accepted” the administrative and auditing positions held by the statutory auditors in other companies will be made known to the general meeting.”

The following tables summarize the Company’s procedures for adopting the principal recommendations of the Code: • Structure of the Board of Directors, the Remuneration Committee and the Committee for Internal Control and Corporate Governance. • Structure of the Board of Statutory Auditors. • Other provisions of the Code. • Positions of director or member of the board of statutory auditors held by the Company’s directors and statutory auditors in other listed companies, in ﬁnancial, banking and insurance companies, and in other large companies.

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Table 1 STRUCTURE OF THE BOARD OF DIRECTORS AND THE BOARD COMMITTEES Board of Directors (1) Committee for Remuneration Internal Control Committee Position Name executive non-executive independent **** Number *** **** *** **** of other positions ** Chairman Marco Tronchetti Provera X 100% 6 Deputy Chairman Alberto Pirelli X 100% 6 Deputy Chairman Carlo Alessandro Puri Negri X 83% 15 Managing Director Carlo Buora X 100% 7 Director Carlo Acutis X X 67% 13 Director Carlo Angelici (*) X X 83% 1 X 100% Director Gilberto Benetton X 50% 11 Director Franco Bruni (*) X 83% 3 X 100% Director Carlo De Benedetti X X 50% 12 Director Gabriele Galateri di Genola X 33% 15 Director Mario Garraffo (*) X X 100% 4 Director Dino Piero Giarda X X 83% 4 Director Berardino Libonati X X 83% 7 X 100% Director Giulia Maria Ligresti X 100% 11 Director Massimo Moratti X 50% 5 Director Giovanni Perissinotto X 33% 13 Director Giampiero Pesenti X X 67% 12 X 50% (2) Director Aldo Roveri (*) X X 100% - X 100% Director Carlo Secchi X X 100% 6 X 100% Director Paolo Vagnone X 67% 9 Number of meetings held during the year Board of Directors: Committee for Internal Control: Remuneration Committee: (the data refer to the entire ﬁnancial period): 8 5 3 (of which 2 before (of which 2 before (of which 1 before 28 April 2005) 28 April 2005) 28 April 2005) LEGEND * Indicates that the director was elected from a slate presented by minority shareholders (quorum required: 2% of voting stock). ** The positions held on the board of directors or statutory auditors of other companies listed on Italian and foreign regulated markets, of ﬁnancial, banking and insurance companies, and of other large companies are shown in detail in the Report on Corporate Governance. *** The “X” in one of these columns indicates membership of the relevant Board Committee. **** Indicates the attendance of directors at the meetings of the Board of Directors and the Board Committees. (1) The data in the table refer to the members of the Board of Directors nominated on 28 April 2005. The previous Board consisted of the following: Marco Tronchetti Provera (Chairman), Alberto Pirelli (Deputy Chairman), Carlo Alessandro Puri Negri (Deputy Chairman), Carlo Buora (Managing Director), Carlo Acutis, Gilberto Benetton, Carlo De Benedetti, Gabriele Galateri di Genola, Giuseppe Gazzoni Frascara, Mario Greco, Georg F. Krayer, Giulia Maria Ligresti, Massimo Moratti, Luigi Orlando, Giovanni Perissinotto, Giampiero Pesenti, Ennio Presutti, Carlo Secchi, Vincenzo Sozzani, Frank Vischer; two meetings were held before 28 April 2005, with an overall attendance rate of more than 70%. (2) Mr Pesenti was a member of the Committee for Remuneration before 28 April 2005 as well; in 2005, he thus attended a total of two meetings out of three (67%).

Table 2 BOARD OF STATUTORY AUDITORS Position Name Attendance at Number of other Board meetings positions held** Chairman Luigi Guatri 80% 4 Auditor Roberto Bracchetti 100% 2 Auditor Paolo Francesco Lazzati 100% 2 Auditor Franco Ghiringhelli Auditor Sebastiano Guido Number of meetings held during the year: 5 Quorum required for the presentation of slates by minority shareholders for the election of auditors (Article 148 of the Consolidated Law on Finance): 2% LEGEND * Indicates that the statutory auditor/alternate was elected from a slate presented by minority shareholders. ** Indicates the number of positions held on the boards of statutory auditors of other companies listed on Italian regulated markets (excluding Pirelli Group companies). The main positions held in listed and unlisted companies are shown in detail in the Report on Corporate Governance.

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Table 3 Introduction OTHER PROVISIONS OF THE SELF-REGULATORY CODE The Group YES NO Summary reasons for 2005 economic and divergence from the financial review recommendations Major events in 2005 of the Code Consolidated Financial Delegated powers and transactions with related parties Statement The Board of Directors has delegated powers and established: a) the limits to such powers? X Pirelli Labs b) the manner of exercising them? X Subsequent events c) the frequency of reports? X Outlook for the current Has the Board reserved the right to examine and approve transactions year having a significant impact on the Company’s profitability, assets and Tyres Sector liabilities or financial position (including transactions with related parties)? X Pirelli Broadband Has the Board established guidelines for identifying Solutions “significant” transactions? X Pirelli & C. Real Estate Are the above guidelines described in the report? X Pirelli & C. Ambiente Has the Board established special procedures for examining and Information Systems approving transaction with related parties? X Proforma Data Are the procedures for approving transaction with related Equity Investments held parties described in the report? X by Directors, Statutory Auditors and General Procedures used for the most recent appointments of the Managers Board of Directors and the Board of Auditors Stock options plans Were the nominations to the board of directors filed Ī Corporate Governance at least ten days in advance? X Pirelli & C. S.p.A. - Were the nominations to the board of directors accompanied Summary Data by detailed information? X Shareholders’ Resolutions Were the nominations to the board of directors accompanied by an indication as to whether they qualified as independent? X Were the nominations to the board of statutory auditors filed at least ten days in advance? X Were the nominations to the board of statutory auditors accompanied by detailed information? X

Shareholders’ meetings Has the Company approved rules of proceeding for shareholders’ meetings? X Are these rules included in the report (or does the report indicated where they can be obtained/downloaded)? X

Internal control Has the Company appointed the persons responsible for internal control? X Are such persons hierarchically independent from the heads of the operating units? X Unit responsible for internal control (ex Art. 9.3 of the Code) X

Investor relations Has the Company appointed a person to be responsible for investor relations? X Unit and contact details of the person responsible for investor relations. X(1)

1 Investor Relations Department (directly under Managing Director Carlo Buora), headed by Alberto Borgia; Contact details: e-mail [email protected]; tel.: +39.02.64422949; fax: +39.02.64424686.

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Positions of Director or Statutory Auditor held by the members of the Board of Directors Introduction and the Board of Statutory Auditor in other listed companies, in financial, banking and The Group insurance companies of relevant dimensions 2005 economic and financial review Major events in 2005 Marco Tronchetti Provera Camfin S.p.A. Chairman G.P.I. – Gruppo Partecipazioni Industriali S.p.A. Chairman Consolidated Financial Marco Tronchetti Provera & C. S.a.p.A. Chairman Statement Olimpia S.p.A. Chairman Pirelli Labs Pirelli & C. Real Estate S.p.A. Chairman Subsequent events Telecom Italia S.p.A. Chairman Outlook for the current Alberto Pirelli FIN. AP. di Alberto Pirelli & C. A.p.A. Chairman year G.P.I. – Gruppo Partecipazioni Industriali S.p.A. Deputy Chairman Tyres Sector Camfin S.p.A. Director Pirelli Broadband G.I.M. – Generale Industrie Metallurgiche S.p.A. Director Solutions Olimpia S.p.A. Director Pirelli & C. Real Estate SMI –Società Metallurgica Italiana S.p.A. Director Pirelli & C. Ambiente Carlo Alessandro Partecipazioni Finanziarie S.r.l. Chairman Information Systems Puri Negri Partecipazioni Real Estate S.p.A. Chairman Proforma Data Pirelli & C. Real Estate Franchising Holding S.r.l. Chairman Equity Investments held Pirelli & C. Real Estate Opportunities SGR S.p.A. Chairman by Directors, Statutory Pirelli & C. Real Estate SGR S.p.A. Chairman Pirelli & C. Ambiente Holding S.p.A. Deputy Chairman and Managing Director Auditors and General Pirelli & C. Real Estate S.p.A Deputy Chairman and Managing Director Managers Camfin S.p.A. Deputy Chairman Stock options plans G.P.I. – Gruppo Partecipazioni Industriali S.p.A. Managing Director Ī Corporate Governance Aon Italia S.p.A. Director Pirelli & C. S.p.A. - Capitalia S.p.A. Director Eurostazioni S.p.A. Director Summary Data Istituto Europeo di Oncologia S.r.l. Director Shareholders’ Resolutions Olimpia S.p.A. Director Telecom Italia S.p.A. Director

Carlo Buora Telecom Italia S.p.A. Managing Director Istituto Europeo di Oncologia S.r.l. Director Mediobanca S.p.A. Director Olimpia S.p.A. Director Pirelli & C. Real Estate S.p.A. Director RCS MediaGroup S.p.A. Director RAS S.p.A. Director

Carlo Acutis BPC Investimenti SGR S.p.A. Chairman Vittoria Assicurazioni S.p.A. Deputy Chairman Banca Passadore & C. S.p.A. Deputy Chairman Camﬁn S.p.A. Director Ergo Italia S.p.A. Director Ergo Assicurazioni S.p.A. Director Ergo Previdenza S.A. Director Vittoria Capital N.V. Director Yura S.A. Director Yura International Holding B.V. Director SCOR S.A. Director Cogedim SA Member of the “Conseil de Surveillance” Yam Invest N.V. Member of the “Supervisory Board”

Carlo Angelici Stretto di Messina S.p.A. Director

Gilberto Benetton Autogrill S.p.A. Chairman Edizione Holding S.p.A. Chairman Olimpia S.p.A. Deputy Chairman Telecom Italia S.p.A. Deputy Chairman Aldeasa S.A. Director Autostrade S.p.A. Director Benetton Group S.p.A. Director Infrastrutture e Sviluppo S.p.A. Director

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Gilberto Benetton Lloyd Adriatico S.p.A. Director Introduction Mediobanca S.p.A. Director Schemaventotto S.p.A. Director The Group 2005 economic and Franco Bruni Unicredit Audit S.p.A. Director ﬁnancial review Unicredit Banca Mobiliare S.p.A. Director Major events in 2005 Pioneer Global Asset Management S.p.A. Director Consolidated Financial Carlo De Benedetti Carlo De Benedetti & Figli S.a.p a. Member of the Board of Managing Partners Statement BIM Alternative Investments SGR S.p.A. Chairman Pirelli Labs CDB Web Tech S.p.A. Chairman Subsequent events CIR S.p.A. Chairman Outlook for the current COFIDE S.p.A. Chairman year Management & Capitali S.p.A. Chairman ROMED S.p.A. Chairman Tyres Sector Banca Intermobiliare di Investimenti e Pirelli Broadband Gestioni S.p.A. Director Solutions Gruppo Editoriale L’Espresso S.p.A. Director Pirelli & C. Real Estate SOGEFI S.p.A. Director Pirelli & C. Ambiente Valeo SA Director Information Systems Gabriele Galateri di Genola Mediobanca S.p.A. Chairman Proforma Data Istituto Europeo di Oncologia S.r.l. Chairman Equity Investments held Istituto Italiano di Tecnologia Chairman by Directors, Statutory Centro Cardiologico Monzino Chairman Auditors and General Assicurazioni Generali S.p.A. Deputy Chairman Managers RCS Mediagroup S.p.A. Deputy Chairman Accor S.A. Director Stock options plans Banca CRS S.p.A. Director Ī Corporate Governance Banca Esperia S.p.A. Director Pirelli & C. S.p.A. - IFI S.p.A. Director Summary Data Italmobiliare S.p.A. Director Shareholders’ Resolutions San Faustin N.V. Director Sifalberghi S.r.l. Director UTET S.p.A. Director Commerzbank A.G. Member of the Central Advisory Board

Mario Garaffo RCN Finanziaria S.p.A. Director Recordati Industria Chimica e Farmaceutica S.p.A. Director TERNA - Rete Elettrica Nazionale S.p.A. Director Virtus Holding S.p.A. Director

Dino Piero Giarda Banca Popolare Italiana Chairman BiPielle Investimenti S.p.A. Chairman Cassa del Trentino S.p.A. Chairman Acea S.p.A. Director

Berardino Libonati Banca di Roma S.p.A. Chairman Swiss RE Italia S.p.A. Chairman Unidroit Chairman Acotel Group Director Edizioni Scientiﬁche Italiane - E.S.I. S.p.A. Director Mediobanca Banca di Credito Finanziario S.p.A. Director Nomisma - Società di Studi Economici S.p.A. Director

Giulia Maria Ligresti Premaﬁn Finanziaria Holding di Partecipazioni S.p.A. Chairman and Managing Director FONSAI MB&A S.p.A. Chairman SAIFIN S.p.A. Chairman Fondiaria SAI S.p.A. Deputy Chairman SAI Holding Italia S.p.A. Managing Director Finadin S.p.A. Managing Director Istituto Europeo di Oncologia S.r.l. Director Milano Assicurazioni S.p.A. Director Sailux S.A. Director Sainternational S.A. Director Telecom Italia Media S.p.A. Director

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Massimo Moratti Angelo Moratti Sapa di GianMarco e Massimo Moratti Member of the Board of Managing Partners Introduction SARAS S.p.A. Raffinerie Sarde Managing Director The Group Interbanca S.p.A. Director 2005 economic and Sarint S.A. Director ﬁnancial review Telecom Italia S.p.A. Director Major events in 2005 Giovanni Perissinotto Banca Generali Chairman Consolidated Financial Generali Asset Management Sgr S.p.A. Chairman Statement Generali Finances S.A. Chairman Pirelli Labs Generali Properties Chairman Subsequent events Assicurazioni Generali S.p.A. Managing Director and General Manager Outlook for the current Alleanza Assicurazioni S.p.A. Director Assitalia S.p.A. Director year Banca Intesa S.p.A. Director Tyres Sector Banca Nazionale del Lavoro S.p.A. Director Pirelli Broadband BSI - Banca della Svizzera Italiana S.A. Director Solutions INA Vita S.p.A. Director Pirelli & C. Real Estate Participatie Maatschappij Graafschap Director and member of Holland N.V. Supervisory Board Pirelli & C. Ambiente Transocean Holding Corporation Director Information Systems Proforma Data Giampiero Pesenti Franco Tosi S.r.l. Chairman Equity Investments held Italcementi S.p.A. Chairman Italmobiliare S.p.A. by Directors, Statutory Chairman and Managing Director Ciment Francais Deputy Chairman Auditors and General Fincomind AG Deputy Chairman Managers Ciments du Maroc Director Stock options plans Compagnie Monegasque de Banque Director Ī Corporate Governance Credit Mobilier de Monaco Director Finter Bank Zurich Director Pirelli & C. S.p.A. - Mittel S.p.A. Director Summary Data RAS - Riunione Adriatica di Sicurtà S.p.A. Director Shareholders’ Resolutions Soparﬁnter SA (Luxembourg) Director

Aldo Roveri

Carlo Secchi Fastweb S.p.A. Director Fondazione Teatro alla Scala Director Lloyd Adriatico S.p.A. Director Parmalat S.p.A. Director Tangenziali Esterne di Milano S.p.A. Director Veneranda Fabbrica del Duomo Director

Paolo Vagnone Allianz Subalpina S.p.A. Chairman L’Assicuratrice Italiana Danni S.p.A. Chairman and Managing Director L’Assicuratrice Italiana Vita S.p.A. Chairman Rasbank S.p.A. Deputy Chairman Creditras Vita S.p.A. Deputy Chairman Creditras Assicurazioni S.p.A. Deputy Chairman RAS S.p.A. Managing Director Mondial Assistance Italia S.p.A. Director Unicredito Italiano S.p.A. Director

Luigi Guatri BPU – Banche Popolari Unite ScpA Chairman Board of Statutory Auditors Centrobanca S.p.A. Chairman Board of Statutory Auditors Italcementi S.p.A. Chairman Board of Statutory Auditors Italmobiliare S.p.A. Chairman Board of Statutory Auditors Movi Lemar S.p.A. Chairman Board of Statutory Auditors Movi S.p.A. Chairman Board of Statutory Auditors Permasteelisa S.p.A. Chairman Board of Statutory Auditors Rhiﬁm S.p.A. Chairman Board of Statutory Auditors Wimed S.p.A. Chairman Board of Statutory Auditors ABCGroup S.p.A. Chairman Board of Director Finanziaria 2000 S.p.A. Chairman Board of Director Vittoria Assicurazioni S.p.A. Chairman Board of Director

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Luigi Guatri Walter Mieli S.p.A. Chairman Board of Director Introduction Banco di Desio e della Brianza Director Consulenti Associati S.p.A. Director The Group Granitifiandre S.p.A. Director 2005 economic and Maffei S.p.A. Director financial review Negri Bossi S.p.A. Director Major events in 2005 SO.PA.F. S.p.A. Director Consolidated Financial Roberto Bracchetti Actelios S.p.A. Chairman Board of Statutory Auditors Statement Alsco Italia S.r.l. Chairman Board of Statutory Auditors Pirelli Labs Biochimici PSN S.p.A. Chairman Board of Statutory Auditors Subsequent events Borgo Antico S.r.l. Chairman Board of Statutory Auditors Outlook for the current Bruno Sforni S.p.A. Chairman Board of Statutory Auditors year Cantoni ITC S.p.A. Chairman Board of Statutory Auditors Durkopp Adler Italia S.r.l. Chairman Board of Statutory Auditors Tyres Sector Elba S.p.A. Chairman Board of Statutory Auditors Pirelli Broadband FAG Italia S.p.A. Chairman Board of Statutory Auditors Solutions Fidim S.r.l. Chairman Board of Statutory Auditors Pirelli & C. Real Estate Impar S.r.l. Chairman Board of Statutory Auditors Pirelli & C. Ambiente Mediolanum Farmaceutici S.p.A. Chairman Board of Statutory Auditors Olimpia S.p.A. Chairman Board of Statutory Auditors Information Systems Pirelli & C. Ambiente S.p.A. Chairman Board of Statutory Auditors Proforma Data Pirelli & C. Ambiente Bonifiche S.r.l. Chairman Board of Statutory Auditors Equity Investments held Pirelli & C. Ambiente Holding S.p.A. Chairman Board of Statutory Auditors by Directors, Statutory Pirelli & C. Real Estate S.p.A. Chairman Board of Statutory Auditors Auditors and General Pirelli & C. Real Estate SGR S.p.A. Chairman Board of Statutory Auditors Pirelli & C. Real Estate Project Management S.p.A. Chairman Board of Statutory Auditors Managers Pirelli & C. Real Estate Opportunities SGR S.p.A. Chairman Board of Statutory Auditors Stock options plans Prima S.r.l. Chairman Board of Statutory Auditors Ī Corporate Governance PSN Group S.p.A. Chairman Board of Statutory Auditors Pirelli & C. S.p.A. - Ratti S.p.A. Chairman Board of Statutory Auditors Summary Data Rottapharm S.p.A. Chairman Board of Statutory Auditors RRL Immobiliare S.p.A. Chairman Board of Statutory Auditors Shareholders’ Resolutions SIM S.p.A. Chairman Board of Statutory Auditors Sir.Tess S.p.A. Chairman Board of Statutory Auditors Spencer Stuart Italia S.r.l. Chairman Board of Statutory Auditors ABB S.p.A. Statutory Auditors ACB Group S.p.A. Statutory Auditors Alstom S.p.A. Statutory Auditors Alstom Power Italia S.p.A. Statutory Auditors Coface Assicurazioni S.p.A. Statutory Auditors Coface Factoring Italia S.p.A. Statutory Auditors Coface Service S.p.A. Statutory Auditors Energia S.p.A. Statutory Auditors Energia Holding S.p.A. Statutory Auditors Energia Italiana S.p.A. Statutory Auditors Iniziative Immobiliari S.r.l. Statutory Auditors Iniziative Retail S.r.l. Statutory Auditors Isringhausen S.p.A. Statutory Auditors La Rinascente S.r.l. Statutory Auditors La Viscontea Immobiliare S.r.l. Statutory Auditors Landinvest S.r.l. Statutory Auditors Luceplan S.p.A. Statutory Auditors Rinascente/Upim S.p.A. Statutory Auditors Tamerice Immobiliare S.r.l. Statutory Auditors Tiglio 1 S.r.l. Statutory Auditors Upim S.r.l. Statutory Auditors Velluti Redaelli S.p.A. Statutory Auditors Verbund Italia S.p.A. Member of Supervisory Board

Paolo Francesco Lazzati Amiata Energia S.p.A. Chairman Board of Statutory Auditors Apogeo S.r.l. Chairman Board of Statutory Auditors Aree Urbane S.r.l. Chairman Board of Statutory Auditors Baleri Italia S.p.A. Chairman Board of Statutory Auditors Casaclick S.p.A. Chairman Board of Statutory Auditors Creval Banking S.p.A. Chairman Board of Statutory Auditors Feltrinelli Libra S.p.A. Chairman Board of Statutory Auditors Fin Fashion Group S.p.A. Chairman Board of Statutory Auditors

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Paolo Francesco Lazzati Finpol S.p.A. Chairman Board of Statutory Auditors Introduction Free SIM SpA Chairman Board of Statutory Auditors Giangiacomo Feltrinelli Editore S.r.l. Chairman Board of Statutory Auditors The Group Kowalski Editore S.r.l. Chairman Board of Statutory Auditors 2005 economic and Imation S.p.A. Chairman Board of Statutory Auditors financial review Invoicing S.r.l. Chairman Board of Statutory Auditors Major events in 2005 MCS & Partners S.r.l. Chairman Board of Statutory Auditors Consolidated Financial Molteni S.p.A. Chairman Board of Statutory Auditors Monit S.p.A. - Monetaria Italiana Chairman Board of Statutory Auditors Statement Parcheggi Bicocca S.r.l. Chairman Board of Statutory Auditors Pirelli Labs Pirelli Pneumatici S.p.A. Chairman Board of Statutory Auditors Subsequent events Pirelli & C. Real Estate Agency S.p.A. Chairman Board of Statutory Auditors Outlook for the current Pirelli & C. Real Estate Energy S.p.A. Chairman Board of Statutory Auditors year Pirelli & C. Real Estate Franchising S.p.A. Chairman Board of Statutory Auditors OASI Chairman Board of Statutory Auditors Tyres Sector Prysmian S.r.l. Chairman Board of Statutory Auditors Pirelli Broadband Prysmian Cavi e Sistemi Energia S.r.l. Chairman Board of Statutory Auditors Solutions Prysmian Cavi e Sistemi Telecom S.r.l. Chairman Board of Statutory Auditors Pirelli & C. Real Estate Società degli Avi per Azioni Chairman Board of Statutory Auditors Pirelli & C. Ambiente Sorocaima S.p.A. Chairman Board of Statutory Auditors Spazio Industriale 2 S.r.l. Chairman Board of Statutory Auditors Information Systems Spazio Industriale 3 S.r.l. Chairman Board of Statutory Auditors Proforma Data USO S.r.l. Statutory Auditors Equity Investments held Alfa S.r.l. Statutory Auditors by Directors, Statutory Antonio Cerruti e C. S.a.pA. Statutory Auditors Auditors and General Attività Finanziarie Immobiliari S.p.A. Statutory Auditors Bernini Immobiliare Statutory Auditors Managers Camfin S.p.A Statutory Auditors Stock options plans CAM Partecipazioni S.r.l. Statutory Auditors Ī Corporate Governance Castello S.r.l. Statutory Auditors Pirelli & C. S.p.A. - Credito Artigiano S.p.A Statutory Auditors Summary Data Dear Cinestudi S.p.A. Statutory Auditors Dear Immobiliare S.p.A. Statutory Auditors Shareholders’ Resolutions Dixia S.r.l. Statutory Auditors Ecla S.p.A. Statutory Auditors Edilnord Gestioni S.p.A. Statutory Auditors EFFE 2005 Finanziaria Feltrinelli S.p.A. Statutory Auditors EFFE.COM S.r.l. Statutory Auditors Elesa S.p.A. Statutory Auditors Erogasmet Holding S.p.A. Statutory Auditors Finlibri S.r.l. Statutory Auditors Giangiacomo Feltrinelli Editore S.r.l. Statutory Auditors Grafica Sipiel S.r.l. Statutory Auditors Kedrios S.p.A. Statutory Auditors ICIERRE S.r.l. Statutory Auditors ILMA Plastica S.r.l. Statutory Auditors Istituto Centrale delle Banche Popolari Italiane SpA Statutory Auditors Librerie Feltrinelli S.r.l. Statutory Auditors Lanificio Fratelli Cerruti S.p.A. Statutory Auditors Orione Immobiliare Prima S.p.A. Statutory Auditors Pino Partecipazioni S.p.A. Statutory Auditors Pirelli & C. Real Estate Franchising Holding S.r.l. Statutory Auditors Pirelli & C. Real Estate SGR SpA Statutory Auditors Pirelli & C. Real Estate Opportunities SGR S.p.A. Statutory Auditors Progetto Bicocca La Piazza S.r.l. Statutory Auditors Progetto Corsico S.r.l. Statutory Auditors Progetto Fontana S.r.l. Statutory Auditors Tau S.r.l. Statutory Auditors Thesia S.p.A. Statutory Auditors Verdi S.r.l. Statutory Auditors Vivigas S.p.A. Statutory Auditors Comocalor S.p.A. Director Elle Servizi S.r.l. Director Finaval S.p.A. Director Mirage S.r.l. Director Profida S.r.l. Director Pro Juvara S.r.l. Director Stone S.r.l Director

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Procedure for compliance with the requirements of article 150.1 Introduction of legislative decree 58/1998 The Group 2005 economic and financial review Premise Major events in 2005 Consolidated Financial According to Article 150.1 of Legislative Decree 58/1998 (hereinafter “Consolidated Law on Statement Financial Intermediation”) “the directors shall promptly inform the Board of Statutory Auditors, Pirelli Labs in the manner laid down in the bylaws and at least every three months, of the activities carried Subsequent events out and the transactions having a significant impact on the company’s profitability, financial Outlook for the current position or assets and liabilities effected by the company or its subsidiaries; in particular, year they shall report on any transaction in which they have an interest on their own behalf Tyres Sector or on behalf of third parties, or which is influenced by the party exercising management Pirelli Broadband 8 Solutions and coordination activities” . Pirelli & C. Real Estate Pursuant to the above-mentioned provision and in the light of Consob’s communications regarding 9 Pirelli & C. Ambiente corporate controls, this procedure defines the persons and transactions involved in the flow Information Systems of information directed to the Board of Auditors of Pirelli & C. S.p.A. (hereinafter “Pirelli” or Proforma Data “the Company”) and the phases and timetable of that flow. In particular, the procedure defines: Equity Investments held 1. the method, frequency and content of information; by Directors, Statutory 2. the collection of the information. Auditors and General This procedure thus aims, in the first place, to provide the Board of Statutory Auditors with Managers information serving for the performance of the oversight activity entrusted to it by the Consolidated Stock options plans Law on Financial Intermediation (Article 149). Ī Corporate Governance Secondly, this procedure implements corporate governance instruments that put into practice the Pirelli & C. S.p.A. - Summary Data recommendations contained in the Self-Regulatory Code of Conduct drawn up by the Committee for Shareholders’ Resolutions the Corporate Governance of Listed Companies, which Pirelli has adopted from the time it was issued. In particular, by enhancing the transparency of the Company’s operations, it enables each director to participate in its management in a more knowledgeable and informed manner. Moreover, the procedure activates flows of information between directors exercising delegated powers and the Board, in accordance with the recommendations of the Self-Regulatory Code of Conduct, with a view both to sanctioning the “centrality” of the Board in its entirety and strengthening the functions of internal control.

Method, frequency and content of information The Board of Directors, possibly by means of delegated organs, every three months shall send the Board of Auditors a specific written report on: a) the activity carried out; b) transactions having a significant impact on the Company’s profitability, financial position or assets and liabilities; c) transactions potentially involving a conflict of interest, that is to say: c1) intra-group transactions; c2) transactions with related parties other than intra-group transactions;

8 This provision is implemented by Article 11.3 of the Bylaws of Pirelli & C. S.p.A.: “The Board of Directors and the Board of Statutory Auditors are kept informed, also by the delegated bodies, about the activities carried out, the general performance of operations, the future outlook and the most important economic, financial and equity transactions carried out by the Company and its subsidiaries; in particular, the delegated bodies refer about transactions in which they have an interest, on their own behalf or on behalf of third parties, or transactions that are influenced by the party, if any, exercising management and coordination activities. Communication is given on a timely basis and, in any case, at least quarterly, at meetings of the Board of Directors and Executive Committee, if appointed, or by written communication.” 9 Currently, Consob Communications 97001574 of 20 February 1997 and 1025564 of 6 April 2001; see also Consob Communication 2064231 of 30 September 2002 concerning the definition of the notion of “related parties”.

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d) atypical or unusual transactions and any other activity or transaction which it is considered Introduction appropriate to report to the Board of Auditors. The Group The information supplied shall refer to the activity performed and the transactions effected in the 2005 economic and period of time following that covered by the previous report. financial review The report in question shall be transmitted simultaneously to all the directors and to the Board of Major events in 2005 Statutory Auditors. Consolidated Financial Statement Pirelli Labs 1. Activity performed Subsequent events Outlook for the current year The information shall regard executive activities and the developments of transactions already Tyres Sector approved by the Board of Directors, as well as the activities of the committees (Committee for Pirelli Broadband Internal Control and Corporate Governance, Committee for Remuneration and other internal Solutions committees); in particular, it shall report on the activities that the executive directors have Pirelli & C. Real Estate performed, by means of the structures of the Company and its subsidiaries or otherwise, in the Pirelli & C. Ambiente exercise of the powers delegated to them, including the initiatives taken and the projects begun. Information Systems Proforma Data Equity Investments held 2. Transactions having a significant impact on profitability, financial position or assets by Directors, Statutory and liabilities Auditors and General Managers The information shall concern transactions having a significant impact on the Company’s profitability, Stock options plans financial position or assets and liabilities and shall detail, in particular, their strategic aims, Ī Corporate Governance consistency with the budget and industrial plan, manner of execution (including the economic and Pirelli & C. S.p.A. - Summary Data other terms and conditions) and developments, as well as their possible consequences and Shareholders’ Resolutions implications for the activity of the Pirelli Group. For the purposes of this procedure, in addition to transactions reserved to the Board of Directors pursuant to Article 2381 of the Civil Code and the Bylaws, the following shall be considered transactions having a significant impact on profitability, financial position or assets and liabilities: 1) issues of financial instruments for a total value of more than 100 million euros; 2) the provision of real or personal guarantees in the interest of subsidiaries (or in the interest of Pirelli in the case of real guarantees) against obligations of an amount exceeding 25 million euros; 3) the granting of loans or guarantees to the benefit or in the interest of third parties for amounts exceeding 10 million euros; 4) the granting of loans to the benefit of subsidiaries, investments and disinvestments, including those involving real estate, and acquisitions and disposals of shareholdings, businesses or branches of businesses, tangible fixed assets or other assets for amounts exceeding 100 million euros; 5) mergers or spin-offs in which subsidiaries participate where at least one of the applicable parameters below is equal to at least 15%: a. total assets of the merged company or activities to be spun off/total assets of the Company (data from the consolidated accounts); b. results before tax and non-recurring income and expense of the merged company or of the activities to be spun off/results before tax and non-recurring income and expense of the Company (data from the consolidated accounts); c. total net worth of the merged company or the branch of business to be spun off/total net worth of the Company (data from the consolidated accounts). Mergers and amalgamations between listed companies, amalgamations between a listed company and an unlisted company and mergers of a listed company into an unlisted company shall for the purposes of this procedure always be considered transactions having a significant impact on the Company’s profitability, financial position or assets and liabilities.

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The information shall also regard transactions which, although individually below the quantitative Introduction thresholds indicated above or those that determine the exclusive responsibility of the Board The Group of Directors, are interconnected within one and the same strategic or executive structure and 2005 economic and therefore, when considered as a whole, exceed the threshold of significance. financial review Major events in 2005 Consolidated Financial 3. Transactions potentially involving a conflict of interest: Statement Pirelli Labs 3a) Intra-group transactions Subsequent events The information on intra-group transactions shall describe their underlying interest and logic Outlook for the current in the group context and the manner of their execution (including the economic and other year terms and conditions), with particular regard to the valuation procedures adopted. Tyres Sector Specific details shall be given of transactions whose value exceeds 50 million euros, or less Pirelli Broadband if not concluded at arm’s length conditions10. Details shall also be given of transactions which, Solutions although individually below the quantitative threshold indicated above, are interconnected Pirelli & C. Real Estate within one and the same strategic or executive structure and therefore, when considered Pirelli & C. Ambiente as a whole, exceed it. Information Systems For the purposes of this procedure, intra-group transactions11 shall be taken to mean transactions Proforma Data effected by Pirelli or by subsidiaries of Pirelli with: Equity Investments held by Directors, Statutory a) companies that directly or indirectly, or by means of a trust company or third parties, control Auditors and General Pirelli pursuant to Article 2359, first and second paragraphs, of the Civil Code and Article 93 Managers of the Consolidated Law on Financial Intermediation; Stock options plans b) companies that directly or indirectly, or by means of a trust company or third parties, are Ī Corporate Governance controlled by Pirelli pursuant to Article 2359, first and second paragraphs, of the Civil Code and Pirelli & C. S.p.A. - Article 93 of the Consolidated Law on Financial Intermediation; Summary Data c) companies that directly or indirectly, or by means of a trust company or third parties, are Shareholders’ Resolutions controlled by the same companies that control Pirelli pursuant to Article 2359, first and second paragraphs, of the Civil Code and Article 93 of the Consolidated Law on Financial Intermediation; d) companies related with Pirelli pursuant to Article 2359, third paragraph, of the Civil Code and those that exercise a significant influence on Pirelli. Such a relationship does not exist with the related company of a related company.

3b) Transactions with related parties other than intra-group transactions The information on transactions with related parties other than intra-group transactions shall detail the underlying interest and describe the manner of their execution (including the economic and other terms and conditions), with particular regard to the valuation procedures adopted. For the purposes of this procedure, transactions with related parties shall be taken to mean transactions carried out by Pirelli or by its subsidiaries with parties directly or indirectly related to Pirelli.

The following shall be considered parties directly related to Pirelli: a) natural persons who hold (directly or indirectly,or by means of a trust company or third parties) an interest equal to at least 10% of the share capital represented by ordinary shares of Pirelli; b) natural persons who hold (directly or indirectly, or by means of a trust company or third parties) an equity interest smaller than the percentage indicated at point a) but who nonetheless by virtue of shareholders’ agreements can, individually or jointly with the other participants in the agreements, appoint the majority of the members of Pirelli’s Board of Directors;

10 For the purposes of this procedure, transactions concluded at arm’s length conditions shall be taken to mean transactions concluded at the same conditions as those applied by the Company to whatsoever party. 11 AThe following shall be material for the purposes of this procedure: transfers, with or without a consideration, of personal or real property or of transferable economic rights, transactions involving the performance of work or services, the granting or obtaining of loans and guarantees, and cooperation agreements for the conduct and development of company business. 12 See preceding note.

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c) natural persons who hold (directly or indirectly, or by means of a trust company or third parties) Introduction an equity interest smaller than the percentage indicated at point a) but who nonetheless by virtue The Group of shareholders’ agreements control, individually or jointly with the other participants in the 2005 economic and agreements, the majority of votes exercisable in Pirelli’s ordinary shareholders’ meeting; ﬁnancial review d) Directors and members of the Board of Statutory Auditors of Pirelli; Major events in 2005 e) general managers, the secretary of the Board of Directors and the heads of business units/central Consolidated Financial functions/operating activities of Pirelli that report directly to the Chairman and the Managing Statement Pirelli Labs Directors (so-called ﬁrst reports). Subsequent events Outlook for the current The following shall be considered parties indirectly related to Pirelli: year f) non legally separated spouses of persons referred to at points a) to e); Tyres Sector g) relatives by blood or affinity up to the second degree of kinship of persons referred to at points a) Pirelli Broadband to e); Solutions h) companies in which persons referred to at points a) to g) hold directly or indirectly, or by means a Pirelli & C. Real Estate of a trust company or third parties, an equity interest of at least 10% (in the case of a listed Pirelli & C. Ambiente company) or 20% (in the case of an unlisted company) of the share capital represented by shares Information Systems having voting rights in the ordinary shareholders’ meeting; Proforma Data i) companies in which persons referred to at points a) to g) hold equity interests smaller than Equity Investments held by Directors, Statutory percentages indicated at point h) but nonetheless by virtue of shareholders’ agreements can, Auditors and General individually or jointly with the other participants in the agreements, appoint the majority of the Managers members of the company’s board of directors; Stock options plans j) companies in which persons referred to at points a) to g) hold equity interests smaller than the Ī Corporate Governance percentages indicated at point h) but nonetheless by virtue of shareholders’ agreements control, Pirelli & C. S.p.A. - individually or jointly with the other participants in the agreements, the majority of the votes Summary Data exercisable in the ordinary shareholders’ meeting of the company; Shareholders’ Resolutions k) companies in which persons referred to at points a) to g) have a strategic management role and subsidiaries of such companies; l) Companies having a majority of directors in common with Pirelli.

Parties related to Pirelli shall be as well considered direct or indirect participants in shareholders’ agreements referred to in Article 122.1 of Legislative Decree 58/1998 whose subject is the exercise of voting rights, if the shares covered by the agreement constitute a controlling interest. The information shall regard transactions having a value greater than 500 thousand euros, or less if not concluded at arm’s length conditions, whether or not carried out by means of a third parties, with parties directly or indirectly related to Pirelli. Details must also be given of transactions which, although individually below the quantitative threshold indicated, are interconnected within one and the same strategic or executive structure and therefore, when considered as a whole, exceed it.

4. Atypical or unusual transactions and other transactions

Information on atypical or unusual transactions, including those effected by subsidiaries, and on every other activity or transactions about which it is considered appropriate to give information shall detail the underlying interest and describe the manner of their execution (including the economic and other terms and conditions), with particular regard to the valuation procedures adopted. For the purposes of this procedure, atypical or unusual transactions shall be taken to mean those in which the object or nature of the transaction is extraneous to the normal course of business of the Company and those involving particular critical factors due to their characteristics and risks, the nature of the counterpart or the time at which they are concluded13.

13 Transactions carried out at the end or the beginning of the ﬁnancial year.

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Procedure for collecting the information Introduction The Group The Board of Directors shall report to the Board of Auditors by means of the delegated organs. 2005 economic and To permit the specific report to be prepared, the information is to be transmitted to the Chairman financial review and to the Managing Directors according to the procedure set out below. Major events in 2005 Consolidated Financial Statement 1. Information on the activity performed, on transactions having a significant impact on Pirelli Labs profitability, financial position or assets and liabilities, on intra-group transactions Subsequent events and on atypical or unusual transactions. Outlook for the current year General managers and the heads of business units/central functions/operating activities of Pirelli Tyres Sector that report directly to the Chairman and to the Managing Directors (so-called first reports) by means Pirelli Broadband Solutions of the General Directorate for Administration and Control shall send the Chairman and the Managing Pirelli & C. Real Estate Directors a specific note, on quarterly basis, on the activity performed during the period by the Pirelli & C. Ambiente structure concerned, with details of the transactions having a significant impact on the Company’s Information Systems profitability, financial position or assets and liabilities, of intra-group transactions of a value Proforma Data exceeding 50 million euros, or less if not concluded at arm’s length conditions, of atypical or unusual Equity Investments held transactions, of executive activities and the developments of transactions already approved by the by Directors, Statutory Board of Directors, of the main activities carried out in the exercise of the powers delegated to Auditors and General them, including the most important projects begun and initiatives taken. Managers Transactions which, although individually below the quantitative thresholds indicated above or Stock options plans those that determine the exclusive responsibility of the Board of Directors, are interconnected within Ī Corporate Governance one and the same strategic or executive structure and therefore, when considered as a whole, Pirelli & C. S.p.A. - 14 Summary Data exceed the threshold of significance must also be reported. Shareholders’ Resolutions The information on the activities of the Committee for Internal Control and Corporate Governance, the Committee for Remuneration and other internal committees shall be supplied by their respective chairmen.

2. Information on transactions with related parties other than intra-group transactions

The General Directorate for Administration and Control shall collect and transmit to the Chairman and to the Managing Directors, on the same quarterly basis of the preceding point 1, the declarations with which parties directly related to Pirelli report the transactions: • carried out, even by means of third parties, with Pirelli or subsidiaries of Pirelli, by themselves directly or through one of the persons referred to at the above paragraph 3.b, from letter h) to letter l) by non legally separated spouses, by relatives by blood or affinity up to the second degree; • having a value greater than 500.000 euros, or, if less, concluded not at arm’s length conditions.

In providing such information details must also be given of transactions which, although individually below the quantitative threshold indicated above, are mutually interconnected on the basis of a common relation and therefore, considered as a whole, exceed the aforementioned threshold.15

The General Directorate for Administration and Control shall also collect the declarations in which directly related parties (i) list the companies that by their means complete the case in point as referred to the previous paragraph 3.b, from letter h) to letter k), as well as the companies in which they are directors; (ii) update the above mentioned list.

14 In such case the transactions shall be material even where they are carried out in a span of time exceeding the three months covered by the report. 15 See preceding note.

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The General Directorate for Administration and Control shall transmit the list of the parties related Introduction to Pirelli as above identified, to the General Managers, the heads of Business Units/Central The Group Functions/Operating Activities of Pirelli that report directly to the Chairman and the Managing 2005 economic and Directors (so called First Reports). financial review Major events in 2005 The First Reports quarterly inform the Chairman and the Managing Directors of the transactions Consolidated Financial carried out with Pirelli – or with its subsidiaries – by the indirectly related parties, as identified in the Statement Pirelli Labs list provided by the General Directorate for Administration and Control, also by means of third Subsequent events parties, having a value greater than 500.000 euros, and even if less, of those concluded not at arm’s Outlook for the current length conditions. year Tyres Sector Pirelli Broadband Rules of conduct for effecting transactions with related parties Solutions Pirelli & C. Real Estate 1. Transactions with related parties, including intra-group transactions, except for typical or usual Pirelli & C. Ambiente transactions concluded at arm’s length conditions, must be approved in advance by the Board of Information Systems Directors. Proforma Data Equity Investments held by Directors, Statutory 2. Typical or usual transactions shall be taken to mean those which, by their object or nature, are not Auditors and General extraneous to the normal course of business of the Company and those which do not involve Managers particular critical factors due to their characteristics or to the risks related to the nature of the Stock options plans counterpart or to the time at which they are concluded. Transactions concluded at arm’s length Ī Corporate Governance conditions means transactions concluded at the same conditions as those applied by the Company Pirelli & C. S.p.A. - to whatsoever party. Summary Data Shareholders’ Resolutions 3. The Board of Directors shall receive adequate information on the nature of the relationship, the manner of execution of the transaction, the economic and other terms and conditions governing it, the valuation procedure adopted, the underlying interest and motivations, and the possible risks for the Company. Where the relationship is with a Director or with a party related by means of a Director, the Director concerned shall limit himself to providing clarifications and shall leave the meeting of the Board when the decision is to be taken.

4. Depending on the nature, value and other characteristics of the transaction, to guard against the transaction’s being carried out at unsuitable conditions the Board of Directors shall be assisted by one or more experts, who shall express an opinion, according to the case, on the economic conditions and/or the legitimacy and/or the technical aspects of the transaction.

5. For transactions with related parties, including intra-group transactions, which are not submitted to the Board of Directors inasmuch as they are typical or usual concluded at arm’s length, the Directors having delegated powers or the managers responsible for carrying out the transaction, without detriment to compliance with the speciﬁc procedure pursuant to Article 150.1 of the Consolidated Law on Financial Intermediation, shall collect and preserve, inter alia by type or group of transaction, adequate information on the nature of the relationship, the manner of execution of the transaction, the economic and other terms and conditions governing it, the valuation procedure adopted, the underlying interest and motivations, and the possible risks for the Company. For such transactions also, one or more experts may be appointed as provided above.

6. The experts are to be chosen from among persons of recognized professional experience and competence in the matters concerned. Their independence and absence of conﬂicts of interest will be carefully evaluated.

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Regulations for Shareholders’ Meetings Introduction The Group Article 1 2005 economic and - These Regulations shall apply to the Company’s ordinary and extraordinary shareholders’ meetings. financial review Major events in 2005 Article 2 Consolidated Financial Statement - To ensure the regular conduct of shareholders’ meetings, for matters not expressly governed by Pirelli Labs these Regulations, the Chairman of the meeting (hereinafter the “Chairman”) shall adopt the Subsequent events measures and solutions deemed most appropriate, in compliance with the law and the bylaws. Outlook for the current year Article 3 Tyres Sector - Meetings may be attended, with the right to take part in the discussion and to vote, by persons Pirelli Broadband entitled to do so pursuant to the applicable provisions (hereinafter the “Participants”). Solutions - Unless stated otherwise in the notice convening the meeting, personal identification and Pirelli & C. Real Estate verification of the right to attend the meeting shall begin at the place where it is to be held at least Pirelli & C. Ambiente one hour before the time fixed for it to start. When the Participants have been identified and their Information Systems right to attend verified, under the supervision of the Chairman, the auxiliary staff provided by the Proforma Data Company shall issue badges that serve for control purposes and to exercise the right to vote. Equity Investments held by Directors, Statutory - The Participants shall be able to follow the discussion, take the floor during the discussion and Auditors and General exercise their right to vote, in the technical manner specified on each occasion by the Chairman. Managers - Participants who, after being admitted to the meeting, intend for any reason to leave the premises Stock options plans where it is being held, must inform the auxiliary staff. Ī Corporate Governance Pirelli & C. S.p.A. - Article 4 Summary Data - Directors, senior executive and employees of the Company and of Group companies may attend Shareholders’ Resolutions the meetings, as may other persons whose presence is deemed useful in relation to the matters to be discussed. - With the agreement of the Chairman, the proceedings may be followed by professionals, consultants, experts, financial analysts and suitably qualified journalists, accredited for a single meeting, in areas which could specifically be set aside for that purpose. - Persons accredited to follow the proceedings must report for identification by the Company’s appointees at the entrance of the premises where the meeting is to be held and collect a special badge to be exhibited upon request.

Article 5 - In accordance with the law and the bylaws, it is up to the Chairman to direct the meeting and ensure the best conditions for its orderly and effective conduct. - The Chairman may authorize the use of audio-visual recording and transmission equipment.

Article 6 - The Chairman shall be assisted in the conduct of the meeting and in the preparation of the minutes by a Secretary, where a Notary public is not present. The Secretary or the Notary public may in turn arrange to be assisted by persons of their trust. - The Chairman, for the purposes of conducting the voting procedures, shall be assisted by scrutineers; he may use auxiliary staff to provide the necessary technical support and to maintain order.

Article 7 - When the quorum for duly constituting the shareholders’ meeting is not reached, after an appropriate period of time the Participants shall be informed of the fact and the discussion of the matters on the agenda shall be understood to be deferred until the next call of the meeting, if any. - During a meeting the Chairman may, if he deems it desirable and the majority of the capital represented at the meeting does not object, suspend the proceedings for up to three hours.

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Article 8 Introduction - The Chairman shall establish the order in which the items on the agenda are to be discussed, The Group which may differ from that indicated in the notice convening the meeting. 2005 economic and - He may provide for several items to be discussed together or for the discussion to proceed item by financial review item. Major events in 2005 - The Chairman and, at his invitation, persons attending the meeting pursuant to the Article 4, Consolidated Financial paragraph 1, shall explain the items on the agenda. Statement Pirelli Labs Subsequent events Article 9 Outlook for the current - It is up to the Chairman to conduct and moderate the discussion, ensure its correctness and year prevent disturbances of the regular course of the meeting. Tyres Sector - The Chairman, taking account of the subject matter and importance of the individual items on the Pirelli Broadband agenda, may establish at the start of the meeting the time - not less than 15 minutes - available to Solutions each speaker. Pirelli & C. Real Estate - The Chairman shall call on Participants to comply with the time limits for speaking established in Pirelli & C. Ambiente advance and to keep to the matters stated in the agenda. In the event of an overrun and/or an Information Systems abuse, the Chairman shall interrupt the speaker. Proforma Data Equity Investments held by Directors, Statutory Article 10 Auditors and General - Persons who intend to speak must apply to the Chairman or the Secretary, indicating the subject Managers they will address. Such requests may be submitted until the Chairman closes the discussion on the Stock options plans subject to which they refer. Ī Corporate Governance - Participants may ask to take the floor a second time during the same discussion, for not more than Pirelli & C. S.p.A. - five minutes, exclusively in response to other speakers or to declare how they intend to vote. Summary Data Shareholders’ Resolutions Article 11 - The Board of Directors and the Participants may put forward, giving reasons, proposals for alternative or amended resolutions with respect to those originally put forward by the Board of Directors. The Chairman shall evaluate the compatibility of such proposals in relation to the agenda of the meeting.

Article 12 - The members of the Board of Directors and the Board of Statutory Auditors may intervene in the discussion; at the invitation of the Chairman, persons attending the meeting pursuant to the Article 4, paragraph 1, may also take the ﬂoor, inter alia to respond to requests for clariﬁcation.

Article 13 - The Chairman shall take appropriate measures to ensure the orderly conduct of voting and provide for the voting on an item to be held immediately after the close of the discussion thereof or at the end of the discussion of all the items on the agenda. - The Chairman shall establish how each voting procedure is to be conducted and the procedures for identifying and counting the votes cast and shall be responsible for ascertaining the results.

Article 14 - Upon completion of the voting and the necessary counting of the votes with the help of the scrutineers and the Secretary, the results of the voting shall be announced.

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Abridged form of Pirelli & C. Società per Azioni Introduction The Group Shareholders Agreement 2005 economic and financial review 1. Type and objective of the agreement Major events in 2005 The purpose of the Pirelli & C. shareholders agreement is to ensure a stable shareholder base and a Consolidated Financial uniform strategy in the management of the company. Statement Pirelli Labs Subsequent events 2. Parties to the shareholders agreement and Pirelli & C. shares transferred to the agreement: Outlook for the current year Number of % of all shares % of the total Tyres Sector Shares granted granted n. of ordinary shares issued Pirelli Broadband Solutions CAMFIN S.p.A. 1,027,455,727 42.48 19.83 Pirelli & C. Real Estate MEDIOBANCA S.p.A. 233,001,859 9.63 4.50 Pirelli & C. Ambiente EDIZIONE HOLDING S.p.A. 232,992,911 9.63 4.50 Information Systems FONDIARIA - SAI S.p.A. 223,543,498 9.24 4.31 Proforma Data RAS S.p.A. 222,958,537 9.22 4.30 Equity Investments held ASSICURAZIONI GENERALI S.p.A. (*) 222,958,531 9.22 4.30 by Directors, Statutory BANCA INTESA S.p.A. 81,665,400 3.38 1.58 Auditors and General CAPITALIA S.p.A. 81,665,400 3.38 1.58 Managers Massimo MORATTI (**) 60,300,084 2.49 1.16 Stock options plans SINPAR HOLDING S.A. - SINPAR S.p.A. (***) 32,048,563 1.33 0.62 Ī Corporate Governance Total 2,418,590,510 100 46.68 Pirelli & C. S.p.A. - Summary Data (*) n. 57,400,000 shares through La Fédération Continentale Compagnie d'Assurances Sur La Vie S.A., n. 82,779,265 shares through Ina Vita S.p.A. and n. 82.779.266 shares through Generali Vita S.p.A. Shareholders’ Resolutions (**) Including 37,420,339 shares through CMC S.p.A. and n. 11,328,318 shares fiduciary owned by Istifid S.p.A. (***) n. 19,797,563 shares of Sinpar Holding S.A. and n. 12,251,000 shares of Sinpar S.p.A.

3. The party, if any, which, through the agreement, can exercise control over the company There is no party which, through the agreement, can exercise control over Pirelli & C..

4. Restrictions on the sale of the shares transferred and on the subscription and the purchase of new shares The sale of the shares to third parties (and option rights in the event of a capital increase against payment) is prohibited. Shares can be sold freely and pre-emptively to subsidiaries, according to article 2359, paragraph 1, point 1 of the Italian Civil Code, and to the parent companies as well as other participants to the shareholders agreement. Each participant may buy or sell additional shares for an amount not in excess of the higher of 20% of the shares already transferred by the participant itself and 2% of the ordinary share capital issued; purchases of greater amounts are permitted only with the intent of reaching a holding equal to 5% of the ordinary share capital issued, on condition that the amount in excess of the above limits came under the shareholders agreement. CAMFIN S.p.A. is authorized to freely purchase additional Pirelli & C. shares; it can transfer shares to the shareholders agreement, but to the extent that, at any one time, the shares do not exceed 49.99% of total shares transferred by all the participants in the shareholders agreement. This has been decided so that a stable predominate position is not assumed in the shareholders agreement or a stable veto power is not exercised over common decisions. Except where the Pirelli & C. ordinary shares in the shareholders agreement correspond to the majority of the voting rights in the ordinary shareholders’ meetings, each participant (also through parent companies and/or subsidiaries) intending to purchase shares of that category shall inform the President in writing beforehand and the President shall inform the participant if, taking into account the laws in force concerning tender offers, the participant can proceed, in whole or in part, with the proposed purchase. Buy or sell the shares.

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5. Availability of the shares Introduction The shares transferred shall remain at disposal of the participants in the shareholders agreement. The Group 2005 economic and 6. Bodies governing the agreement, composition, meetings and powers ﬁnancial review The Body governing the agreement is the Shareholders Agreement Executive Committee. Major events in 2005 The Shareholders Agreement Executive Committee shall consist of a president and vice-president, Consolidated Financial in the form of the president and the longest serving vice-president of Pirelli & C., and by a member Statement Pirelli Labs representing each participant unless a participant has deposited more than 10% of ordinary share Subsequent events capital, in which case another member may be designated: for this purpose, in the event the Outlook for the current shareholders agreement is composed of several companies related by a controlling relationship or year belonging to the same parent company, their aggregate shall be considered for this purpose as one Tyres Sector sole participant in the shareholders agreement. Pirelli Broadband The Shareholders Agreement Executive Committee shall be convened to evaluate the proposals Solutions to be submitted to the shareholders’ meetings, for the possible earlier termination of the agreement Pirelli & C. Real Estate and for the admission of new participants. The Shareholders Agreement Executive Committee shall Pirelli & C. Ambiente also meet at least twice a year to examine the semiannual performance, the annual results, Information Systems the general guidelines for the company’s development, the investment policy and proposed signiﬁcant Proforma Data divestitures and more in general, all the relevant matters of discussion by both the ordinary and Equity Investments held by Directors, Statutory extraordinary sessions of the shareholders’ meetings. Auditors and General Managers 7. Matters covered by the Agreement Stock options plans Those contemplated in points 4 and 6 above. Ī Corporate Governance Pirelli & C. S.p.A. - 8. Majorities needed to reach decisions regarding the issues governed by the Agreement Summary Data The Shareholders Agreement Executive Committee approves its resolutions with the favourable vote Shareholders’ Resolutions of the majority of the shares transferred; the Shareholders Agreement Executive Committee can designate a trusted person to represent the shares in the shareholders agreement at the shareholders’ meetings in order to vote according to its instructions. Whenever the decisions of the Shareholders Agreement Executive Committee are not voted unanimously, the dissenting participant shall have the right to freely vote at the shareholders’ meeting.

9. Term, renewal and cancellation of the agreement The agreement shall be valid until April 15, 2007 and shall be tacitly renewed for a period of three years except for withdrawal, which can be exercised between December 15 and January 15 prior to the expiration date. In case of withdrawal, the shares transferred by the withdrawing party shall be automatically offered pro quota to the other participants. The agreement shall remain in force, whenever it is possible, at every expiration date, to renew the agreement for a percentage of Pirelli & C.’s subscribed ordinary share capital of not less than 33%.

10. Penalties for breach of the commitments contained in the agreement They are not envisaged by the agreement.

11. Registration of the agreement at the Company Registry The agreement is registered at the office of the Milan Companies Registry.

Milan, 10 January 2006

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Introduction Pirelli & C. S.p.A. – Summary Data The Group 2005 economic and In accordance with Legislative Decree No. 38 dated February 28, 2005, Pirelli & C. S.p.A. has elected financial review to prepare the financial statements for the year ended December 31, 2005 in conformity with the Major events in 2005 international financial reporting standards in force at that date and the relative interpretations. Consolidated Financial Accordingly, the data relating to the year 2004 has also been reclassified for purposes of comparison. Statement The reconciliation of shareholders’ equity at January 1, 2004, at December 31, 2004, at January 1, Pirelli Labs 2005 and the result for 2004 is as follows: Subsequent events Outlook for the current Result Other IAS 32/39 year (in millions of euros) 1/1/2004 2004 Dividends movements 12/31/2004 adjustments 1/1/2005 Tyres Sector A) Shareholders' equity Italian GAAP 3,355 150 (109) 175 3,571 3,571 Pirelli Broadband Intangible assets (7) 2 (5) (5) Solutions Effect of separation land/buildings 1 1 1 Pirelli & C. Real Estate Employee benefits (2) (2) (2) Pirelli & C. Ambiente Dividends (131) (33) (164) (164) Information Systems Financial instruments (69) (69) Proforma Data Treasury shares (5) (5) Equity Investments held Measurement of available-for-sale by Directors, Statutory financial assets at fair value 147 147 Auditors and General Other - B) Shareholders’ equity IAS 3,216 119 (109) 175 3,401 73 3,474 Managers Difference (139) (31) - - (170) 73 (97) Stock options plans Corporate Governance Ī Pirelli & C. S.p.A. - Summary Data Balance sheet and financial position Shareholders’ Resolutions (in millions of euros) 12/31/2005 12/31/2004 Intangible assets 2 4 Property, plant and equipment 52 57 Financial assets 6,433 4,963 Net working capital (391) (7) 6,096 5,017 Shareholders’ equity 4,661 3,400 Provisions 193 295 Net financial (liquidity)/debt position 1,242 1,322 6,096 5,017

The above statement presents the balance sheet and financial position of the company. The most significant changes during 2005 refer to the following: - financial assets increased by Euros 1,470 million mainly as a result of the subscription to the Olimpia S.p.A. share capital increase (Euros 1,344 million), the purchase of Capitalia S.p.A. shares from the subsidiary Pirelli Finance Luxembourg S.A. (Euros 140 million) and of RCS Mediagroup S.p.A. shares (Euros 59 million), the adjustment of available-for-sale financial assets to fair value (Euros 259 million) countered by the sale of the investments in the Cables and Systems Sector (Euros 342 million) and writedowns of Euros 28 million. - Shareholders’ equity increased by Euros 1,261 million compared to the prior year. The changes in shareholders’ equity are presented in the following table:

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(in millions of euros) Introduction Shareholders’ equity at 12/31/2004 3,400 The Group Adoption of IAS 32 and 39 74 2005 economic and Dividends paid (114) financial review Share capital increase (net of costs incurred) 1,048 Major events in 2005 Exercise warrants 2003/2006 1 Consolidated Financial Change in IAS reserves 112 Net income 140 Statement Shareholders’ equity at 12/31/2005 4,661 Pirelli Labs Subsequent events - the decrease in provisions is mainly due to the recognition of the provision relating Outlook for the current to the valuation of the subsidiary Pirelli UK (Euros 105 million) offset by the classification in year Working Capital of liabilities relating to the put option granted to the shareholder banks Tyres Sector Pirelli Broadband of Olimpia under the shareholders’ agreements (Euros 233 million) according to IAS 32/39 Solutions adopted from January 1, 2005; Pirelli & C. Real Estate - the net financial debt position went from Euros 1,322 million at December 31, 2004 to Euros Pirelli & C. Ambiente 1,242 million at December 31, 2005. A summary of the changes is detailed in the following table: Information Systems Proforma Data (in millions of euros) Equity Investments held Net financial position at 12/31/2004 1,322 by Directors, Statutory Cash flows from operating activities (23) Auditors and General Net financial investments 1,242 Managers Share capital increase (net of costs incurred) (1,048) Stock options plans Dividends distributed 114 Corporate Governance Dividends collected (325) Exercise of warrants 2003/2006 (1) Ī Pirelli & C. S.p.A. - Other changes (39) Summary Data Net financial position at 12/31/2005 1,242 Shareholders’ Resolutions

Income statement

(in millions of euros) 2005 2004 Financial income (expenses) (40) (1) Investment income 325 143 Valuation adjustments to ﬁnancial assets (133) (27) Other operating income (expenses) (31) (25) Income before income taxes 121 90 Income taxes 19 28 Net income 140 118

The year 2005 ended with a net income of Euros 140 million compared to Euros 118 million for the prior year.

The improvement in income before income taxes (Euros 31 million) is due to: - a deterioration of Euros 39 million in ﬁnancial income/expenses (in 2004, this item had included the gain realized on the sale to third parties of Pirelli & C. Real Estate S.p.A. shares for Euros 89 million and the accrual for risks on the options granted to Hopa under the shareholders’ agreement for Euros 40 million). In 2005, gains were recorded on the sale of equity investments for Euros 22 million (Euros 13 million on the sale of the Cables and Systems Sector and Euros 8 million on the sale of the Gemina shares in portfolio). - increase in investment income from Euros 143 million to Euros 325 million principally as a result of higher dividends collected from Pirelli Tyre Holding (Euros 120 million against Euros 85 million) and Sipir (Euros 147 million against Euros 11 million). - the item valuation adjustments to ﬁnancial assets is a negative amount of Euros 133 million and includes the writedown of the subsidiary Pirelli UK which carries on its books the pension funds of the affiliates of the former Cables and Systems Sector of the United Kingdom (Euros 110 million) and the holding F.C. Internazionale Milano S.p.A. (Euros 15 million).

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Compensation paid to Directors, Statutory Auditors and General Managers (in thousands of euros)

Individual Description of post Compensation received in 2005 Compensation for the year 2005 to be paid in 2006 Name Post Term Compensation Non- Bonuses Other Compens. Bonuses held of office for the post monetary and other compens. for the and other beneﬁts incentives post incentives Tronchetti Provera Marco Chairman 2006 2,757 43 (2) 50 Pirelli Alberto Deputy Chairman 2006 547 353 (3) 50 174 (3) Puri Negri Carlo Alessandro Deputy Chairman 2006 310 2,075 (4) 50 3,344 (4) Buora Carlo Managing Director 2006 178 43 (5) 50 General Manager - 7 1,520 Acutis Carlo Director 2006 50 Angelici Carlo Director from 4/28/05 34 Benetton Gilberto Director 2006 50 Bruni Franco Director from 4/28/05 34 De Benedetti Carlo (1) Director 2006 50 Galateri di Genola Gabriele (1) Director 2006 50 Garraffo Mario Director from 4/28/05 34 Gazzoni-Frascara Giuseppe Director up to 4/28/05 16 Giarda Dino Piero Director from 4/28/05 34 Greco Mario (1) Director up to 4/28/05 16 Krayer Georg F. Director up to 4/28/05 16 Libonati Berardino Director from 4/28/05 44 (6) 34 Ligresti Giulia Maria Director 2006 50 Moratti Massimo Director 2006 50 Orlando Luigi Director up to 4/28/05 16 Perissinotto Giovanni Director 2006 50 Pesenti Giampiero Director 2006 50 Presutti Ennio Director up to 4/28/05 16 Rovari Aldo Director from 4/28/05 34 Secchi Carlo Director 2006 50 Sozzani Vincenzo Director up to 4/28/05 16 192 (7) Vagnone Paolo Director from 4/28/05 Vischer Frank Director up to 4/28/05 16 Battista Valerio General Manager up to 6/30/05 3 100 410 De Conto Claudio General Manager - 4 982 653 409 Gobbi Luciano General Manager - 4 725 605 409 Gori Francesco General Manager - 3 775 567 Guatri Luigi Chairman of the Board of Statutory Auditors 2006 62 Bracchetti Roberto Standing members 2006 124 (8) 41 Lazzati Paolo Standing members 2006 104 (9) 41 1) Compensation paid over to company of which he is part. 2) As Chairman of Pirelli & C. Real Estate S.p.A. (PRE). 3) From Pirelli Pneumatici S.p.A.. 4) From PRE and its subsidiaries. 5) As a director of PRE. 6) The amount refers to activities carried out by the professional offices of Prof. Libonati for mandates conferred prior to his appointment as director. 7) Of which Euros 129 thousand is from Pirelli Sociètè Generale SA and Euros 63 thousand from PRE and its subsidiaries. 8) For the post of Chairman of the Board of Statutory Auditors of PRE (Euros 72 thousand) and Pirelli Ambiente S.p.A. (Euro 5 thousand), as well as the post of statutory auditor in subsidiaries of PRE (Euros 47 thousand). 9) For the post of Chairman of the Board of Statutory Auditors of Pirelli Pneumatici S.p.A. (Euros 15 thousand) and Euros 89 thousand for the post of statutory auditor in subsidiaries of PRE.

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Shareholders’ Resolutions Introduction The Group Appropriation of net income 2005 economic and financial review Major events in 2005 The year ended December 31, 2005 shows a net income of Euros 139,769,313 Consolidated Financial The board of directors proposes the distribution of dividends, before withholding taxes, of: Statement • Euros 0.0210 for each ordinary share. Pirelli Labs Subsequent events • Euros 0.0364 for each savings share. Outlook for the current year If in agreement with our proposal, we ask you to pass the following Tyres Sector Pirelli Broadband RESOLUTION Solutions Pirelli & C. Real Estate The shareholders’ meeting: Pirelli & C. Ambiente Information Systems • having taken note of the Directors’ Report on Operations; Proforma Data Equity Investments held • having taken note of the board of Statutory Auditors’ report; by Directors, Statutory • having examined the financial statements at December 31, 2005 which show a net income Auditors and General of Euros 139,769,313 Managers Stock options plans RESOLVES Corporate Governance Pirelli & C. S.p.A. - Summary Data a) to approve: Ī Shareholders’ Resolutions - the Directors’ Report on Operations; - the balance sheet, the income statement, the notes to financial statements for the year ended December 31, 2005 which show a net income of Euros 139,769,313 as presented by the board of directors in their entirety and in the individual entries, with the proposed accruals;

b) to appropriate the net income for the year of Euros 139,769,313 as follows: • 5 percent to the legal reserve Euros 6,988,466 • to the shareholders: Euros 0.0210 to 5,179,378,793 (*) ordinary shares, for a total Euros 108,766,955 0.0364 to 134,764,429 savings shares, for a total Euros 4,905,425 • to retained earnings Euros 19,108,467

(*) net of 2,617,500 treasury shares currently held by the company. The number of shares could change as a result of the exercise of warrants up to March 12, 2006.

c) to authorize the directors, in the event treasury shares are purchased before the ex dividend date in reference to point b) to appropriate the amount of the dividends to which such shares are entitled to retained earnings, and to charge the same caption for the balance of roundings which may arise at the time of the payment of the dividends.

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Appointment of the Board of Statutory Auditors Introduction The Group • appointment of the standing and alternate members of the board; 2005 economic and • appointment of the chairman of the board of statutory auditors; financial review • determination of the compensation to the members of the board of statutory auditors. Major events in 2005 Consolidated Financial Dear Shareholders, Statement With this meeting, the three-year term of office of the board of statutory auditors expires. Pirelli Labs The mandate was conferred to the board of statutory auditors on May 7, 2003 (the appointment was Subsequent events Outlook for the current effective from the date of August 4, 2003, the date on which the merger of Pirelli & C. Luxembourg year S.p.A. and Pirelli S.p.A. in Pirelli & C. S.p.A. became effective). 1 Tyres Sector The shareholders’ meeting is therefore asked, pursuant to the law and bylaws (articles 16 ) to: Pirelli Broadband - appoint the standing and alternate statutory auditors; Solutions - appoint the chairman of the board of statutory auditors; Pirelli & C. Real Estate - determine the compensation of the members of the board of statutory auditors. Pirelli & C. Ambiente However, pursuant to article 148 of Legislative Decree 58/1998, amended by Law 262/2005, the Information Systems shareholders’ meeting is entrusted with the appointment of the chairman of the board of statutory Proforma Data auditors, who shall be chosen from the statutory auditors elected by the minority shareholders, Equity Investments held i.e. among the standing auditors of the minority slate. The clause shall not be applied which states by Directors, Statutory that the chair of the board of statutory auditors shall pertain to the standing member listed as the Auditors and General first candidate on the slate which obtains the highest number of votes (majority slate). Managers Lastly, in accordance with the provisions of article 2400, last paragraph, of the Italian Civil Code, Stock options plans as amended by Law 262/2005, when the appointment is made and before accepting the post, Corporate Governance the shareholders’ meeting shall be informed of the positions of administration and control held by Pirelli & C. S.p.A. - Summary Data the statutory auditors in other companies: the statutory auditors are requested to provide a specific Ī Shareholders’ Resolutions statement in this sense in the curricula vitae which are required to be deposited prior to the shareholders’ meeting in accordance with the bylaws, with the recommendation to ensure that they are updated to the effective date on which the shareholders’ meeting is held.

1 Article 16 of the bylaws - Board of Statutory Auditors The Board of Statutory Auditors shall be composed of three standing and two alternate auditors, who must be in possession of the requisites established under applicable laws and regulations; to this end, it shall be borne in mind that the fields and sectors of business closely connected with those of the Company are those stated in the Company’s purpose, with particular reference to companies or corporations operating in the financial, industrial, banking, insurance and real estate sectors and in the services field in general. The ordinary shareholders’ meeting shall elect the Board of Statutory Auditors and determine its remuneration. The minority shareholders shall be entitled to appoint one standing auditor and one alternate auditor. With the exception of the provisions of the third-to-last paragraph of this article 16, the Board of Statutory Auditors shall be appointed on the basis of slates presented by the shareholders in which candidates are listed by consecutive number. Each slate shall contain a number of candidates which does not exceed the number of members to be appointed. Shareholders who, alone or together with other shareholders, represent at least 2 percent of the shares with voting rights in the ordinary shareholders’ meeting, shall be entitled to submit slates, subject to their proving ownership of the number of shares needed for the presentation of slates at least two days prior to the date set for the shareholders’ meeting to be held on first call. Each shareholder may present or take part in the presentation of only one slate. The slates of candidates, which must be undersigned by the parties submitting them, shall be filed in the Company’s registered office and be available to anyone on request, at least ten days prior to the date set for the shareholders’ meeting to be held on first call. A professional curriculum of the individuals standing for election must be enclosed with the slates together with statements in which the individual candidates agree to their nomination and attest, under their own liability, that there are no grounds for their ineligibility or incompatibility, and that they meet the requisites prescribed by law or by these By-laws for the position. Any slates submitted without complying with the foregoing provisions shall be disregarded. Each candidate may appear on only one slate, on pain of ineligibility. Furthermore, those individuals who are not in possession of the requisites established by the applicable rules and regulations, or who already hold the position of standing auditor in more than five companies whose securities are listed on regulated Italian markets, with the exception of the subsidiaries of Pirelli & C., cannot be elected to the Board of Statutory Auditors. The slates shall be divided into two sections: one for candidates for the position of standing auditor and one for candidates for the position of alternate auditor. The first candidate listed in each section must be selected from among the persons enrolled in the Register of Auditors who have worked on statutory audits for a period of no less than three years. Each person entitled to vote may vote for only one slate. The Board of Statutory Auditors shall be elected as specified below: a) two standing members and one alternate member shall be chosen from the slate which obtains the highest number of votes (known as the majority slate), in the consecutive order in which they are listed thereon; b) the remaining standing member and the other alternate member shall be chosen from the slate which obtains the highest number of votes cast by the shareholders after the first slate (known as the minority slate), in the consecutive order in which they are listed thereon; if several slates obtain the same number of votes, a new vote between said slates will be cast by all the shareholders attending the meeting, and the candidates on the slate which obtains the simple majority of the votes will be elected.

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The chair of the Board of Statutory Auditors shall pertain to the standing member listed as the first candidate on the slate which obtains the Introduction highest number of votes. (clause not applicable following the provisions introduced by Law 262/2005.) The position of a standing auditor which falls vacant due to his/her death, forfeiture or resignation shall be filled by the alternate auditor chosen The Group from the same slate as the former. In the event of the replacement of the Chairman of the Board of Statutory Auditors, the chair shall pertain to 2005 economic and the other standing member chosen from the same slate as the former Chairman; if it proves impossible to effect substitutions and replacements financial review under the foregoing procedures, a shareholders’ meeting shall be called to complete the Board of Statutory Auditors which shall adopt Major events in 2005 resolutions by relative majority vote. When the shareholders’ meeting is required, pursuant to the provisions of the foregoing paragraph or to the law, to appoint the standing and/or Consolidated Financial alternate members needed to complete the Board of Statutory Auditors, it shall proceed as follows: if auditors elected from the majority slate Statement have to be replaced, the appointment shall be made by relative majority vote without slate constraints; if, however, auditors elected from the Pirelli Labs minority slate have to be replaced, the shareholders’ meeting shall replace them by relative majority vote, selecting them where possible from Subsequent events amongst the candidates listed on the slate on which the auditor to be replaced appeared. Outlook for the current When appointing auditors who, for whatsoever reason, were not appointed under the procedures established herein, the shareholders’ meeting shall vote on the basis of the majorities required by law. year Outgoing members of the Board of Statutory Auditors may be re-elected to office. Tyres Sector Meetings of the Board of Statutory Auditors may, if the Chairman or whoever acts in his/her stead verifies the necessity, be attended by means of Pirelli Broadband telecommunications systems that permit all attendees to participate in the discussion and obtain information on an equal basis. Solutions Pirelli & C. Real Estate Pirelli & C. Ambiente Information Systems Proforma Data Proposal for the purchase and disposition procedures of treasury shares Equity Investments held by Directors, Statutory Dear Shareholders, Auditors and General Managers In the resolution passed on April 28, 2005, you authorized the purchase of treasury shares Stock options plans (ordinary and savings shares) up to the maximum amount allowed by art. 2357 of the Italian Civil Corporate Governance Code, equal to 10 percent of share capital pro-tempore and for a period of 18 months from the date Pirelli & C. S.p.A. - of the resolution. Summary Data This authorization will expire on October 27, 2006. Ī Shareholders’ Resolutions Since the same opportunities now exist which persuaded the directors to propose to you the April 2005 resolution, we believe it convenient to propose to you at this shareholders’ meeting, and in order to avoid convening a specific meeting close to the above expiration date, to proceed to issue a new authorization, which is completely the same as the existing one, canceling the authorization not used.

We therefore submit for your approval, the request for the authorization of the purchase and disposal of treasury shares, for the reasons and in the manner and according to the terms illustrated below.

1. Reasons for the request for authorization The main objectives that the board intends to pursue through the transactions for which your authorization is requested are the following: - to intervene, in accordance with existing laws, directly or indirectly through intermediaries, to control anomalous movements in market prices and to regularize the trend of trading and prices when faced with distorting phenomena connected with excess volatility or insufficient liquidity in trading; - to offer the shareholders an additional instrument for the monetization of their investment; - to use the treasury shares to service the stock incentive plans, if any, reserved for the directors and/or employees and/or contributors of the company, or its subsidiaries. The request for the authorization to purchase treasury shares is not, at this time, destined for transactions to reduce share capital by canceling the treasury shares purchased. With regard to the disposal of treasury shares, the board believes it is in its best interests not only to use the treasury shares to service the above stock incentive plans but also to take advantage of opportunities to maximize the value that may originate from market performance – and therefore also pursue trading – or enter into other transactions that may be strategic nature for the company.

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2. Maximum number, class and par value of shares to which the authorization refers Introduction As of today’s date, the share capital of Pirelli & C. S.p.A. is represented by 5,316,760,722 shares, of The Group which 5,181,996,293 are ordinary shares and 134,764,429 are savings shares, all with a par value of 2005 economic and Euros 0.52 each.1 financial review The authorization for the purchase of treasury shares, ordinary and/or savings shares, is being Major events in 2005 proposed for amounts that can be freely determined by the board, up to the maximum allowed by Consolidated Financial law and, therefore, up to 10% of share capital, taking into account the treasury shares owned directly Statement Pirelli Labs and those that may be owned by the subsidiaries. Subsequent events In any case, purchases may not be made for amounts that are not covered by the available reserves Outlook for the current shown in the most recent duly approved financial statements of the company. year Tyres Sector 3. Useful information for the purposes of evaluation according to article 2357, paragraph 3 Pirelli Broadband of the Italian Civil Code Solutions The company, as of today’s date, holds 2,617,500 ordinary treasury shares, which represent Pirelli & C. Real Estate approximately 0.05% of share capital. Pirelli & C. Ambiente To this end, reference is made to the fact that the draft financial statements at December 31, 2005, Information Systems submitted for the approval of the shareholders’ meeting called for the approval of this motion for the Proforma Data authorization of treasury shares, has available reserves recorded for a total amount of Euros 1,025.6 Equity Investments held million. by Directors, Statutory When treasury shares are purchased or disposed of, exchanged, conferred or written down, Auditors and General the appropriate accounting entry must be made, in accordance with the law and the applicable Managers Stock options plans accounting principles. In the case of disposal, exchange, conferral or writedown, the corresponding Corporate Governance amount may be reused for further purchases, until the expiration of the term of the authorization by Pirelli & C. S.p.A. - the shareholders’ meeting, with no changes in the quantitative limits and expenses or in the Summary Data conditions established by the shareholders’ meeting. Ī Shareholders’ Resolutions 4. Period of the authorization The period of the authorization requested is for 18 months from the date on which the shareholders’ meeting shall pass the corresponding resolution. The board may proceed to enter into the authorized transactions on one or more occasions and at any time.

5. Minimum and maximum consideration The board proposes that the purchase price for the shares shall be identiﬁed each time, taking into account the selected manner for carrying out the transaction and in accordance with any regulatory requirements or admitted market practices, within a minimum and a maximum that shall be determined according to the following criteria: - the purchase price of each share shall not be lower or higher, in each case, than the maximum of 15% of the weighted average official market price of the shares of the same class recorded by Borsa Italiana S.p.A. in the three trading sessions prior to each single transaction. As for the disposal of treasury shares, the board shall establish the criteria for the determination of the relative price taking into account the manner for carrying out the transactions, the trend in the share price in the period prior to the transactions and the best interests of the company.

6. Procedure for executing the transactions In view of the various purposes for carrying out transactions relating to treasury shares, the board proposes that the authorization be given to effect purchases in any manner allowed by the laws in force, to be identiﬁed each time at the board’s discretion, and, therefore, at this time: - through public purchase and sale offers; - with purchases effected on regulated markets, according to procedures established by Borsa Italiana S.p.A.;

1 The data takes into account the ordinary shares originating from the exercise of Pirelli & C. ordinary share warrants 2003- 2006 effected by March 12, 2006.

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- through the purchase and sale of derivative instruments traded on regulated markets which call Introduction for the physical delivery of the underlying shares and at the conditions established by Borsa Italiana The Group S.p.A.; 2005 economic and - through the proportional allocation of sales options to the shareholders. ﬁnancial review As for transactions for the disposal of treasury shares, the board proposes that the authorization Major events in 2005 shall allow for the adoption of any procedure necessary to arrive at the purposes pursued. Consolidated Financial Statement 7. Possible cancellation of the treasury shares purchased Pirelli Labs As stated, the purchase of treasury shares is not, at this time, pre-destined for transactions to reduce Subsequent events share capital by canceling the treasury shares purchased. Outlook for the current year Tyres Sector ***** Pirelli Broadband Solutions If, in agreement, we ask you to approve the following Pirelli & C. Real Estate Pirelli & C. Ambiente RESOLUTION Information Systems Proforma Data “The shareholders’ meeting: Equity Investments held by Directors, Statutory - having taken note of the proposal by the directors; Auditors and General - having taken note of the provisions of art. 2357 and 2357-ter of the Italian Civil Code; Managers - having taken note that, as of today, the company is the owner of 2,617,500 ordinary shares, equal to Stock options plans approximately 0.05% of share capital amounting to Euros 2,764,715,575.44; Corporate Governance - having seen the statutory ﬁnancial statements for the year ended December 31 2005, Pirelli & C. S.p.A. - Summary Data RESOLVES Ī Shareholders’ Resolutions a) to cancel the resolution passed by the ordinary shareholders’ meeting of April 28, 2005 authorizing the purchase and the disposition of treasury shares, as not used;

b) to authorize the purchase of treasury shares (ordinary and savings shares) of par value Euros 0.52 each within the maximum limit established by art. 2357 of the Italian Civil Code, equal to 10 percent of share capital pro-tempore, establishing that: - the purchase can be made at one or more times within 18 months of the date of this resolution; - the purchase price of each share shall not be either lower or higher, in both cases, than a maximum of 15 percent of the weighted average official prices recorded by the Italian stock exchange for shares of the same class registered by Borsa Italian S.p.A. in the three trading sessions prior to each single transaction; - the purchase shall be made by using retained earnings and the available reserves as shown in the most recent duly approved ﬁnancial statements at the time of the transaction, setting up a reserve for treasury shares in the manner and within the limits established by law; - the purchase shall be made according to the manner allowed by the laws and regulations in force, at the discretion of the Board of Directors;

c) a) to authorize, for the same period of 18 months starting from the date of this resolution by the shareholders’ meeting, the disposal, in whole or in part, at one or more times and at any time, of Pirelli & C. S.p.A. ordinary and/or savings shares in the portfolio of the company. The disposal, also of the treasury shares already held by Pirelli & C. S.p.A. at the date of this resolution, may be made at the price determined according to the criteria established by the Board of Directors, with regard to the manner of disposal used, the trend in the prices of the shares during the preceding period and the best interests of the company. The disposals may be made according to the manner allowed by the laws and regulation in force, at the discretion of the Board of Directors;

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d) to confer to the Board of Directors a mandate so that it can see to the necessary accounting Introduction entries following transactions for the purchase, sale, exchange or contribution of the treasury The Group shares, in accordance with the provisions of the law and the accounting principles which from 2005 economic and time to time are applicable, utilizing and replenishing the reserves used for transactions involving ﬁnancial review treasury shares depending on the cases; under the assumption of the disposal, exchange, Major events in 2005 contribution or writedown, the corresponding amount may be reused for further purchases, Consolidated Financial until the expiration date of the authorization given by the shareholders’ meeting and with no Statement Pirelli Labs change in the quantitative limits or the conditions provided by this resolution; Subsequent events Outlook for the current e) to confer to the board, and on its behalf, to the chairman, deputy chairmen and managing year directors, separately, any and all powers necessary to make purchases and sales and in any case Tyres Sector to carry out the preceding resolutions, also through those holding power of attorney, fulﬁlling that Pirelli Broadband eventually required by the appropriate authorities”. Solutions Pirelli & C. Real Estate Pirelli & C. Ambiente Information Systems Proforma Data Equity Investments held by Directors, Statutory Auditors and General Managers Board of Directors Stock options plans Milan, 13 March 2006 Corporate Governance Pirelli & C. S.p.A. - Summary Data Ī Shareholders’ Resolutions

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1. PIRELLI AND SUSTAINABLE DEVELOPMENT

The Pirelli & C. 2005 Sustainability Report is vitally important for the entire Pirelli community. It seeks to fully embody a corporate culture based on the integration of economic, environmental and social policies. For this reason a description of performance in the area of sustainability is included in the Annual Report, 2005. The report is drawn up using the Triple Bottom Line approach as the basis for drawing together economic, environmental and social issues.

The Pirelli Group incorporates various different business areas, each of which addresses sustainability within the context of its respective areas of activity. This necessarily implies a relatively heterogeneous weave of relations with stakeholders, which translates into a positive variety of ways of listening to and involving all the parties concerned.

This report provides a virtual showcase for many of these experiences. Attention is focused on those deemed of greatest interest to the reader, providing a succinct picture of Pirelli’s sense of Corporate Responsibility. The report avoids undue emphasis on the goals that have been achieved, while transparently illustrating critical issues that have emerged.

The publication of this document is crucially important for the Pirelli Group and all its stakeholders and should be seen as a starting point, a sort of initial analysis of sustainability within the Group.

As evidence of its ﬁrm intention to communicate with the utmost transparency, this report has drawn upon the 2002 Sustainability Reporting Guidelines featured in the Global Reporting Initiative (GRI). In addressing economic and social issues use has also been made of the “Corporate Reporting Principles”, drawn up by the “Study Group for Corporate Reporting” of the Italian Ministry of Employment and Social Policies. Environmental issues are analysed on the basis of the speciﬁc protocols set down in the GRI.

All the figures and information contained in this report refer to the Pirelli Group, as described in the previous sections of this report. More specifically, any significant variations in the limits and scope of the reporting are specified along with any aspects influenced thereby.

The path pursued by Pirelli in its approach to sustainability is illustrated below, followed by a collection of the main documents adopted by the company to enhance its economic, environmental and social assets.

Pirelli’s Path towards Sustainable Development 2005 • Pirelli Group Values and Ethical Code communicated to all employees in local languages • The Pirelli Policy on Health, Safety, the Environment and Social Responsibility translated into all languages spoken in the Group and made available through intranet and internet sites • Group Equal Opportunities Project established • Establishment of an Equal Opportunities Steering Committee and appointment of Equal Opportunities Manager • My Time for Indonesia Project 2004 • A CSR Steering Committee is enforced by the Chairman • New “Policy for Health, Safety, Environment and Social Responsibility” • SA 8000 deﬁned as reference standard for Pirelli Group Corporate Social Responsibility

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2000 • First “Environmental Report” • “New website section dedicated to “Environment” 1995 • Launch of “Pirelli Environmental Policy” and “Pirelli Policy for Safety at Work ” 1990 • Pirelli signs the business “Charter for Sustainable Development” of the International Chamber of Commerce, the basis for the joint position taken by industrial delegates at the Rio Conference

Pirelli listed on the Dow Jones and FTSE Sustainability Indices. Documents on Sustainability

Document Area of Sustainability Main Stakeholders Availability Involved Involved Values and Ethical Code Economy Shareholders Translated into 14 languages of the Pirelli Group Environment Customers - Community and available on Pirelli website Society Human Resources Environment Policy on Health, Environment Human Resources Translated into 14 languages Safety at Work, Society Community and available on Pirelli website the Environment and Social Responsibility Shareholder’s Handbook Economy Society Shareholders Available on Pirelli website Annual Report on Corporate Economy Shareholders Available on Pirelli website Governance Society Community Environmental Report Environment Shareholders Available on Pirelli website (2000-2004) Society Customers - Community Human Resources Environment

1.1. The Values and Ethical Code of the Pirelli Group

In order to provide even tighter and more uniform guidelines on professional practices within the company, a document entitled “The Values and Ethical Code of the Pirelli Group”, was drawn up and distributed to all group employees. The document was translated into 14 different languages.

1.2. Policy for Health, Safety, the Environment and Social Responsibility

Within an international context in which social, environmental and economic expectations are ever more demanding, the policy adopted by the Pirelli group in June 2004 (published in all the languages used by the group) has further reinforced the equilibrium between sustainability and the group’s industrial development. As well as referring to the principle of sustainable development, the Pirelli Policy for Health, Safety, the Environment and Social Responsibility brings together in a single document the earlier policies relating to the environment (ﬁrst version published in July 1995 and updated in September 2000) and safety at work (September 1995). The Pirelli group has always considered the safety, health and wellbeing of its employees and the environment as one of the primary needs that have to be respected in the organization of its activities. Pirelli adheres to the principle of Sustainable Development, committing itself to upholding – among others – the following principles: • the government of its activities through the adoption of management systems relating to health and safety at work, the environment and social responsibility that conform to the international standards;

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• the communication and diffusion of information regarding health and safety at work, the environment and social responsibility to the internal and external “stakeholders”, actively working with the national and international academic and legislative bodies; • the promotion of the use of the most advanced technologies in order to achieve a degree of excellence with regards to the protection of workers’ health and safety at work and the safeguarding of the environment; • the evaluation and reduction of the environmental impact of its processes/products through the LCA (Life Cycle Assessment) approach; • the responsible use of resources with the objective of achieving sustainable development that respects the environment and the rights of future generations; • the evaluation of the risks of professional injury or disease so as to eliminate or at least reduce them, observing as a minimum standard the existing legislation in the various countries; • avoidance of the use of or giving support to the use of either child labour or forced labour; • guaranteeing equal opportunities and freedom of association; promoting the development of each individual; • establishing and actively maintaining the procedures necessary for the evaluation and selection of contractors and sub-contractors on the basis of their commitment in the ﬁeld of social and environmental responsibility; • the involvement of all the group’s organizational levels and employees, ensuring that operational responsibilities and procedures are precisely deﬁned, appropriately communicated and clearly understood.

Pirelli is committed to the continuous improvement of its policies and programmes and to implementing procedures, regulations and directives aimed at ensuring that the values enshrined in this Code are reﬂected in their actions and in the behaviour of each individual company and all their employees and partners.

1.3. The Management Systems Approach

In applying the ﬁrst principle of the policy, in 2005 Pirelli continued with an intensive programme of activities in the ﬁeld of Management Systems, continuing to believe in the validity of these methods of improving the efficacy and efficiency of its processes while achieving further reductions of the impacts on the health of its employees, the conditions of safety at work and the external environment. In 1998, an environmental management system was inaugurated that conformed to the ISO 14001 standard. Subsequently, in 2001, this approach was extended to the management of safety, with the OHSAS 18001 standard being progressively introduced to the group’s operational units.

1.4. The Global Compact

At the international level, it is worth noting that Pirelli is a member of the Global Compact, an international network under the aegis of the United Nations agencies that is intended to promote responsible corporate citizenship in such a way as to permit the business world to contribute to ﬁnding solutions to the challenges of globalization. Through a letter to the Secretary General of the United Nations, the Pirelli group has formalized its commitment to uphold the “ten principles” relating to human rights, labour, the environment and the ﬁght against corruption. These principles are universally shared in that they derive from the Universal Declaration of Human Rights, the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work, the Rio Declaration on Environment and Development and the United Nations Convention Against Corruption.

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2. ECONOMIC DIMENSION

Group companies are committed to contributing to the economic well-being and growth of the community in which they operate by providing efficient and technologically advanced services. (Article 5 of the Ethical Code – Community).

2.1. Added Value

Added Value means the wealth created over a given period, calculated as the difference between the revenues generated and external costs sustained while doing business. Sharing out added value between the stakeholders allows relations between Pirelli and its main stakeholders to be expressed in monetary terms, shifting the attention towards the socio-economic system in which the group operates (as outlined in the following diagram).

Customers Revenues Costs Suppliers

Overall Added Value

Public Outside Employees Financers Shareholders Company Administration Community

Renumeration Severance Depreciation Indemnity Taxes Financial Provisions Outside Shared profits Corporate Social and levies Charges Unshared donations benefits profits Social costs

During the 2005 financial year, Pirelli & C. Group created gross added value for a total of 1,836,320 thousand Euros. 77% of the wealth created by the Group was distributed to employees, Outside Company Community financers and the public administration sector, while the remaining 23.4% 23% was allocated to the company itself. 0.5% Shareholders More specifically, personnel received a total of 1,029,880 thousand 8.1% Euros, tax and levies amounting to 128,484 thousand Euros were paid out to the public administration, and resources totalling 429,361 thousand Euros were allocated to the company itself.

The added value created by Pirelli & Co. Group was shared out as follows:

Year 2005 (in thousands of euros) % Gross overall added value 1,836,320 Employees A Payments to personnel (1,029,880) 56.1% 56.1% B Payments to Public Administration (128,484) 7.0% Financers Public 4.9% Administration C Payments of credit capital (90,672) 4.9% 7.0% D Payments of venture capital (149,492) 8.1% E Payments to the company (429,361) 23.4% Gross overall added value. F Outside donations (8,431) 0.5%

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The following table shows Pirelli & C. Group contributions and donations in 2005 broken down into different categories.

Operating Sector (in thousands of euros) Education 799 Culture 5,533 Sport 450 Research 290 Solidarity 914 Other 445 TOTAL 8,431

Group companies do not contribute or confer advantages or other beneﬁts upon political parties and trade union organizations or their representatives and candidates, without prejudice to compliance with the relevant prevailing legislation. (from Article 5 of the Ethical Code – Community).

2.2. Customers

Group companies pursue market excellence and competitiveness, offering customers a quality of service that effectively meets their requirements (from Article 2 of the Ethical Code – Aims and Values).

Sales broken down into different geographical areas Geographical Area % of total value of sales Italy 32% Rest of Europe 36% North America 7% Latin America 17% Australia, Africa, Asia 8%

2.3. Suppliers

The management of relations with suppliers is backed up by special procedures allowing a proper working relationship to be set up. Supply procedures are centrally controlled by the Sector Purchasing Departments, which check suppliers meet the required standards ensuring omogeneous and coordinated operations and allowing at the same time the system to be as ﬂexible as possible and can adapt to the characteristics of the various type of business the group is engaged in. In 2006, the general supply terms will include special clauses referring to Corporate Social Responsibility.

Suppliers broken down into different geographical areas Economic Area Geographical Area % of total value of purchases OECD countries: EUROPE 67% NORTH AMERICA 9% OTHERS1 2% Non OECD countries: LATIN AMERICA 11% ASIA 10% AFRICA 1%

Goods and services purchased broken down into different categories Category ?/000 Raw Materials 1,426,574 Consumables 135,332 Services 1,123,559

1 Australia, New Zeland, Japan, Korea.

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2.4. Shareholders

Group companies are committed to ensuring equal treatment for all categories of shareholders, avoiding any preferential treatment. The reciprocal beneﬁts that derive from belonging to a group of companies are pursued in accordance with the relevant legislation and the autonomous interests of each Group Company as it seeks to create value. (Article 3 of the Ethical Code - Shareholders).

Over recent years the Pirelli Group has developed one of the most advanced governance systems in the world, making strenuous efforts to appoint independent administrators and minority groups onto its own board. Independents now account for ﬁfty percent of the total (ten out of twenty), and a ﬁfth of them (four) represent minority shareholders. Independents are also co-ordinated by a “Lead Independent Director” responsible for dealing with and co-ordinating all their demands. Specially appointed internal committees ensure all inside operations proceed smoothly.

Ordinary shares are the most common type of equity investment and confer full Shareholder status. Pirelli & C. also issues savings shares, which do not guarantee full voting rights, grant the holder privileges in the distribution of profits. In its Articles of Association, at the Art. 18, Pirelli & C. stipulates that the so called “preferential dividend” to draw must be 7% of the nominal share value (0.52 for Pirelli & C.). Furthermore, any profi t remaining after this dividend has been allocated to the savings shares is divided between shares so that savings shares receive a higher dividend than ordinary shares (at least 2% of the nominal share value). Finally, if no profits are distributed by the Company (or if less than 7% of the nominal value is distributed), then holders of savings shares are entitled to collect the basic dividend for that period within two years. Holders of savings shares have no voting rights or the right to attend general Meetings, whether ordinary or extraordinary. However, they may attend special Meetings of holders of savings shares organised for the purpose of electing (or dismissing) their common representative and discussing any prejudicial resolutions adopted by the Company’s general Meetings or other relevant topics of interest. The common representative for holders of savings shares is vested with the power to represent these Shareholders and has the right to attend Meetings of ordinary Shareholders of the Company, regardless of the nature or agenda of such Meetings, and to contest the resolutions adopted by the Meeting.

The majority shareholders are part of a business syndicate representing 46.68% of the share capital. Approximately 23% is formed by retail shareholders and the remaining 30.32% by institutional investors. At the end of May 2005 there were about 107,000 retail shareholders (about 27% being women). Foreign shareholders accounted for approximately 6% of the total share capital.

It is in Pirelli & C. S.p.A.’s own primary interest to set up and maintain constant interaction with its shareholders and institutional investors. To this end, it set up a department for managing relations with investors back in the early-1990s, which has the job of implementing a specific active reporting and information programme aimed at the financial community: institutional investors and financial analysts. In recent years, these operations have also been extended to small savers due to the considerable percentage of the capital they hold.

Relations with the ﬁnancial community take the form of live or conference call presentations regularly reporting the company’s economic-ﬁnancial results and development strategies.

Details of the aforementioned work and presentation documents are available from the Pirelli website: www.pirelli.com in the Investor Relations section.

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Finally, it is worth noting that both the Holding Company and the affiliate Pirelli & C. Real Estate (a listed company on the telematics shares market of the Italian Stock Exchange) have set up a dedicated means of information specially for retail shareholders: the Shareholder’s Manual, drawn up based on experience with best international practice, is a benchmark for listed companies in Italy interested in communicating directly with their shareholders. As an ideal continuation of the Shareholder’s Manual, Pirelli & C. Real Estate regularly publishes a newsletter specially for retail shareholders on its own website, informing retail shareholders about corporate operations, projects and new enterprises, key facts, business trends and results over given periods, and industrial-ﬁnancial strategies.

3. ENVIRONMENTAL DIMENSION

Group companies believe in sustainable international growth in the common interest of all stakeholders, both current and future. Their investment and business decisions therefore reflect respect for the environment and public health. Without prejudice to compliance with specific prevailing legislation, Group companies are aware of the importance of environmental issues when making choices, not least in the adoption of specific technologies and manufacturing methods (where this is technically feasible and economically viable) that allow for the reduction of the environmental impact of their operations, even beyond the minimum limits set down by regulatory requirements. (Article 7 of the Ethical Code).

In an international context in which social, environmental and economic expectations are increasingly high, the integrated Environment-Health-Safety-Social Responsibility policy adopted by the Pirelli Group ensures the right balance between sustainability and industrial development. By enforcing the principles contained in the policy, the group has achieved notable results in terms of: • reducing the environmental impact of its own operations • conserving and enhancing the territory • making rational use of resources and energy.

3.1. Key Environmental Factors As previously indicated, the Pirelli Group is characterized by a wide range of production operations, including tyre manufacturing, steel cord manufacturing, Research & Development carried out at Pirelli Labs (both in the ﬁeld of new materials and opto-electronic components), business sectors involved in recovering energy from waste (Pirelli Ambiente Holding), technology for sustainable development (new fuels, innovative systems for reducing exhaust fumes,…), environmental remediations, up to the real-estate sector (Pirelli & C. Real Estate) and business in the ﬁeld of photonics aimed at developing cutting-edge innovative solutions for the latest generation of telecom infrastructures (Pirelli Broadband Solutions). A brief outline of all the aforementioned business areas, highlighting their main impacts on the environment will be showed in the following paragraphs.

3.2. The Environmental Management System The Pirelli Group’s Environmental Management System mainly concerns manufacturing operations (since, potentially, they have most impact on the environment), but, in certain cases, it also encompasses design work, research, logistics and services provided by Pirelli. The efforts made at a group level to introduce the Environmental Management System and appropriately maintain it over time have favoured the gradual increase in awareness of,

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and expertise with regards to, environmental questions and, in many cases, have improved the group’s environmental performance. At the end of 2005, 19 (out of a total of 24) of the Operating Units in the Tyre Sector were certified to ISO 14001 international standard. Not only the manufacturing plants, but also the Pirelli Centre for scientifically assessing tyre-vehicle performances located in Vizzola Ticino (in Lombardy-Italy) is ISO 14001 certified. This certification is particularly important because the centre, covering an area of about 26 hectares, is set in Parco Lombardo in Valle del Ticino, forming part of UNESCO’s so-called Mab (Man and Biosphere) areas: a group of 425 biosphere reserves spread across 95 countries worldwide.

In 2005 there were no environmental accident at tyre Pirelli Group’s ISO 14001 Certiﬁcate. manufacturing plants and no ﬁnes associated with environmental issues were imposed.

3.3. Tyres Sector

The main activities in this manufacturing sector cover a wide range of production operations for both tyres (for cars, industrial-commercial vehicles, buses and motor vehicles) and steel cord mainly used for making tyres. The two main production operations in the Tyre Sector have been analysed separately, both in terms of production output and quantitative data concerning a list of environmental indicators.

3.3.1. Structure of a tyre A tyre may be seen as a compound or, in other words, a solid assemblage of materials with very different properties, whose manufacture necessarily requires great precision.

To get a clearer insight into the environmental issues associated with this kind of production process, referring to the diagram in the next page, a tyre may be schematically represented as follows: • A perfectly airtight layer of synthetic rubber. This layer is actually inside the tyre and acts like an inner-tube. • The carcass. This is the tyre’s load-bearing structure. It is composed of thin threads of fabric set in a straight arc and glued to the rubber. These threads are a key part of the tyre structure and make it pressure resistant. The ply of a car tyre has about 1400 wires, each of which can withstand a force of 15 kg. • Padding in the bottom section, which serves the purpose of transmitting the engine torque and braking torque from the rim to the area where the tyre touches the ground. • Bead wires are metal rings with lots of parallel rubberised wires, which are wound – from the inside out – around the carcass plies, so that the said plies are ﬁrmly set in place and do not unwind under pressure. • Sidewalls are the part of the tyre between the “bead” and shoulder of the “tread”. Sidewalls are usually made of rubber strips highly resistant to repeated bending and oxidation (ageing). They are designed to protect and reinforce the carcass, while absorbing some of the dynamic stress and strain to which the tyre is subjected. • Beads are composed of a set of threaded steel rings obtained from one single thread wound

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several times over various layers. They are designed to attach the tyre to the wheel rim, so that stress and strain are transmitted from the vehicle to the road and vice-versa. • The Belt is made of plies which are usually strengthened by very thin but highly resistant steel threads, crossed over diagonally and glued to each other. The criss-crossing of these threads with the carcass threads creates un-deformable triangles. This triangulation effect ensures they are stiffened and strengthened at the top. The plies, totally enveloping the whole top of the tyre like a belt, play an important role and must speciﬁcally be: - rigid enough along the circumference of the tyre not to stretch under the effects of centrifugal force, so that the diameter of the tyre may be controlled whatever the operating conditions; - rigid crossways in order to withstand drift thrust; - vertically elastic to overcome obstacles. These plies are obtained by gluing the steel to the rubber. It is vital but extremely difficult to bond these very dissimilar materials together perfectly. • Tread. Tread is placed over the top ply. This part of the tyre, ﬁtted with suitable grooves, is where it comes into contact with the road. The tread must be able to withstand great forces at the point of contact with the road. The compound out of which it is made must adhere to all kinds of surfaces, be hardwearing and abrasion resistant, and cope with a slight warming up.

Tyre structure (Source: “Life Cycle Assessment of an average European Car Tyre”, PRè Consultants B.V., 2001)

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3.3.2. Production From a production viewpoint, the construction of a tyre may, at least initially, be broken down into two main stages: • manufacture of the rubber part, tyre compound and sidewalls; • manufacture of the basic structure, an authentic rubberised “frame” supporting all the components.

The rubbery part of the tyre (tread, sidewalls and plies) is a special mix referred to as a “compound”, mainly composed of rubber (both natural and synthetic), plasticizers (oil by-products) and fillers (mainly carbon black), each in a percentage of approximately 30%, although the exact amount depends on the type of compound required. The remaining 10%, roughly, is formed of other mineral fillers and assorted binders (e.g. accelerating agents, antidegradants, vulcanising agents,…). The plasticizers and carbon black are stored in special silos and conveyed into a closed mixer called banbury, where the compound is first processed. A computer controls and manages the quantities involved, either coming from the stores or sent through to the banbury. The rubber (both natural and synthetic) is cut into pieces and inserted by hand, after checking its weight to ensure it is right for the composition required.

The strips of compound are then placed in an open mixer (calender) made of two big rollers used to even out the compound in terms of both its composition and thickness: in fact, this special process involves a constant torque coupled with elongation. Special chemicals are added towards the end of the cycle, such as vulcanising and accelerating agents, required for the later stages. The batch of compound is then cut into strips and dipped into a batch-off tank for ﬁnal cooling.

At this point the compound is ready to be used for the tread or sidewalls and is next drawn into the shape, or rather cross-section, required for later operations. The plies form the heart of the tyre structure and are made of longitudinal (pattern) and cross (warp) threads, composed of various materials.

The plies are then cut at a certain angle to the longitudinal direction.

The sidewall is another key part of a tyre and actually positioned right by the metal rim known as the heal. The base of the heal is supported by the bead, which is made of a set of brass-coated steel threads to strengthen the area in contact with the rim.

The next stage in completing the ﬁnished tyre is the building of the components described above, carried out using special assembly equipment.

The “green” tyre produced is then sent on to the next stage called vulcanisation, an authentic solid state chemical reaction.

Before vulcanisation, the green tyres undergo a painting process to prevent the tyre from sticking to either the mould or vulcanisation chamber inside the vulcanizer.

After this stage has been completed and enough time for cooling has been allowed, the vulcanised tyre is ﬁrst trimmed to get rid of any imperfections affecting the way it looks and then given an initial visual inspection (both inside and outside to check no crude construction mistakes have been made), immediately followed (for truck tyres) by an X-ray check in special shielded areas.

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3.3.3. Environmental impact To carefully assess how manufacturing a tyre is related to the 100% environment, studies must be extended to cover the entire 100 2.1% 89% lifecycle of the said tyre. Analysing the environmental impact 2.1% throughout the entire life cycle (so-called Life Cycle Assessment) 80 is advantageous in that it identifies the stages when the most 86.0% significant impact is caused, actually quantifying it. 60 75.0% This approach – foreseen by ISO 14040 standards – was adopted in 40 the life cycle assessment of an average European car tyre, jointly 2 carried out by leading European tyre manufacturers . 20 The most striking result of the aforementioned study is the notable 0.2% 0.2% environmental impact associated with the tyre usage stage, 11.7% 11.3% 0 Conventional “Silica” - which – in the case of a “conventional” tyre – accounts for 86% of tyre based the total impact. (“carbon black” tyre - based) Examining the impact caused during the usage stage in greater detail, it may be seen that approximately 90% of it is due to fuel End-of-Life Usage consumption owing to friction between the tyre and road surface, Transport Raw Materials and Production while the rest is due to the outcome of the friction: the so-called tyre debris. The figure shown here also highlights the contribution from the raw materials supply and production stages (jointly accounting for approximately 12% of total impact), causing, respectively, about 10% and 2% of total impact. On average, tyres are responsible for approximately 20% of overall vehicle consumption, and this partly explains the high environmental impact caused during usage.

A notable reduction in consumption (equal to 2.6%) is found in tyres containing silica compared to traditional models (which are mainly made of carbon black), resulting in an eleven percent reduction in overall environmental impact. Since a number of years Pirelli has mainly been using silica rather than carbon black in the manufacture of compounds used for the tread, which is the part of the tyre responsible for the impact caused during usage.

Typical composition of a tyre Raw Materials Percentages (in weight) Natural rubber 20 ÷ 25 Synthetic rubber ֈ 25 Carbon black 20 ÷ 30 Textile material ֈ 5 Vulcanising agents 1 ÷ 2 Solvents = Softening agents 5 ÷ 10 Other substances Accelerating agents ֈ 1 Zinc oxide 1 ÷ 2 Antidegradants 1 ÷ 2 Amorphous silica 1 ÷ 10

2 “Life Cycle Assessment of an average European Car Tyre”, PRè Consultants B.V. on behalf of BLIC, 2001. This study is signiﬁcantly representative of the full range of car tyres, excluding so-called “snow” tyres.

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In this context, although Pirelli is only directly responsible for the impact of production, the group has actually taken many steps to draw on technologies currently available to reduce any impact caused during those stages in a tyre’s life cycle over which it has no direct control.

Activities on Raw Materials With a view to reducing the impact summarised above, these activities work on two key fronts: on one hand, raw materials are chosen with a view to reducing, as far as possible, the use of hazardous substances for both people and the environment; on the other, action is taken which, from a cost-beneﬁts viewpoint, exploit as few natural resources as possible during production. As regards problems related to raw materials, the following steps were taken in 2005: • together with other tyre manufacturers, Pirelli took part in a working group on processed oils specially arranged by the BLIC (“European Association of the Rubber Industry”). The workshop helped set down the technical speciﬁcations of the European Directive 2005/69/EC, concerning restriction on the marketing and use of process oils due to their content of polycyclic aromatic hydrocarbons (PAHs), substances considered a hazard for both people’s health and the environment. • In accordance with the group’s own corporate standards, work continued on assessing the eco-toxicological properties of certain new chemicals before incorporating them in manufacturing cycles. In particular, in light of recent European-wide regulations on classifying, labelling and packaging dangerous substances and compounds, the list of substances which cannot be used in manufacturing processes, or for which research programmes are under way to replace them, has been updated. This has resulted in approximately 50 new raw materials being analysed and assessed in 2005. • The use of a system for assessing suppliers (so-called “Vendor Rating”) based on synthetic quantitative standards for assessing the quality and standard of the services they provide, also including performance ratings on Health, Safety and the Environment.

Vendor Rating refers to the fact that suppliers are chosen and compared in terms of performance not only based on price, but also in terms of the “total costs” involved for the company. During the course of 2005, work on developing new corporate Vendor Rating guidelines was completed at sector level to meet real needs more effectively, also in terms of ﬁtting in with other data processing systems already in use in the group.

This meant that, as far as the HSE area was speciﬁcally concerned, the opportunity was taken to integrate existing environmental factors with those concerning safety and health, taking into account: • the use of HSE performance indicators and plans to improve them, • the publication of an annual HSE report, • the introduction of a certiﬁed management system (e.g. ISO 14001, OHSAS 18001 or their equivalent), • the implementation of systems to reduce impact connected with packaging and logistics.

On an operating level: • an initial list was drawn up of all suppliers of raw materials and other chemicals (approximately 110); • the 27 main suppliers were screened and sent a questionnaire on the aforementioned matters;

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Environment & Safety e g d t a o d r n o a e e l B G v l e d e A y y u o d c r l r v n o a x / e a e n B O V E V G V Environment Partner companies involvment in the implementation of the Environmental requirements 95 Plan to improve Environmental aspects 95 Use of Performance Indicators to monitor Environmental aspects 95 Compliance with all the necessary Enviromental licenses and laws 95 Editing of a Public Environmental annual report 50 Achievement of Environmental Management System certiﬁcates (ISO 14001, EMAS or equivalent) 95 Implementation of return systems to reuse and recycle materials 95 Optimization of packaging and logistics to reduce environmental impact 95 Safety Imposition of Safety requirements to partner companies 95 Plan to improve Safet aspects 95 Use of Performance Indicators to monitor Safety aspects 95 Compliance with all the necessary Safety licenses and laws 95 Editing of a public Safety annual report 50 Reliability to supply Material Safety Data Sheet in local language for raw materials supplid to Pirelli 20 Achievement of Occupational Health and Safety Management System certiﬁcates (OHSAS18001 or equivalent) 95

Example of replies to the questionnaire on HSE Vendor Rating.

• suppliers are assessed – from a HSE viewpoint – based on their replies, as for example shown above; • the HSE assessment is passed on to the Purchasing Department, which draws up the ﬁnal Vendor Rating.

In 2006 these Vendor Rating guidelines will also be extended to incorporate issues related to Social Responsibility.

Activities on production processes Work continued as usual in 2005, focusing mainly on optimising the manufacture of high-quality compounds (by means of the so-called “CCM” system, which stands for “Continuous Compounds Mixing”) and also boosting tyre production using the MIRS™ system (“Modular Integrated Robotized System”).

CCM Process Based on two twin-screw extruders working continuously for the preparation of the compounds, the so-called A stage in the manufacture of compounds CCM technology integrated in the MIRS™ plant is a using the CCM process. computer-controlled pneumatic distribution system allowing ingredients to be transported directly from the storage silos to the extruders.

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This kind of manufacturing technology is designed to handle the complexity associated with the total of over 40 components involved, resulting in improvements in the quality of the compound and, hence, the ﬁnal result. Moreover, from a hygiene-environmental viewpoint, as well as involving the use of systems for collecting and recycling dust, this system also ensures that dust and dirt levels in the department are kept at an extremely low level. The CCM process also allows a notable reduction in the amount of space taken up, as well as an approximately 20% decrease in energy consumption per unit of product.

MIRSTM The MIRS™ process is outstanding for its high degree of flexibility, speed of transit time, reduced amount of work in progress, and optimisation of modularity and logistics. Unlike large-scale conventional plants with extremely high production rates (designed to supply car manufacturers in different geographical locations), these much smaller islands, flexible and easily programmed to adapt to the production of new models with a minimum of preparation time, are not just technologically updated, they are also undoubtedly a logistical View of a MIRS™ unit. step forward since they can easily be located close to the manufacturing process being served. Tyres are constructed around a heated drum custom-designed for a specific model; the drum is constantly rotated by robots under an extrusion device spreading rubber all over the surface. The drum rotations and supply process are co-ordinated so that the material is distributed exactly as required for creating a specific tyre design. This robotized process allows for improved product quality thanks to the smooth and even geometric distribution of rubber fibres over the tyre. Part of the manufacturing process using The island is extremely flexible and when a new model is the MIRS™. brought into production, a specific drum is used and the robots are re-programmed; set-up time is reduced to a minimum, since the entire programming process is carried out off-line, while manufacturing continues.

Activities on tyre usage To reduce the environmental impact associated with tyre usage, the Tyres Sector is constantly involved, ﬁrst and foremost, in the design and development of new compounds and new product lines that, thanks to new materials, innovative internal structures and new tread patterns are capable of reducing rolling resistance without sacriﬁcing the durability of the tyre itself.

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As it has already been pointed out the tyre usage phase causes the most signiﬁcant environmental effects. Rolling resistance index RRc.

The most striking aspect relates to safety: on one hand, a tyre 18 must ensure vehicle controllability in all kinds of situations, 16 but on the other, due to the inevitable friction, it is responsible for part of the vehicle’s fuel consumption. 14 12

With this in mind, the Sector has focused on optimising rolling 10

resistance or, in other words, the force that the tyre opposes 8 to the advancement of the vehicle. Together with the resistance 6 offered by the vehicle’s mechanical organs and its resistance 4 to the penetration of the air, it infuences fuel consumption and, 20 40 60 80 100 120 140 160 consequently, the emissions of exhaust gases per unit of Speed (Km/h) distance travelled. “New comcept” tyre “Traditional” tyre Rolling resistance The rolling resistance value is naturally different for different RRc = Weight supported by the tyre types of tyre and depends on a series of factors such as the formulation of the tread compound, the tyre’s inﬂation pressure, the speed and weight of the vehicle, the road surface characteristics, the ambient temperature, and how the tyre itself is used…

In this context the ELRR (“Extra Low Rolling Resistance”) package has been available for some years and inﬂuences every component of the tyre to obtain an improvement in general tyre performance ratings as well as a further reduction in rolling resistance.

Another part of total impact is due to tyre debris, which refers to the particles of tyre rubber worn away as a result of the friction between the tread and the road surface: during its life cycle a tyre shreds a quantity of tyre debris, estimated at around 10-14% of its original weight.

Studies are currently being carried out across Europe into the impact of these particles on the environment: Pirelli constantly monitors this topic through a continuous exchange of information and experiences with other tyre manufacturers, through the BLIC mentioned earlier. Granulometric fraction of under 100 µm from the tyre debris generated by a truck tyre (above) and a care tyre (below). One ﬁnal (but no less important) aspect associated with the use of tyres concerns a tyre’s noise emissions, which are studied with the aid of special software and testing procedures, both in the ﬁeld and through laboratory testing in appropriately equipped facilities (anechoic chambers).

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Analysis of the graph presented here reveals that there is a Noise levels dB(A). signiﬁcant difference in the noise level – at various speeds – generated by traditional and new generation tyres. 90 80

End-Of-Life tyres 60 Pirelli’s commitment to the disposal of End-of-Life Tyres (ELTs) 50 10 20 30 40 50 60 70 80 90100 110 120 130 140 has been one of the group’s research objectives for a number Speed (Km/h) of years. As we have seen, the the End-of-Life scenario makes “New comcept” tyre only a modest contribution to the overall impact of the entire “Traditional” tyre lifecycle of the tyre and, among the various final disposal options, burial in landfill sites is without doubt the one that is least compatible from an environmental point of view. European Directive 1999/31/EC (which has prohibited the disposal of whole ELTs in landfill sites since 2003 and that of fragmented ELTs since July 2006) means that the quest for alternative means of disposal is an ever more pressing requirement. End-of-life tyres may be recycled either to recover the materials of which they are composed (“materials recovery”) or using them as fuel (“energy recovery”), exploiting their high calorific power as a valid alternative to the use of solid fuels, above all in terms of improving atmospheric emissions.

Average characteristics of End-of-life tyres1 Average values Ferrous materials 15% Ashes 2% Fuel 81.5% Sulphur 1.5% Lowest caloriﬁc potential > 7,400 Kcal/kg Volatile materials (regarding the fuel component) >70% 1 U. Ghezzi, M. Giugliano, M. gross, S. Pollo, G. Zerbo: “Tyres used as fuel within a cement work furnace” (Original title: “L’impiego di pneumatici come combustibile in un forno da cemento”).

Thanks also to collaboration with Pirelli Labs, a number of projects have have developed in the ﬁelds of recycling and energy recovery.

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Diagram of tyre recycling

End-of-Life Tyre Gasiﬁcation

Gaseous fuel Solid fuel Sectioning

Asphalt

Pyrolysis Granulation – Building Pulverization material

Acoustic Carbon black insulation material Technology for compound production

Products in rubber or plastic

The activities in question are focussed on the recovery of materials, for example, through granulation that, once the “textile” and “metal” fractions are separated, provides a rubber granulate that may in turn be ground further to produce a ﬁner powder. In this context can also be included the activities described in paragraph 3.7.1 hereafter.

In addition to the research and development operations described above, Pirelli is part of a specic work team set up at the BLIC to co-ordinate (on a European scale) operations in various European countries, fostering interaction with various national bodies and working through associations and companies set up by Examples of associations and companies Pirelli, together with other leading tyre manufacturers, in order to operating in Europe, which promote or promote and manage the recovery of ELTs. manage the recovery of ELTs.

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3.3.4. Environmental Database In parallel with the customary analyses and processing of the data compiled by the operational units, in 2005 the database developed along WEB-based lines in the ‘Intranet” area became fully operational. This allows the various operational units to insert data directly via computer, thus making the processes of data entry, veriﬁcation and processing considerably more efficient while also allowing for a more dynamic management of improvement targets. The evaluation of greenhouse-effect gas emissions is carried out using the following conversion coefficients:

Energy conversion coefficients Type of energy Source Factor of Conversion

Natural gas BUWAL 250 57.0 kg CO 2 / GJ 0.06 kg NO x / GJ

Diesel Idemat 2001 2,983.3 kg CO 2 / t diesel 9.7 kg NO x / t diesel

LPG Idemat 2001 2,703.6 kg CO 2 / t LPG 13.2 kg NO x / t LPG

Fuel oil BUWAL 250 88.9 kg CO 2 / GJ 0.23 kg NO x / GJ

Electricity BUWAL 250 119 kg CO 2 / GJ 0.26 kg NO x / GJ

3.3.5. Quantitative data for tyre manufacuring The following ﬁgures refer to 17 tyre production Units. The Yanzhou factory (China) manufacturing tyres for industrial vehicles is not included because it is not yet fully operational, also the Slatina factory for car tyre production (Romania), still under completion, is not included.

2000 2001 2002 2003 2004 2005 Water consumption (m3) 13,233,013 12,926,495 14,150,666 14,021,157 13,799,718 13,833,401 3 Specific water consumption (m /tonnpF) 21.25 21.18 21.51 19.55 18.60 16.72 Energy consumption (GJ) 6,992,750 7,031,007 7,447,103 7,855,546 6,817,907 6,820,991 Specific energy consumption (GJ/tonnpF) 11.23 11.52 11.31 10.96 9.19 8.24 Organic solvent consumption (tonn) 2,899.34 2,780.66 2,076.32 2,233.45 2,525.76 2,499.00 Specific organic solvent consumption (kg/tonnpF) 4.66 4.56 3.15 3.11 3.40 3.02 Dielectric oils containing PCB/PCT (kg)3 NA 32,003 27,333 27,333 21,455 17,517 Ozone depleting substances (kg) NA 8,280.65 8,141.2 10,445.3 9,730.9 8,587.7 Hazardous waste (tonn)4 4,543.15 4,451.65 4,434.57 5,107.01 6,082.52 6,213.71 Specific hazardous waste (kg/tonnpF) 7.30 7.29 6.74 7.12 8.20 7.51 Non-hazardous waste (tonn) 43,854.45 48,495.42 53,268.70 64,744.10 70,339.45 77,268.19 Specific non-hazardous waste (kg/tonnpF) 70.42 79.45 80.91 90.29 94.80 93.39 Recycled waste out of total waste (%) NA 22.7 39.2 60.6 71.9 68.8 CO2 emissions (tonn) NA NA 643,864 681,404 626,255 606,788 Specific CO2 emissions (tonn/tonnpF) NA NA 0.98 0.95 0.84 0.73 NOx emissions (tonn) NA NA 1,236 1,314 1,250 1,139 Specific NOx emissions (kg/tonnpF) NA NA 1.88 1.83 1.68 1.38

As the ﬁgures above show, faced with an increase in manufacturing output over 11% (rising from over 740,000 tons in 2004 to over 825,000 tons in 2005), almost all the indicators show signiﬁcant improvements, due both to more efficient production management and also stemming from the contribution of the MIRS™ tyre production technology described earlier.

3 Quantities of dielectric oils with PCB/PCT concentrations of over 50 ppm. 4 In accordance with reports for previous years, the same breakdown – for the entire Group – into hazardous and non-hazardous waste was also used in 2005, as foreseen by the European regulations in force in this sector (notably, Ruling no. 532 by the European Commission dated 3rd May 2000 and later alterations and supplements).

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The pie chart above shows that a little over 50% of energy Petrol Diesel 0.2% requirements are met by primary energy sources (natural gas, 0.4% LPG, fuel oil, diesel and petrol), whose use generates, respectively, Steam 0.02% LPG 34% and 25% of total CO2 and NOx emissions. 1.6% Fuel Oil 4.2% 3.3.6. Environmental targets for tyre production Sector General Management have set the following environmental improvement targets for industrial tyre production: • 2% reduction in speciﬁc energy consumption • 4% reduction in speciﬁc water consumption (average for the entire Sector, including the Steel Cord Business Unit).

Electricity Natural Gas 3.4. Steel Cord Business Unit 49.3% 44.3%

Steel cord is a part-ﬁnished product used mainly in the Breakdown of Energy Consumption production of tyres (particulalrly in metal fabrics and bead (Tyres). rings). Within the group steel cord production takes place in 5 operational units in Brazil, Germany, Italy, Turkey and Romania (where a new plant has been built). Diagram of Steel Cord Production

Sulphuric Borax/iron Sodium acid solution stearate

Wire rod Preparation First cold stripping of wire rod drawing

Second cold Patenting and prepara- drawing tion of medium wires

Patenting

Brassing (electrical deposition in galvanic baths)

Phosphoric Zinc acid Copper acid Copper alkaline Sulphuric pickling deposition deposition deposition pickling

Pyrophosphate Phosphoric Zinc sulphate Copper sulphate Sulphuric acid of copper acid solution and aluminium and sulphuric acid solution and potassium

Third drawing Stranding Cording

Synthetic oils in emulsion

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3.4.1. Technological cycle As shown above, the end products from the technological cycle are basically of two types: • Steel cord proper, composed of several drawn and brass-coated strands used for strengthening the structure of tyres; • a drawn and brass-coated strand used for strengthening high-pressure rubber tubes and pipes.

The raw material used for both products is a wire rod – with a high carbon content – with a diameter of approximately 5.5 mm. Bearing in mind tiny differences between the various operating units, manufacturing operations on the steel wire rod may be broken down into 8 main stages as follows: a) stripping and preparation, which involves removing ﬂakes of oxide forming on the surface during the hot-rolling process carried out at steel works. b) ﬁrst drawing, during which the previously prepared wire rod is reduced in diameter by cold drawing using special lubricants (mainly sodium stearate). The products from this stage are divided into thick wires (diameter between 2.5-3 µm) and medium wires (diameter between 1-1.7 mm). c) patenting for thick wires, involving the heat treatment required to repair the wire structure and prepare it for further reduction by cold drawing. The heat treatment usually takes place in a furnace at a temperature of approximately 1000°C, followed by cooling down in molten lead at approximately 550°C. d) second drawing for thick wires, involving a cold deformation process similar to that described in stage b). e) patenting and brassing, for both medium wires and those emerging from stage d). The patenting during this stage is similar to that described in stage c), while the brassing procedure involves depositing a very thin layer (approximately 2 ÷ 4 mm) of brass (with a zinc content of approximately 30%) required to make the rubber compounds adhere to the cords. Generally speaking, the production sequence is as shown in the diagram above: - electrolytic sulphuric pickling, - copper deposition in an alkaline bath, - copper deposition in an acid bath, - zinc deposition in an acid bath, - brass alloy obtained through heat diffusion, - phosphoric pickling. f) third drawing, required to obtain wires with the required working diameter (generally around 0.25 mm). At this stage both the wire and dies are immersed in lubricating baths containing synthetic oils in water emulsion. g) stranding, involving the stranding together of between 2-10 wires, with the possibility of – in turn – further stranding. h) cording, during which both single wires and strands of wires are made into more or less intricate cords, whose number and arrangement varies according to their usage (tyres for cars, trucks, …). i) testing and packaging, during which the product undergoes both general and statistical tests.

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3.4.2. Quantitative data for steel cord production

The following data refer to all the operational units in the Steel Cord Business Unit including the new plant in Slatina.

2000 2001 2002 2003 2004 2005 Water consumption (m3) 1,419,919 1,501,836 1,420,825 1,438,185 1,465,002 1,251,351 3 Specific water consumption (m /tonnpF) 13.10 13.50 12.50 11.60 11.10 9.1 Energy Consumption (GJ) 1,220,579 1,305,207 1,320,452 1,440,218 1,441,334 1,569,232 Specific energy consumption (GJ/tonnpF) 11.30 11.76 11.65 11.62 10.94 11.43 Ozone depleting substances (kg)5 NA 83 76 70 120 130.0 Hazardous waste (tonn) 5,756.53 5,548.87 5,717.78 5,701.89 7,791.29 6,595.80 Specific hazardous waste (kg/tonnpF) 53.28 50.01 50.44 46.02 59.15 48.02 Non-hazardous waste (tonn) 6,621.39 7,919.85 14,116.36 15,601.27 15,043.24 18,721.50 Specific non-hazardous waste (kg/tonnpF) 61.28 71.37 124.54 125.91 114.20 133.03 Recycled waste out of total waste (%) NA 23.2 54 60.6 60 60.3 CO2 emissions (tonn) NA NA 130,216 141,022 147,261 159,773 Specific CO2 emissions (tonn/tonnpF) NA NA 1.15 1.14 1.12 1.16 NOx emissions (tonn) NA NA 267 299 310 315 Specific NOx emissions (kg/tonnpF) NA NA 2.36 2.41 2.35 2.30

Signiﬁcant improvements were also recorded in many of the Other 1% Natural Gas indicators for the production of steel cord and similar products, 27% as output of this part-ﬁnished product rose from approximately 131,000 tons in 2004 to approximately 137,000 tons in 2005.

Electricity consumption due to mechanical processing (drawing and cording) accounts for almost three-quarters of total consumption. 72 % of CO2 emissions come from generating the electricity used, as does 92% of total NOx emissions. Electricity 72% 3.5. Pirelli Broadband Solutions Breakdown of energy consumption (Steel Cord). Pirelli Broadband Solutions was set up at the end of 2004 and is aimed at researching and developing innovative and advanced solutions for next-generation telecom infrastructures. Supported by Pirelli Labs’ ongoing technological breakthroughs - Pirelli Broadband Solutions bases its activities on integrated competences in the ﬁelds of Photonics, Nanotechnologies and Broadband Access Systems, both wired and wireless. Pirelli Broadband Solutions develop competitive and innovative solutions, providing operators with voice, data and multi-media services through customised products and end-to-end platforms. The products of Pirelli Broadband Solutions also enhance the growing and widespread use of videoconferencing and video calls, thus reducing the needs of personnel to travel and thereby having positive direct and indirect effects on the environment.

5 The increase in 2005 is due to the purchase of equipment containing hydrofluorocarbons (HCFCs), which deplete the ozone layer a lot less than is internationally acknowledged for the categories of bromofluorocarbons (Halons) and chlorofluorocarbons (CFCs). The danger is defined by the so-called ODP factor (Ozone Depletion Potential), which sets at one the ODP value of the substance conventionally taken for reference purposes (CFC-11): for HCFCs the value is between 0.014- 0.1 (Source: PRè Consultants B.V. “the Ecoindicator 99 - A Damage Oriented Method For Life Cycle Impact Assessment, The Netherlands, 1999).

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3.6. Pirelli & C. Real Estate

3.6.1. Territorial expansion The Pirelli & C. Real Estate Group is a dynamic and constantly expanding enterprise, whose range of operations and assets is changing rapidly; variations signiﬁcantly affecting relations with the stakeholders. The company is implementing a full-scale reporting system to systematically manage and monitor, on a constant basis, its business dealings with people in the realms of: economics, the environment and society.

Total Consumption Consumption per Employee Water 12539 mc 20.2 mc/emp Heating 2208 MWh 3.6 MWh/emp Electricity 4036 MWh 6.5 MWh/emp Example of monitoring consumption at the headquarters in Milano Bicocca.

Pirelli RE is one the leading Italian players in major urban development schemes – i.e. projects to redevelop abandoned areas – a ﬁeld in which it has played a pioneering role, carrying out some of the most important urban transformation projects in Italy and setting new standards internationally.

These development projects are guided by a very deﬁnite theory of urban development, revolving around the idea of a “metropolitan” city and treating the modern-day city as a polycentric system. Each pole of the city has its own identity and independence while, at the same time, being perfectly knit into the surrounding territory, thereby moving beyond fragmentation and contrast between centre and suburbs.

In this light, the designing of the cityscape takes on crucial importance, calling for strategic thought about social trends and dynamics: phenomena like globalisation, technological progress, de-industrialisation and multi-culturism have brought about changes rapid and radical enough to call for a re-thinking of the very notion of the city and its functions.

A project must bring together all the potential of its location, incorporating all the studies and discussions carried out with the local community to cater for changes in lifestyle and the quality of living/life. In other words, a project must give meaning to the transformation of the cityscape and lay the foundations for sustainable development – social, economic and environmental – enhancing the territory’s identity and making it more attractive and competitive on the global scene. The following is an outline of two projects drawing on the best practices internationally available.

3.6.2. “Malaspina Project” The area in question is situated on Lake Malaspina, just outside Milan; the Pirelli RE project, developed as a joint venture with Aedes and Banca Antonveneta, has been devised with a special eye for well-being and quality of life, so that people can live and work in a lovely environmental setting. Housing and offices overlook Lake Malaspina in one of the biggest areas of greenery in Lombardy, as part of a regional project called “Ten big forests for the plain”, a breath of fresh air and nature extending over a total area of 720,000 square metres.

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The project has been carried out with speciﬁc emphasis on:

Quality of Life The Malaspina Project allocates plenty of room for pedestrian spaces, cycle paths and recreation areas. The services provided include sports facilities, retail spaces, eating places, a bank and post office.

Innovative High-Efficiency Systems The project will supply heating-cooling energy to a residential-services neighbourhood encompassing a total of 400,000 cubic metres by means of co-generation. This technical solution will allow considerable energy savings in the consumption and emission of polluting substances compared to conventional systems. Moreover, in order to increase the buildings’ energy efficiency, a building shell was designed in conjunction with Milan Polytechnic, whose excellent insulation properties allow 35% energy savings compared to conventional designs.

Air Quality: Ecorivestimento Ecorivestimento was used for the Malaspina Project. This is an eco-active building product, which exploits photo-catalysis to effectively reduce pollution, dirt attacking surfaces, bacteria and mould. This produces a notable reduction in toxic pollutants generated by cars, factories, home heating and other sources, and also gets rid of dirt, mould and bacteria attacking both indoor and outdoor surfaces.

Detail of the Malaspina project.

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3.6.3. “International Design Competition – Former Ansaldo Area” After obtaining approval for a Lotting Scheme for the former Ansaldo works area in Milano Bicocca (10-12-2004), a project to be developed by Pirelli & C. Real Estate in a joint-venture with Morgan Stanley, an international invitational design competition (preliminary and ﬁnal) was set up for two lots inside the project area.

The criteria for judging the projects were aimed at assessing: - town-planning quality of the proposed project; - architectural quality of the proposed project; - compliance with the client’s functional requirements; - compliance with the environmental sustainability requisites stipulated in the tender. The methodology for assessing the buildings’ sustainability (Green Building Challenge) is the result of Pirelli & C. Real Estate working with: - iiSBE (International Initiative for a Sustainable Built Environment), an international organisation aimed at publicising policies, methods and tools for promoting the most sustainable built environment possible; - ITC-CNR (National Research Council’s Building Technology Institute), demonstrating the CNR’s commitment to experimentation in the building industry. It works in the ﬁelds of research, services, training, and projects in conjunction with international technical-scientiﬁc networks.

The competition organised the design process along the lines of “Green Building”, offering competitive advantages in terms of low management costs, minimal environmental impact, high-comfort work environments, ﬂexibility of use and optimal long-term performance ratings.

3.7. Pirelli & C. Ambiente Holding Pirelli Ambiente Holding is the new company set up by the Pirelli Group to reinforce its presence in the environmental ﬁeld. Born out of the merger of the activities of Pirelli Ambient and Cam Tecnologie, Pirelli Ambiente Holding is actively involved in environmental and sustainable development projects. Pirelli’s presence in the environmental sector stems from the awareness that appropriate handling of environmental issues – in terms of the use of resources, the optimization of processes and products and the marketing of products with low environmental impacts – represents a factor of success and is one of the key elements in the sustainable development of the group.

Pirelli Ambiente Holding is active in particular in three business areas: • the recovery of energy from waste, • technology for sustainable development, • environmental reclamation.

3.7.1. Recovery of energy from waste With regard to the recovery of energy from waste, Pirelli Ambiente Holding has developed and patented – in collaboration with Pirelli Labs – a high quality WDF (Waste-Derived Fuel).

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WDF-P Chart

The fuel is obtained by adding to the dry portion of solid urban waste (S.U.W.) a number of components with a high caloriﬁc power such as end-of-life tyres (ELTs) and non-chlorinated plastics.

It is mainly used for co-combustion as a partial replacement for conventional fossil fuels in existing energy generation and power stations, such as thermoelectric power stations and cement works. The product, created using Pirelli Ambiente Tecnologie technology, is of a higher quality than fuels derived solely from urban waste. Its distinctive features are: • the product’s consistency and homogeneity; • type of raw materials used; • low humidity and chlorine content; • high caloriﬁc rating; • deﬁnition of the relations of mass; • physical form of the fuel’s components, designed to smoothly feed a combustion chamber.

In addition to its formula enriched with end-of-life tyres(ELTs) and non-chlorinated plastics and the caloriﬁc stability this entails, the fuel stands out for its contribution to improving emissions.

It is used to partially replace carbon in percentages varying between 10-25%.

The cost of generating electricity is a quarter of the cost of using biomasses.

All the projects promoted by Pirelli Ambiente Tecnologie based on the use of quality fuel quantify and analyse the environmental beneﬁts involved by means of Life Cycle Assessment (LCA), which evaluates the entire manufacturing process and ﬂows of materials and energy involved in each separate operation supporting the chosen technology.

Since 2001 this project has been an industrial reality through the constitution of I.D.E.A. Granda, a company out of Pirelli Ambiente and A.C.S.R. (the Cunese Waste Disposal ﬁrm serving 54 municipalities) and the construction of the high quality waste-derived fuel plant at Roccavione in the province of Cuneo. The WDF produced is then burnt together with fossil fuel in the largest Italian cement works, the property of Buzzi Unicem, located in the municipality of Robilante: the use of this mixed-fuel system in the cement works in question allowed a reduction in the atmospheric emission of CO2 of around 25,000 tonnes in 2005. As well as permitting a reduction in the amount of waste disposed of in land-ﬁll sites, a problem faced by all industrialized nations, the use of this fuel represents a valid opportunity for energy-hungry industries (in particular cement production and thermoelectric poower generation) called upon to increase the use of renewable sources of energy, while allowing them to perform a useful social function. In 2005 Pirelli signed an agreement with the British company Britannica Re-Energy to produce and market WDF-P in the United Kingdom.

3.7.2. Technology for sustainable development

Low environmental impact fuels Within the technology for sustainable development sector, Pirelli Ambiente is working successfully thanks to the years of experience accumulated by Cam Tecnologie in the field of low environmental impact fuels and through the new initiatives developed in collaboration with Pirelli Labs and important international research centres. The company’s reference product is GECAM™, the so-called “white diesel™”. GECAM™ is a low environmental impact fuel patented by the group that permits a reduction in the polluting emissions typical of diesel oil (fine particulates, nitrogen oxides, carbon monoxide). The product is an emulsion of diesel oil and water (10%) usable by diesel-powered vehicles and power stations. Tests carried out in Italy at the laboratory belonging to the JRC European Community Research Centre and ENI Tecnologie labs have certified that these emulsions are highly effective at reducing the main polluting emissions from diesel oil. Particulates in particular are reduced by approximately 50%.

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Gecam Chart

Initially offered to the public transport sector; subsequently, GECAM™ has swiftly been adopted by other sectors of the Italian extra-network market and is today also used by vehicles used for waste collection, goods transport, railway transport, earth moving and for heating systems. Roughly 80 municipalities now use Gecam™ meaning that a total of over 400 milion litres have been consumed and over 800 million km covered from 1999 to the present day. (The share in the public transport market is over 20% even reaching 40% in northern regions). In the heating sector, over 400 heating systems use Gecam™ as a fuel, making a signiﬁcant contribution to improved air quality in towns and cities. White diesel™ has also gone beyond the Italian national borders, and is available commercially in France, the Czech Republic and China. There are now 8 manufacturing facilities across Italy, 1 in France and 1 in China. Gecam™ is also available as a diesel fuel with a low sulphur content: Gecam™10 ppm .

Anti-particulate Filters These systems are fitted on diesel-powered vehicles weighing over 2.5 tons already on the road and consist of three parts: • Particulate filter: made of porous silicon carbide, material that offers unique characteristics of resistance to heat and thermal shock. Its honeycombed stucture filters exhaust gases, reducing emissions and particulate by over 90%. The filter is fitted inside the exhaust silencer and can be combined with an oxidising catalyst to reduce CO to unburnt hydrocarbons. • Additive: added to ordinary fuel, it allows for the complete combustion of the carbonaceous particulate previously trapped by the filter on reaching a temperature of approximately 250/280°C (filter regeneration process). Typical temperatures of exhaust gases emitted by vehicles on the road vary between 250/400°C. • Control unit for monitoring the entire system. Logo of the Eco-Friendly Innovation Prize. Recent tests have shown reductions of over 90% in particulate, 89% in carbon monoxide and 69% in unburnt hydrocarbons. In 2005 Pirelli Ambiente was awarded the Premio all’Innovazione Amica dell’Ambiente (Eco-Friendly Innovation Prize)6 by Legambiente and the Lombardy Regional Council.

3.7.3. Environmental remediation In terms of environmental remediation, Pirelli Ambiente Holding intends to market the experience gained in the ﬁeld in collaboration with Pirelli Real Estate and the Pirelli group’s industrial divisions. The company is capable of providing comprehensive management of the remediation process: the activities proposed comprise all the solutions for the remediation of sites, from the preliminary quantiﬁcation of the environmental liabilities through to complete redevelopment and valorization of the site with respect to the environment and its resources. Broadly speaking, operations over recent years may be broken down as follows:

Total surface area redeveloped or undergoing redevelopment Approximately 2 million square metres Buildings demolished Approximately 2 and a half million cubic metres Material salvaged from demolition work Approximately half a million cubic metres Earth dug up and processed for remediation Approximately1 million cubic metres

6 http://www.premioinnovazione.legambiente.org/

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3.8. Pirelli Labs

Founded in the May of 2001 with an overall investment of around 135 million Euros, Pirelli Labs represents the group’s pole of technological excellence. The research centre, extending for around 13,000m2 in the Milano Bicocca area, is active in the fields of photonics, optical fibres and new materials. With its Optical Innovation and Materials Innovation divisions, Pirelli Labs represents the point of reference for all Pirelli research activities throughout the world and is directly linked to the group’s other research centres and important private and university centres in the USA, Russia and Italy. In 2005 Pirelli Labs continued its work on developing components for fuel cells, which are an optimal way of generating electricity at a time when fossil fuels are coming under increasing pressure and there is a growing demand for clean energy to reduce greenhouse-effect gas emissions. Development work has mainly focused on the fields of SOFCs (Solid Oxide Fuel Cells) and PEMs (Polymer Electrolyte Membrane). As regards SOFCs, the results attained in the field of ceramic materials have been applied as part of a joint-venture arranged with the prestigious Alberta Research Council (ARC) in Canada, which plans to combine fuel cell miniaturisation technology developed by ARC with innovative materials designed at Pirelli Labs. Unlike marketed products made of fluorinated polymers, PEM-type membranes can work with high concentrations of methanol. These traits have appealed to various companies operating on the world market for fuel cells, which have been sent samples of the material to be assessed as components in the main applications for portable electronics. A special membrane has been developed in the field of hydrogen-powered fuel cells and a technical-economic study has been set under way to assess the possibility of scaling up production of this material. With refernce to the recovery of materials from end-of-life tyres (ELTs), work has begun on the industrial development of products obtained by mixing ELT granules with special binders, which turn out to be effective in reducing noise due to footsteps. These products have been used in construct work on a residential building; sound tests, carried out by an accredited laboratory, in accordance with the ISO 140/7 standard, have produced better sound abatement readings than those recorded for products currently on the market. In 2005 the joint-venture with Telecom Italia continued research into issues involving the study of innovative materials designed for being used in radio frequency devices applied to telecommunications.

Simulation of a view of the wind generator in the Cummersdale district (420 m from the plant).

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In this particular field, it is worth mentioning the so-called Telemedicine Project, resulting in the first prototype of a high-resolution telecardiograph. This project, carried out in conjunction with important international partners, provides experts with an innovative means of checking key medical parameters of non-hospitalised patients, without requiring them to change their usual lifestyle. Medium-term research work is also focusing on Distributed Sensorial Networks (DSN). A technological hardware and software platform has been developed for using and managing sensorial devices diffused through innovative customised wireless networks with advanced networking functions. To assess potential applications of these systems, field tests have been carried out in the field of agro-meteorology, and the final touches are currently being made to developing innovative sensorial technology for monitoring air quality and road traffic, which, when suitably incorporated in these networks, will provide the means of creating new systems and services in the sustainable mobility sector in particular.

3.9. Pirelli and renewable energy

Group companies are committed to promoting the use of the most advanced technologies in order to achieve excellence in environmental protection; the company is likewise committed to the responsible use of resources with a view to achieving sustainable growth that respects the environment and the rights of future generations (from Pirelli Policy on Health, Safety, the Environment and Social Responsibility).

For several years now, the Carlisle plant in the north of England close to the Scottish border has been striving to reduce its energy consumption, and its efforts have been rewarded by official recognition by the National Energy Foundation. Checks Pirelli commissioned independent bodies to carry out have conﬁrmed that there are no further opportunities for improving energy efficiency. On the other hand, the cost of energy has really spiralled in 2004-2005 and is expected to continue to increase in 2006 (see graph).

Energy unit costs and efficiency in the Carlisle factory.

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This is the framework within which the plant has set about designing a wind-energy generator, which will be capable of supplying 23% of the power used in the plant itself. The plant’s main features are summed up in the following table

Rated power output 2.5 – 3.0 MWh Max. rotor diameter 95 m Max. hub height 80 m Max. overall height 120 m Colour Semi-matt light grey

The project has undergone careful environmental impact assessment and been approved by local authorities. The picture at page 122 shows the school near the village of Cummersdale just 420 metres from the wind-generator, one of numerous visual impact simulations already carried out.

4. SOCIAL DIMENSION 4.1. Internal Community Group companies recognize the central importance of human resources in the belief that the key to the success of any business is the professional contribution of the people that work for it, in a climate of fairness and mutual trust. Group companies shall safeguard health and safety in the workplace and consider respect for workers’ rights as fundamental to the business. Working relationships are managed with a view to guaranteeing equal opportunities and promoting the personal development of each employee. (Article 6 of the Ethical Code – Human Resources).

4.1.1. The Figures – Breakdown of Headcount

Breakdown of employees on 12/31/2005 Corporate7 Tyres Real Estate PBS Ambiente Total Executives 105 188 166 11 8 478 Staff (cadres included) 1247 4700 1145 104 34 7230 Blue-collar 23 18785 303 7 1 19119 Total 1375 23673 1614 122 43 26827

Geographical breakdown of employees on 12/31/2005 Corporate Tyres Real Estate PBS Ambiente Total Europe 1347 12661 1614 122 43 15787 North America 14 226 / / / 240 Latin America 13 9123 / / / 9136 Asia, Africa and Oceania 1 1663 / / / 1664

Type of employment contract Employment ﬂows on 12/31/20059 Permanent 88.4% New Hirings 3588 Fixed term 8.8% Employee Leavings 2511 Agency workers 2.8% Average length of service (years): Part-time (% of total of FTE) 0.7% - Executives 11 Stage / Other8 615 - Staff (cadres included) 10 - Blue-collar 9

As regards the turnover dimension, this is a phenomena mainly regarding the Tyre Sector and mainly referred to the blu-collar category. It has two main features: seasonal ﬂuxes or, in other words,

7 (Pirelli & C. SpA, SSC, Pirelli Labs, PISEFI, CSAP, SAP, Polo Viaggi, Freign Corporate Companies). 8 Not included in total employees. 9 Not including people involved in corporate mergers or concessions or company branches.

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temporary workers used every year instead of permanent workers during the summer months (approximately 700 people in Germany, UK and Turkey) and the hiring of workers in Brazil as a result of a change in the shift work pattern and of an increase in the production output. The group does not employ anybody under the age of 14 years; the tyre sector employs 81 young workers aged 16-18 years (42 in Brazil, 14 in Venezuela, 11 in UK and 14 in Germany) and, as an exception, 10 young workers aged between 14-16 years in Brazil, as part of training and induction schemes in line with local laws.

4.1.2. HR Policies10 In order to control crucial stages in the process of placing and developing human resources, the Pirelli Group applies a wide range of policies on both a group (Corporate initiatives) and Sector/foreign affiliate Company level. The policies defining and controlling staff Recruiting & Selection procedures are enforced by local affiliates in accordance with the practices and regulations in force. In Italy the process of recruiting recent graduates is initially controlled and managed externally (search, screening and assessment procedures based on group dynamics and individual interviews by a specialist firm). The second stage is carried out internally based on cognitive and second interviews directly with the line manager in conjunction with HR. Candidates assessed favourably are introduced into the company through vocational training courses. Salary Review policies apply locally in the various countries, except for procedures involving Executives worldwide, which is co-ordinated centrally along common lines at Corporate level, always complying with the needs of an international Management team. Performance assessment/improvement policies are closely tied to salary reviews. 100% of Executives and 50% of Cadres take part in the Group’s annual incentive scheme (MBO), which sets clear Group/Business and individual economic-financial targets and pays out bonuses varying according to assessment and the extent to which the said targets are achieved. More or less structured performance assessment schemes exist in all countries. A structured performance improvement/support scheme is currently being reviewed (with a view to extending it right across the board) for Cadres not included in the Group’s incentive scheme and a part of white collars population. This involves joint targets with superiors set at the beginning of the year, objective and transparent assessment of whether they have been hit, and a final feedback meeting to point out strengths and weaknesses in annual performances (MPI = Management Performance Improvement). For all the rest of the staff (the remaining white collars population and blue collars personnel, there are bonus schemes if they hit their targets (e.g. production bonuses). The benefits policies are managed and enforced by local affiliates, which also offer a variety of other bonuses (the most common being company cars, grants, seniority bonuses etc.). It is worth focusing on and highlighting the International Mobility policy, which emphasises the strategic value of an international approach to developing leadership within the Pirelli Group. Over the last decade, each year an average of over 200 executives, senior management and staff from various countries and backgrounds have exchanged know-how, developed their professional skills, and taken advantage of managerial opportunities to help build a truly international group. Many aspects of the new global job market have meant that a more flexible approach to the international nature of business needed to be thought out, in order to come up with timely solutions to the needs of the organisation and people working for it. Our new policy provides flexible replies to needs/demands, which, in the past, were seen as obstacles to international mobility: dual careers (a partner’s work/personal needs), family demands, different school systems, fear of permanent changes etc.

10 HR: Human Resources.

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For instance, over the last 5 years the maximum time working abroad has been reduced from 5 to 3 years, thereby increasing the rotating of people around developmental/strategic posts in the group. At the same time family demands and the issue of dual careers have been catered for by introducing the possibility of commuting (popular in Europe, where the Monday-Friday work routine and relative closeness geographically speaking make it is easy to return to one’s home country on a weekly basis). Overseas employment and missions are still the most popular policies.

If viewed as a chance to grow, international mobility may, to all extents and purposes, be considered a means of supporting the Equal Opportunities scheme. So far women account for 11% of the total number of workers abroad, but we feel this percentage will increase over coming years, thanks also to greater ﬂexibility.

4.1.3. Training and Development

Training and Development Tools The Group’s main training and development tools are outlined below:

Skills Catalogue: the aim of the Skills Catalogue is to create shared guidelines for setting the organisational traits and skills required of staff working for the Pirelli Group. The skills in question (grouped into 10 categories to make them easier to identify) were indicated by top management while certifying the Pirelli Values. In order to develop a shared vocabulary, the Skills Catalogue is used throughout the entire process of mapping out these skills and also for identifying and describing vacant posts.

Potential Assessment Manual: this handbook sets the group guidelines for operating- methodological aspects involved in assessing the potential of human resources. The handbook works around three basic aspects: deﬁning and actually carrying out staff assessment, the methodology of staff assessment and, lastly, a monitoring guide. In addition to this document, there are performance assessment methods, so that performance may be assessed to both encourage and enhance the group’s resources.

Global Grade System11: this handbook provides guidelines for using the Global Grade System and how it is related to the Standard Positions. Each Standard Position may be broken down into: technical-professional skills, competencies/attitudes, background and organisational structure. Finally, it provides support in designating speciﬁc roles, recruiting, job posting, organisation charts, pay schemes, development schemes, and target-setting for the incentive scheme.

Talent Attraction Projects The group organises the following projects as part of its Talent Attraction scheme: - Employer Branding operations; selection of reference universities/faculties; management of brand and Pirelli presence through contacts, official presentations and dedicated testimonials given at leading universities by Line Managers working in various functions/businesses. - Career Days: this international job meeting network is a cycle of events visiting some of the most important university cities each year and allowing direct contact with graduates, undergraduates and young professionals. Taking part in these events is an important employer-branding tool for Pirelli.

11 Pirelli’s grading system for corporate roles/posts.

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- Career Books: this is a career service providing job guidance, post-university training, recruitment and communication opportunities for undergraduates, recent graduates and young professionals. The guides, divided into three sections: career guidance for graduates, corporate proﬁle (containing a description of the company, recruitment procedures, career prospects, and a short section devoted to HR addresses and how to send in a CV) and training, are handed out at university placement offices, careers offices, training facilities, graduate associations and book shops.

As part of this project, Pirelli Real Estate has set up a placement and job rotation scheme for twelve recent graduates (in Economics, Architecture and Engineering) called the Campus Project. The project involves rotation through 3 business areas or functions over a year, with a view to developing a 360° view of the real-estate sector. The on-the job training project is combined with classroom coaching aimed at developing and transferring both technical and managerial skills.

Talent Retention Projects The Group’s Talent Retention projects are as follows:

- Career Development Programmes: help develop the potential of High Potentials during various stages in their careers. They are organised, run and co-ordinated on a group level in conjunction with leading European Business Schools, ensuring candidates have solid skills and expertise and bringing their full potential to the fore. The following diagram breaks down the entire process, outlining the course structure and programmes:

Potential Appraisal Process Career Development Programme

Group training path 2/3 Induction for higi potentials year 1st Potential appraisal

Understanding Business Good potential High potential Complexity

nd 5/7 2 Potential year appraisal

Managing Your Growing Good potential High potential Complexity

10/12 Performance year appraisal

Developing Managerial High potential time Excellence

There now follows a brief outline of the areas covered in the 3 1-week seminars that make up the programme. 1) Understanding Business Complexity: providing a proper overview of the business, so as to be able to move in various directions; comparing personal experiences with those of colleagues from other group businesses, functions and cultural backgrounds; gaining a greater

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awareness of professional aptitudes and values; assessing how the skills of those taking part match up to the high-potential proﬁle and Pirelli Values; creating your own future development. In the case of Real Estate, the company is setting up a Development Center for this purpose. 2) Managing Your Growing Complexity: developing support skills to cope with the increasing complexity of managerial roles; understanding the factors involved in decision-making; providing those taking part with feedback on their motivation, skills, and areas in which they can improve; providing support for working out a carefully structured development plan. 3) Developing Managerial Excellence: understanding how the various operating areas are connected and what impact they have on managing business projects; developing complex managerial skills (analysing tricky contexts, problem-solving, multi-cultural teams, stress management).

Alongside the nurturing and development of potential high-ﬂyers, other Talent Retention tools as part of the Training and Development scheme include Developing Competencies by Professional Area and Developing Professional and Managerial Competencies. • Developing Competencies by Professional Area: this includes training schemes designed to improve, reinforce and spread know-how in speciﬁc business realms (e.g. Administration and Control; Sales and Marketing; Manufacturing and Quality; Personnel; R&D), focusing programmes on “hard” and “soft” business skills required for achieving professional excellence. Special attention is focused on Talents in various functions. • Developing Professional and Managerial Competencies: this includes training schemes designed to improve, reinforce and spread the Pirelli Group’s professional and managerial skills, deemed necessary for covering positions of increasing complexity (e.g. integration schemes for entry positions; schemes for moving up from junior to senior positions; schemes for recently appointed managers). Here again, special attention is focused on group Talents.

Training & Development Projects The following are an outline of the main Training & Development Projects: - Executive Best Practices (designed for senior management in the Tyre Operations sector); project aims: to create shared goals, vision and interaction making it easier to implement effective changes, build “teams of leaders and leaders of teams”, and spread a managerial culture throughout the organisation; to provide the means and opportunities for personal development, bring support systems and management into line, so as to encourage and reinforce the ongoing development of management in the Tyre Business Operations area. The project is broken down into the following units: Managing People, Managing Relations, Managing Innovation and Managing the Unexpected. - Intercultural Management in China; project aims: to develop greater expertise in recognising differences in the “cultural frameworks” that stem from the meeting of European and Chinese cultures, to further the understanding of the value orientations of Chinese culture, and to gain in-depth knowledge and information about the macro-economic context in China, how it has evolved over the last 30 years and the current state of economic development, in order to learn how to interact effectively with the Chinese business community. - On-line CSR; Training; a means of raising the awareness of all employees on this issue using the Group’s Intranet. - Start-up of Tyres Romania; as part of start-up operations for the new tyre factory in Romania, following a number of predominantly “on-the-job” training procedures: approximately 170 workers have received theoretical and on-the-job training at group plants in Italy, Turkey and Germany.

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White-collar staff, on the other hand, underwent lengthy training (around 3-4 months) according to their jobs. Issues examined included: group values and its Ethical Code, multi-cultural differences.

Pirelli Real Estate has also carried out the following projects: Da agente a consulente immobiliare (From real estate agent to consultant), Le operazioni di M&A (M&A operations), Una squadra per l’inquilino (A team for the tenant) and the outdoor projects: L’azienda va in scena (The company goes on stage) and Creare valore attraverso l’HR (Creating value through HR).

These are training schemes aimed at meeting speciﬁc needs that have emerged in certain professional families. Their implementaion has made it possible to work on the dual levels of technical and managerial skills, at the same time fostering integration.

In 2005 Pirelli RE in conjunction with SDA Bocconi was at the centre of a corporate case study revolving around the peculiar nature of its organisational structure and how it has evolved; this case has been drawn up for educational purposes and used on the Master’s course in Real Estate set up in 2005 based on an arrangement between two of the most famous business schools in Milan: SDA Bocconi and MIP Politecnico.

Figures for Training & Development in 2005

Training & Development 2005 (average no. of days per person) EuropE U.S.A. Latin America Others Total Executives 1.6 0 17.4 0 2.7 Staff (cadres included) 2.2 0.3 7.8 3.7 3.1 Blue-Collar 3.0 0.1 2.7 0.7 2.7 Total 2.7 0.2 3.4 1.3 2.8

4.1.4. Equal Opportunities Project The “Equal Opportunities Project” was set up in 2005 in line with Group principles and Pirelli’s commitment to Corporate Social Responsibility, in order to guarantee equal opportunities for professional development in all company functions and environments, helping the company as a whole to manage the issue of “Diversities” in an advanced and effective way as it strives to achieve its business goals.

The importance Pirelli attaches to Diversities within its organisation, as a source of creativity and innovation, is explicitly referred to in the “Group Equal Opportunities Statement”, which Top management will be promoting in 2006, together with the project contents, and will be publicised through an extensive communications campaign aimed at all personnel. In order to ensure that the principles of fair treatment set down in the Statement are properly safeguarded, Pirelli also intends to bring into effect an Internal Complaints Procedure at all its Affiliates, in line with local regulations and practices. To lend further substance to the project, positive actions will also be implemented in the management of Human Resources, mainly aimed at promoting/increasing the number of women working in the most poorly represented areas and in top managerial positions and raising awarness across the organisation as to the valorisation of differences. The subdivision of headcount by gender shows that 17% of managers, 36% of white collars and 2% of blue collars are women. As regards blue collars, the ﬁgure is low due to objective problems in recruiting female staff in factories. This reﬂects the nature of factory work, with non-stop production cycles and night shifts.

One of the aspects of equality of treatment that the company seeks to ensure and monitor group-wide is that of remuneration.

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Analysis of the ﬁgures shows that on the whole men and women receive equal remuneration within Pirelli; more speciﬁcally, as regards Executives, the difference is on average 7% in favour of women; in the case of Cadres the difference is again 7% but this time in favour of men, and the male/female gap among white collar personnel is around 12%, once more in favour of men.

A Group Equal Opportunities Manager has been appointed to pursue greater organisational balance, to lead the operational implementation of Equal Opportunities throughout the Group Affiliates, and to monitor the evolution of Equal Opportunities in the Affiliates. The aforementioned manager will have the backing of a Steering Committee, which will be responsible for the guidance and supervision of these company plans.

Trailbazer Award Pirelli, which has been a leading player on the world motorsports scene for over a century now, believes that sporting competition is a value worth defending and promoting at race tracks worldwide. This also means the company is committed to concretely combating any form of discrimination preventing fair and open competition between drivers and teams of every race, sex and nationality. As proof of this commitment, Pirelli has set up Team X in the USA, a new racing team which not only seeks to compete in and win races, but also aims to encourage black drivers and teams to get involved in motor racing. The first Team X members are two famous Afro-American stars, whose fame has significantly boosted publicity for the anti-discrimination campaign launched by the AFDIM (Association for Diversity in Motorsports): Tony Brakohiapa, a veteran driver and instructor with years of experience accumulated on a thousand tracks, and Tyson Beckford, a popular TV and film actor, as well as fashion model (who, amongst other things, starred with the beautiful Naomi Campbell in a famous advertising campaign for Pzero fashionwear). Together, driving two super fast, Saleen S281 Supercharged Mustangs fitted with Pirelli tyres, Tony and Tyson have already been involved in some breathtaking duels on some of America’s most glorious race tracks in the Formula Drift Series Championship, showing they are by no means intimidated by their fellow competitors… of whatever race or sex. For this truly innovative project, combining motor racing with a socio-cultural commitment against racial discrimination, the AFDIM awarded Pirelli the “Trailblazer Award” for “pioneers in innovation”, who open up new paths of social commitment and solidarity worldwide. This prestigious award was awarded to Pirelli Tires North America in October, 2005, during a well-attended sports ceremony held at Loews Motor Speedway.

4.1.5. Employee Relations

Group Opinion Survey – November 2005 For the ﬁrst time, in November 2005, Pirelli launched a survey to assess the quality of the workplace in all the Group’s units. The survey has two phases: one just completed, which involved Executives, Cadres and White collar workers, and a second phase which will involve blue collars from all over the world.

69% of the empoloyees involved agreed to ﬁll in the questionnaire. The high number of people taking part is a sign of people’s involvement and of their desire to contribute to Pirelli’s continuous improvement as a company. An analysis of the results carried out by a multi-national consultancy ﬁrm specialising in this kind of survey, showed average overall satisfaction ratings of 7.4 (on an assessment scale of 1-10).

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The following graph shows the average ﬁgures, in decreasing order, from the surveys carried out at the main Tyres Sector Affiliates (industrial Affiliates).

8.1 8 7.9 7.7 7.5 7.5 7.4 7.1 7 7 6.9

Venezuela Brazil Germany Argentina Spain USA Egypt Italy Turkey UK

The main strengths emerging across the group are: the opportunity to express personal opinions and to be listened to, personal motivation (stemming from: a genuine passion for the contents of individual roles, a sense of belonging to the company, the power of attraction of the Pirelli brand), and the openness and transparency of relations between colleagues. In contrast, areas for improvement are: the effectiveness of the internal communications process; development, training and career opportunities, attention to the work-life balance and to equal opportunities for men and women. For HR Department at both Group and foreign Affiliate levels, the identiﬁcation of the improvements opportunities emerged through the is the starting point for planning targeted actions in human resources management. A summary of the results of the survey was published on the company Intranet during the ﬁrst few months of 2006, so that all those who took part could see them. There were also opportunities for feedback and dedicated informative meetings.

4.1.6. Internal Communication

Knowledge Management Methods The Pirelli Group is committed to the diffusion of knowledge within the company and to the subsequent generation of wealth starting from its own intellectual resources. Pirelli draws on its wealth of knowledge to create increasingly efficient and effective processes, thereby helping to cut costs and to save time, in order to create value for customers and the people working at Pirelli.

Over the past twenty years, technology has certainly helped the diffusion of knowledge throughout the ﬁrm, particularly bearing in mind that Pirelli is an international company, but this has certainly not wholly supplanted means of sharing knowledge based on direct interaction between people in a physical rather than a virtual environment. Pirelli’s Knowledge Management activities may be divided into two macro-categories: on-line and off-line activities.

Many of these on-line activities are incorporated into the company intranet, the main means of diffusing information, tools and projects in real time in the countries where Pirelli operates. The intranet is the most common means of knowledge management used by Pirelli employees worldwide.

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The following may be classed as on-line Knowledge Management activities: • Forums: devoted to speciﬁc functional and business issues • Learning community: sites dedicated to contents knowledge, broken down by business area • “Knowledge at work” platforms: for exchanging information about the state of advancement of projects • Electronic tableau de board: used within departments to share and assign activities • Electronic notice boards: used as a means of diffusing company messages to all employees at company meeting points such as main entrances • E-learning: contents for learning via computer • Internal communication campaigns and social promotions through mailing lists and interactive boxes on the intranet • Video conferences: remote meetings using video • Manuals: available on the Intranet and providing information on technical matters Off-line Knowledge Management activities promoted by Pirelli include: • Role of Chief Knowledge Officer: the company person to be consulted for technical information about products and research • Road shows: large-scale meetings for the diffusion of company strategies at every organisational level • Workshops: intra and inter-functional meetings to improve work methods and processes • Area meetings: at which people from the same department compare results and discuss future strategies • Institutional and tailored training: major training projects covering a wide range of business and managerial issues • Improvement Teams: in industrial areas for the improvement of processes

Pirelli’s Knowledge Management methods are constantly developing in support of the quest for a better balance between employee satisfaction and the excellence of the services it provides for its customers. The use of company notice boards for communicating with factory workers is particularly important. Special courses are also organised for those workers who are not able to take part in on-line training (as with the implementation of the Ethical Code and as will be the case in 2006 for CSR Training).

4.1.7. Communication Channels:

Pirelli Corporate Press As part of the Corporate function’s promotion of internal communications, corporate press media play a leading role. This is reﬂected in the large number (currently no fewer than 16 publications) and quality of the magazines published by group companies, and aimed at personnel, stakeholders and authoritative external institutions and opinion-makers. Such widespread distribution shows that the so-called corporate business press does not only inform and interact exclusively within the company, but Pirelli Corporate Press. also reaches out to a ‘community’ of business partners, suppliers, customers and, more generally speaking, all those associated with the group and the local communities in which Pirelli works in various countries.

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The 16 full-colour magazines that the group publishes in Italy and around the world (details summarised below) are an extremely important and meaningful asset for Pirelli: for the information they provide, the way they bolster the corporate identity, and the visibility they promote.

Country Title Language Readership Published Circulation Italy Fatti e Notizie Italian Staff Two-monthly 13,500 Pirelli Flash Italian Staff and Outsiders Monthly 6,600 Pirelli World English12 Pirelli Management Quarterly 13,500 Worldwide Germany Pirelli News Germany Staff Monthly 2,000 Great Britain Pirelli News English Dealers and Customers Six-monthly 5,000 Inside Pirelli English Staff Four-monthly 1,300 Spain Pirelli In Spanish Staff Weekly Electronic (Castilian) Newsletter Pirelli Flash Catalan Staff Quarterly 1,000 Turkey Pirelli Radial Turkish Staff and Outsiders Two-monthly 7,500 United State of America Pirelli Newsletter English Dealers and Consumers Quarterly 7,00013 Argentina Pirelliando Spanish Staff and Outsiders Two-monthly 1,000 Mejorando Spanish Staff Two-monthly 1,000 mkt3 Spanish Staff, Dealers and Six-monthly 5,000 National Press Brazil Pirelli Flash Portuguese Staff 14 Monthly 11,150 Pirelli Flash Portuguese Staff For special7,000 special edition events PQT Ativo Portuguese Staff Monthly 4,000 Venezuela Mundo Pirelli Spanish Staff and Outsiders Two-monthly Internet Site

As we have seen, there is a rich and varied variety of publications: a family of magazines related in terms of their aims and contents, in which each journal has its own distinctive traits according to the country in which it is created and published. Pirelli’s Corporate Human Resources and Media Relations Departments, based in Milan, co-ordinate the magazines and check that their contents comply with the group’s communications policies and ethical values. The three Italian magazines (all registered journals since they are of public interest and do not predominantly consist of advertising) are edited by a pool of editors and and run by a professional journalist. Apart from differences in terms of language, layout, frequency and circulation, all the publications examined for the purposes of this Sustainability Report are mainly of an informative nature (as reﬂected by their contents) and serve a dual purpose: to convey information as consistent, accurate and far-reaching as possible and also to help the Pirelli Group to exchange and share facts and values with business partners, stakeholders and the local communities in which they work.

4.1.8. Company Projects for its Employees The company’s projects in favour of its internal community vary from country to country according to the particular needs of the various social settings in which the affiliates operate. In South America, for instance, Projects are aimed at preventing illnesses (vaccination campaigns against tetanus in Argentina, against hepatitis and yellow “Amarilla” fever in Venezuela, and against ‘ﬂu in Brazil, plus special anti-drug abuse days), providing schooling for the children of employees (scholarships, ﬁnancial aid in buying books and school uniforms) and social integration (supervised holidays for the children of employees with educational programmes, Clubs where workers and their families can meet, special days for guided company visits company for the children of employees – e.g. “Where Dad Works”).

12 since 2002 also published in Chinese. 13 10,000 for the SEMA Show in Las Vegas. 14 5 versions: one for all employees, the other 4 specially for the factories in Campinas-Sumarè, Feira de Santana, Gravataì, Santo Andrè.

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Among the various projects organised at the various affiliate companies, the most popular are supervised holidays for employees’ children, scholarships, Company Clubs organising sports and social events, vaccination campaigns against illnesses, conventions providing employees with discounts at shops and medical facilities.

4.1.9. Healthcare Assistance during Working Hours For decades Pirelli has implemented infirmaries operating at manufacturing facilities, with nurses and doctors available to provide employees with medical care during working hours. These facilities provide first aid, consultancy on non work-related health problems and supervision for workers exposed to specific risks. Local health care campaigns are also carried out by mean of these facilities.

4.1.10. Industrial Relations The group’s Industrial Relations are based on constructive dialogue, fairness and respect for respective roles. Relations and negotiations with Trade Unions are managed locally, in accordance with the laws, national and/or company level collective agreements, and customs and practices in force in each different country. This is supported by the guidance and supervision of central company functions. Industrial Relations activity was particularly intense in 2005 with reference to the matters linked to the sale of the Telecom and Energy Cables and Systems businesses to Goldman Sachs Capital Partners. This involved a widescale information and consultation activity with workers and their respective union representatives at both national and international levels.

European Works Council Pirelli’s European Works Council (EWC) was set up in 1998 based on a special union agreement signed by the company along with Representatives of the group’s European workers, in accordance with the provisions of European Directive 94/45/EC. The EWC has the purpose of furthering the dialogue between the Company and its workers, namely, the information and consultation by the parties on the progress of the European companies of the Pirelli Group as a whole and on its general direction. A Select Committee was also been set up within the EWC to facilitate links between members and the head company. The EWC routinely meets once a year upon the publication of company reports and for updates as to economic trends, ﬁnancial-economic forecasts, investments made and planned, progress in research etc. It may also meet with the company on an extraordinary basis whenever information and consultation are required in the light of transnational events involving major company changes, opening, restructuring or closure of legal seats, productive lines or productive sites, important and widespread innovations in the organisation of labour All EWC delegates are suitably equipped with the IT tools required to perform their duties as well as having access to the company intranet for the real time communication of official company press releases. Further to the sale of the Telecom and Energy Cables and Systems businesses, the number of EWC delegates to Pirelli & C. SpA was reduced in proportion to the notable reduction in the size of the workforce they represent. The Committee currently has 12 members.

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Compliance with legal/contractual directives on overtime and time off The Pirelli Group complies with legal and/or contractual directives on the application of overtime and the right to periodical days off, in accordance with existing differences between the various legislative contexts in which they apply. The use of the full entitlement to time off, as is the right of all workers, is not subject to any restriction. The period of fruition is usually agreed between the worker and the company.

Union Representation In certain countries the company knows the exact number of employees adhering to trade union, in accordance with the provisions providing for the respect of employee privacy. In other countries ithe company can only estimate the number of workers who are members of workers’ representative organisations. It is thus estimated that approximately 40% of group employees are adhering to a union. Conversely, the percentage of employees covered by collective agreements is 83%. This depends on differences between various local contexts. In Italy, for instance, the employment contract for all employees (including executives) is governed by collective rules and regulations. Individual bargaining applies to the remaining 17% of employees. In this respect we shall recall for example, the categories of executives all over the world except Italy, the Managers in the UK, the Non Tarifs in Germany, the Excluidos in Spain, and the Senior and Esecutivi in Brazil.

Industrial Actions Overall industrial unrest was generally limited in 2005. During the year there was some unrest at the Gravatai factory in Brazil and at Figline Valdarno, Bollate, Settimo Veicoli Industriali and Settimo Vettura factories in Italy. The strikes at the Gravatai plant in Brazil were over the renewal of the company contract. Unrest at the Italian factories, on the other hand, were partly over the renewal of the labour contract and partly in support of political/union initiatives (e.g. unrest related to the government Budget). All the above industrial disputes were satisfactorily settled by all parties, as far asl company-related disputes were concerned.

Occupational Pension Plans Most affiliates provide their employees with integrative, occupational pension plans. Existing corporate pension plans are both defined benefit and defined contribution schemes. The Group policy favours defined contribution schemes. Defined benefit funds exist in the UK (covering employees hired up to a certain date, while those hired after that date are covered by a defined contribution fund) and in the USA (though this fund was closed a few years ago for employees employed at the time, who subsequently began joining a defined contribution scheme). Alongside retirement pension, pension plans are generally supplemented by life and permanent disability insurances.

Integrative Healthcare Plans Supplementary health care plans widespread exist among the Affiliates companies. These plans provide different levels and types of cover in the different countries, according to local needs, procedures and customs. Almost all the schemes are based on a deﬁned contribution structure, where ﬁxed contribution payments are made by the company into insurance policies or funds (as is, for instance, the case in Italy). In the USA, on the other hand, the rate of company contribution in favour of employees has a variable structure.

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4.1.11. Health and Safety at Work – the Safety Management System The Safety Management System was implemented within the Tyres Sector in line with the OHSAS 18001 standard, as part of a more extensive scheme (called Safety Focus), which, starting from an initial deﬁnition of the methods employed for meeting both the requirements set down in the aforementioned standard and the operational requirements of the Pirelli Group, sets down various tools and methods for safety and communications-related training in the Operating Units. This programme, co-ordinated by committees set up for the speciﬁc purpose of reducing the number and severity of injuries, was initially launched for those Operating Units where the trends indicated the most critical situations. The programme was given an added boost in 2005 with the launch of another project (new in terms of its contents but serving the same purpose) in a series of pilot factories.

At the end of 2005, over 80% of the Operating Units in the sector Industrial accidents trend in Tyre Sector had obtained OHSAS 18001 standard certiﬁcation. A further three Manufacturing Units. Operating Units should obtain the same certiﬁcation during 2006. 5.0

4.0 As regards the ﬁgures for injuries at work in terms of the

increases recorded in the frequency index (FI) and the gravity 3.0 index (GI), this is largely due to the new definitions introduced for calculating the number of injuries and the number of days lost, 2.0 which have been adjusted for the entire Tyre Sector to come into line with the procedures adopted in the rest of Europe. 1.0 There was a fatal accident in Turkey in 2005 involving a worker 0.0 from an outside firm carrying out maintenance work. 2001 2002 2003 2004 2005 Years For the first time, injuries in all non-manufacturing units in the FI GI n. accidents FI = frequency index = 100.000 Tyres Sector were also recorded and in 2006 action will be taken working hours n. day lost GI = gravity index = 1.000 to reduce the number of injuries in these areas too. working hours In 2005 the record of injuries also included group companies belonging to the other sectors and to Pirelli Corporate, where the frequency index is less than one.

Number of accidents in Tyre Sector. 4.1.12. No Smoking Company 1500

A letter sent from top management to all the group’s Chief 1000 Executive Officers announced the company’s decision to become a “No Smoking Company” as of June 2003, in the 500 interests of both smokers and non-smokers. This decision is part of Pirelli’s long-standing policy of protecting the health of 0 2001 2002 2003 2004 2005 its workers in every country where the group operates. Years Manufacturing units Other units Special educational/information campaigns about the damage caused by smoking have been carried out through the distribution of leaﬂets, conferences on tobacco addiction and the publication of questionnaires about smoking on the intranet.

Two and a half years later there are now smoking bans in most group locations, involving 96% of staff. In most cases (78%), special smoking areas have been provided; elsewhere there is a complete ban in all areas inside buildings.

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4.1.13. Group Influenza Vaccination Campaign As is well known and as has been pointed out by the WHO, the nature, possible development and spread of the virus commonly known as “Avian ‘Flu” is currently shrouded in uncertainty. Against this backdrop, although the trivalent ‘flu vaccination used in the current vaccination campaign does not provide specific protection against the A strain (H5N1) of the virus, it does help prevent co-infection, i.e. simultaneous infection by human and avian ‘flu viruses. For this reason Pirelli has offered all personnel who wish to do so the opportunity of free seasonal vaccination. The geographical location of Pirelli’s operations has naturally been taken into account, and therefore personnel in the northern hemisphere were given a total of approximately 2,500 vaccination doses in the autumn of 2005. The same procedure will be undertaken in the southern hemisphere at the appropriate time in relation to seasonal outbreaks of influenza. Last, but by no means least, a company Intranet newsletter has been set up and is regularly updated to provide practical information about those countries where there have already been outbreaks of avian influenza. The information is aimed both at personnel staff resident in these countries and also at those who visit them for short business trips.

4.1.14. Pirelli Workers United in Solidarity: The Project “My Time for Indonesia” In the wake of the tragedy that struck Asian countries at the end of 2004, the company has suggested that its personnel make donations of money to help rebuild the devastated areas. This resulted in the setting up of the “My Time for Indonesia” Project. The Project’s ﬁnancial target was to collect Û 500.000 to pay towards the reconstruction of 2 schools, one in the capital Banda Logo of the My time for Indonesia project. Aceh (project for 1000 children) and one in the province of Aceh Besar (for 200 children), as stipulated in the agreement jointly signed by Pirelli and the Indonesian authorities on 28th April 2005. It was decided to allocate the money collected to rebuilding schools in the belief that schools play a key role in society as the place where younger generations prepare to face the future and, at the same time, to provide reference points and landmarks for both the young and old during the process of reconstruction in the wake of this disaster. Achievement of this target was based on voluntary donations by personnel agreeing to have a certain number of hours’ pay docked from their wages, together with a contribution made by the company equal to the difference between the money collected and the overall amounted pledged. In total, staff donated 9,900 working hours, equivalent to Û 166,713 and the company donated Û 333,287, to reach the target of Û 500.000. As part of the Project, a Trust Committee for Italy (composed of Pirelli’s top executives, the trades unions, and a representative from Price Waterhouse Coopers) and a Trust Committee for Indonesia (composed of Pirelli’s executive management, the Indonesian Minister of National Education, and a representative from Deloitte) were set up. The committees were, and still are responsible for: verifying and ensuring the transparency of the fund collection procedures, approval of the projects proposed by the local work group, authorisation of the transfer of money to third parties for carrying out the projects, veriﬁcation of the use of the funds for the proposed purposes and within the agreed deadlines. Updates on the state of the investments, and therefore on the progress of the reconstruction process (currently under way), are constantly published on the company intranet in a section dedicated to the project. This enables employees who wish to keep track of the project to do so.

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4.2. External Community

Group companies encourage and, where necessary, provide support for social, cultural and educational initiatives geared towards promoting personal development and improving standards of living (Article 5 of the Ethical Code - Community).

The Pirelli group – an Italian business with a long-standing and important presence abroad – promotes and supports a number of enterprises of the highest level in the ﬁelds of culture, training, sustainable growth, solidarity and sport. These projects are carried out in numerous countries thanks to joint ventures with public and private institutions, local administrations, associations and bodies, in the awareness that the growth of the company and long-term success can only be achieved in a balanced and harmonious society, in which the company is a factor in civil and cultural progress.

This commitment goes above and beyond a principle of business ethics or solidarity to become a veritable business positioning strategy that makes Pirelli one of the most fully integrated and active international companies in the various local communities in which it operates. As company Chairman, Marco Tronchetti Provera put it in a recent interview: “This is a necessary and constant commitment, working at a business as well as at an ethical level. The business lives with its human and ﬁnancial resources, with its suppliers, customers and competitors, and will only enjoy enduring growth and success if it is integrated within a balanced social setting. This has always been the policy of the Pirelli Group, one of Italy’s most international companies. We are Brazilians in Brazil, Argentineans in Argentina and Italians in Italy. In every country or market, our companies are actively involved in the life and development of society”.

The following paragraphs sum up in concrete terms the targets and results of Pirelli’s continuing commitment to promoting and supporting socio-cultural projects and non-proﬁt activities. These are mainly operations freely undertaken based on the principle of intelligent divulgation and aid for the less protected social classes, inspired by criteria of quality and uniqueness. In each country, these activities have been undertaken drawing on the local artistic heritage, know-how, energy and resources, promoting a model of active co-operation that combines its partners’ skills with Pirelli’s expertise in the ﬁelds of technology, organisation, promotion and communication.

4.2.1. Theatre and Visual Arts Pirelli has always been committed to supporting projects in the arts, culture and education. “Historical” examples of this commitment include the construction of a wing of the Louvre in Paris dedicated to Etruscan Art, after the group had contributed to its renovation, and the re-landscaping of the” Italian Gardens” at the Victoria and Albert Museum in London.

Pirelli has been active in the music world for many years through its work for the Scala Opera House Foundation and Opera House Museum, contributing to numerous projects. Other memorable examples include the “La Scena del Vate”, an exhibition of D’Annunzio’s works interpreted by painters and set designers, and of course the “Peace Concerts”, a series of extraordinarily successful musical events, which began in Beirut in 1998 and have since been held every year at the behest of Pirelli and the Maestro Riccardo Muti, in extraordinary locations like Jerusalem, Sarajevo, Erevan, Istanbul, Moscow and, more recently, Syria, Tunisia and Morocco.

The construction of the Teatro degli Arcimboldi as part of the redevelopment of the Bicocca industrial area in Milan was another particularly important project, as the theatre became the temporary home to the Scala Opera House, while the historical building designed by Piermarini was closed for a number of years. The Arcimboldi is now Milan’s second most important music venure and still hosts some events on the Scala’s calendar. Last year it staged 165 performances, including ballets, operas and concerts, attended by 320 thousand people, which is 90% of its full capacity.

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Pirelli & C. Group invested 35.5 million Euros in building the new theatre (18 million for town-planning works associated with the Bicocca Project and 17.5 million as a sponsor) out of total of 55.5 million Euros. The theatre was built in the record time of 27 months by Pirelli Real Estate, which co-ordinated all the design and construction operations for the auditorium, now owned by Milan City Council.

Pirelli projects of note in the art world include the complete renovation of the Galleria Capitolina of Villa Torlonia in Rome, official support for Poldi Pezzoli Museum and the Brera Academy of Fine Arts in Milan, plus working partnerships with the Franco Parenti Theatre and Pierlombardo Foundation. The project in Caracas together with “Soﬁa Imber” Contemporary Art Museum in favour of “Jóvenes Artistas” is intended to support contemporary artists in Venezuela, helping them express their full potential.

The art of photography is also very much to the fore: artists Brera Academy: “Pala Pesaro” who have worked with and for Pirelli include names like by G. Savoldo restaured with Pirelli Richard Avedon, Herb Ritts, Peter Lindbergh, Annie Leibowitz contribution. and Norman Parkinson, to mention just a few of the most celebrated creators of the Pirelli calendar. An exhibition on “The Cal”, a cult object for over forty years now, has been displayed in some of the world’s leading museums, such as Palazzo Grassi in Venice, the Louvre, Palazzo Reale in Milan, the New Hermitage in Moscow, and the MASP in San Paolo in Brazil. In conjunction with the latter museum (which hosts Latin America’s most important art collection) Pirelli’s Brazilian subsidiary inaugurated in 1991 a photography competition, which adds to the Pirelli Collection every year and now boastsg almost one thousand works by 109 highly talented photographers.

It is a short step from photography to film, and this step has been taken over recent months as the new Pirelli-Film production company shot a short film entitled “The Call” featuring stars of the calibre of John Malkovich and Naomi Campbell and directed by Antonie Fouqà. A breathtaking thriller, which can be seen on the www.pirellifilm.com website from 23rd March 2006.

Night view of the Arcimboldi Theatre in Milan Bicocca.

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4.2.2. Culture and Education Working for culture also means contributing to the heritage and education of the people. For years Pirelli has been a partner of the FAI-Fondo per l’Ambiente Italiano (Italian Environmental Fund), working together on various projects to restore and conserve monuments, as well as helping organise history of art courses. The two-year period from 2005/2007 saw Pirelli and FAI working on a new edition of the so-called “Art Mondays” (with the patronage of the Lombardy Regional Council and the Milan Province and City Councils), a series of 61 lectures during which 36 professors retrace 150 years of art history from the Impressionist revolution to the most recent experiences. In 2005-2006 Pirelli made an important contribution to a major exhibition on “The Italian Motorcycle: a century on two wheels as seen through art, history and sport”, organised in Milan by the Mazzotta Foundation under the patronage of the President of the Republic and with the support of the ministries of Foreign Affairs and Heritage & Culture. The exhibition on Italian motorbikes, seen not as “objects” but as a “phenomenon” with all its historical, artistic and sporting implications, has been a resounding success both with critics and the general public. The Pirelli Group has also been at the very forefront in supporting science and technology by promoting – in partnership with the Silvio Tronchetti Provera Foundation, the Veronesi Foundation and Cini Foundation – the first World Conference on the Future of Science (Venice, 20th-23rd September 2005), which was attended by a number of Nobel Prize winners and eminent researchers. The event will take place again in Venice in 2006, with three days of conference and debates on the crucial issue of Evolution. Pirelli is, in fact, one of the partners in the Silvio Tronchetti Provera Foundation, a non-profit foundation set up in 2001 to promote research into the fields of economics, the sciences, technology and management as well as into the training of talented youngsters in these fields. This work is carried out both directly and in conjunction with other Italian and foreign associations, notably drawing on the help of Milan’s three universities (the Polytechnic, Bocconi University and Milan Bicocca University), whose rectors sit on the Foundation’s board, which awards money, grants and study prizes to help improve the facilities (also providing equipment) of university and science chairs and institutes. Finally, it is worth mentioning the Pirelli Internetional Award, the first international multi-media competition for the dissemination of scientific culture, run entirely on the Internet (www.pirelliaward.com) and set up in 1996. The tenth edition of the award is currently underway. The prize is awarded each year to the best multi-media presentation in the fields of physics, chemistry, mathematics, the biological sciences, and information and communication technology (ICT).

4.2.3. Sport and Solidarity Pirelli’s commitment to the spread of a sporting culture is borne out by its involvement in numerous major partnerships. First and foremost are motor sports, where a great many racing teams and car manufacturers have sponsorship deals for tyres in the World Rally Championship, FIA-GT and other famous track races (excluding the Formula 1 world championship). Pirelli also has an exclusive partnership deal with Maserati for all its sports activities, and it is the official supplier for Ferrari touring car competitions (the most famous being the Ferrari Challenge). In motorbike racing, Pirelli is the exclusive tyre supplier for the Superbike, Supersport and Superstock World Championships, as well as the partner of leading Motocross teams, with which it has been winning races for many years. Other favourite Pirelli sports include football, with the sponsorship of Inter Milan F.C. in Italy and Club Palmeiras in Brazil (the team set up by Italian immigrants in that country), and also sailing, through a partnership for the Pirelli – Carlo Negri Cup Regattas. In these team sports Pirelli provides its backing for both competitions and special solidarity projects, including the highly successful “Matti per la Vela” (“Crazy About Sailing”) project. Originally devised in 1998 by a group of Genovese health workers, volunteers and professional skippers with a real passion for sailing, the scheme sets out to exploit the sport of sailing as a therapeutic tool to treat and cure sufferers from various types of illness and psychic disorder.

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Football is another sport that lends itself well to solidarity events. In Italy the Inter-Pirelli Campus mainly aims to bring young people together through football, encouraging talented youngsters. But in countries where economic problems and precarious living conditions directly affect children, a passion for sport turns into an invaluable aid in education and solidarity projects. In the summer of 1997, Pirelli set up the Inter-Pirelli Brazil Campus in the city of San Paolo, Brazil, in partnership with Inter Milan FC. The aim was to get children aged 8-14 years off the streets of the favelas and help integrate them into society, combining schooling with the chance to enjoy playing football. In Brazil, Pirelli was also the ﬁrst foreign company to back the Government’s widespread campaign against illiteracy, receiving widespread recognition for its efforts and support. Building on this highly successful project in Brazil (over 4 thousand children, who would otherwise have dropped out, are encouraged to go to school), Inter Milan F.C. has launched other similar As from 1997 the Inter-Pirelli Campus is programmes, in the spirit of Corporate Social Responsibility active in Brazil. scheme, in many other locations worldwide. In Bosnia, 500 Serbian, Croatian and Muslim children are assisted by psychologists with expertise in treating war trauma. In Columbia 550 children have, with the help of football, been saved from drug-dealing and guerrilla warfare. In Israel and Palestine, too, almost 400 children have already taken part in this project of twinning through sport. In Italy, Pirelli organises the annual “Derby del Cuore” (“The Derby of the Heart”) at the San Siro Stadium in Milan, as celebrities from the world of sport and entertainment – supporters of either AC Milan or Inter Milan – play in a football match before a packed stadium. The match, which has been sponsored by Pirelli since it was ﬁrst played in 1996, is marked by high social values, with all the proceeds going to charity.

4.2.4. Pirelli Real Estate: Values and Actions Corporate culture and corporate values are at the very heart of Pirelli RE’s elaborate strategy of interaction with the territory and operations in the social field. The guiding principles are contained in the Ethical Code, which guides its internal and external activities, translating them into specific strategic, organisation and managerial decisions. Pirelli RE has also adopted a document known as Lines of Conduct, which expresses in operational terms the principles set down in the Code. Real estate operations are very closely tied to the territory in which Pirelli RE operates as a driving force for development, altering it, designing the environment and redesigning urban areas, adapting them to the needs of the community. While on the one hand “good corporate citizenship” translates into compliance with the principles of sustainability in business operations and a responsible approach to the territory where it operates, on the other it is embodied in a system of specific actions geared to the needs of the community. The common features of these actions are planning, long term consistency, attention to social well-being and to future generations, and selectivity in four main areas: - Sport and society - The environment and the territory - Art and culture - Education The common denominator in Pirelli RE operations is their links with the world of property: properties are in some instances the direct object of an operation, in others they are the cause or origin of an issue to be tackled and resolved, and in yet others they are the source of some inconvenience that needs to be resolved.

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Operations in the social arena take the form of home help or housing aid. In sport attention has focused on targeted projects to equip sports associations with new facilities or to improve those already in place. In the arts and culture, too, work is mainly concentrated on improving structures and buildings or supporting projects closely tied to their local settings. In education, Pirelli RE is committed to the promotion of an advanced culture and professionalism in the real estate sector.

4.2.5. Relations with Public Administrations Group companies maintain relationships with local, national and supranational authorities in a spirit of full and active cooperation and transparency that does not compromise their independence, economic targets or the values enshrined in this Code (Article 5 of the Ethical Code – Community). In order to further strengthen its own internal controls system, the group’s Italian companies some time ago adopted an Organisational Model, which aims to develop a system geared to the specific requirements foreseen by local legislation (Law Decree 231/2001) regarding companies’ administrative responsibilities for crimes committed by their employees and benefiting the companies in question. Special Supervisory and Monitoring Boards within each of the group’s Italian companies have been designated and are responsible for monitoring the proper running of and compliance with the Organisational Model. In 2005, the Internal Audit Department carried out 75 audits throughout the group, 35 of which were commissioned by the Supervisory and Monitoring Boards of Italian companies. The audits were aimed at verifying the extent of compliance of company processes with the internal control procedures set down by the Organisational Model adopted. With a view to seizing a further opportunity to improve the group’s internal control system, certain control activities featured in the Organisational Models adopted by the group’s Italian companies, designed to ensure a reasonable degree of prevention of the correlated risks of offences being committed, were also adopted by other group companies through the establishement of specific policies and operational regulations.

4.3. Customers

The excellence of the Group’s products and services is based on customer service and the readiness to meet customer needs. The aim is to offer immediate, thoroughgoing and competent responses, tailored to the needs of customers, and in keeping with the spirit of legality, courtesy and co-operation. (Article 4 of the Ethical Code – Customers).

4.3.1. Actions for Customer Safety National and International regulations are increasingly focused on the issue of a car’s active and passive safety features, obliging car manufacturers to ﬁt their vehicles with monitoring and reporting systems that also involve tyres. However, these regulations and devices are often too wide-ranging and potentially inadequate, partly because they are managed by indirect monitoring systems.

Pirelli Tyres meets these needs by keeping tyres at the centre of attention: confirming its confidence in Run Flat; investing in ever closer co-operation with the manufacturers; opting for reliance on “direct” control of tyre pressure to optimise it. In the event of a change in this balance, a revolutionary reaction takes place: the new X-Pressure™ AcousticBlue device sends out a warning signal to both the conventional systems and also to the user’s mobile phone; SWS™ activates an “auto-reinflation” system both in the event of a puncture, allowing more time (and hence greater space) to reach safety, and also in the event of a natural loss of pressure, ensuring optimum pressure for 9-12 months.

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5. SUMMARY TABLES (TABLE OF CONTENTS OF GRI)

This section is designed to help readers to relate the issues addressed within the report to the international experience of the GRI and of the Global Compact. For each indicator the respective position within the text is listed15.

5.1. GRI Reporting Elements

1 Vision and Strategy Page 1.1 Statement of the organisation’s vision and strategy regarding its contribution to sustainable development 8 1.2 Statement from the CEO (or equivalent senior manager) describing key elements of the report 6-8

2 Profilo Profilo Organizzativo Page 2.1 Name of reporting organisation 1 2.2 Major products and/or services, including brands if appropriate 27-48 2.3 Operational structure of the organisation 11-12 2.4 Description of major divisions, operating companies, subsidiaries, and joint-ventures 11-12 2.5 Countries in which the organisation’s operations are located 11 2.6 Nature of ownership; legal form 4, 57, 83 2.7 Nature of markets served 18, 27, 35 2.8 Scale of the reporting organisation: (see headings below) Number of employees 124 Products produced/services offered (quantity or volume) 113, 116 Net sales 5 Total capitalisation broken down in terms of debt and equity 154 Value added 98 Sales/revenues by countries/regions that make up 5 percent or more of total revenues 18, 100 Employees by country/region (specifying the types of employee and where appropriate including the employees of third-party organisations if their number is significantly high in relation to employees of the organisation). 124 2.9 List of stakeholders, key attributes of each, and relationship to the reporting organisation 99 Report Scope 2.10 Contact person(s) for the report, including e-mail and web addresses 66 2.11 Reporting period (e.g., fiscal/calendar year) for information provided 96 2.12 Date of most recent previous report (if any) 96 2.13 Boundaries of report (countries/regions, products/services, divisions/ facilities/joint ventures/subsidiaries) and any specific limitations on the scope 96 2.14 Significant changes in size, structure, ownership, or products/services that have occurred since the previous report 9 2.15 Basis for reporting on joint ventures, partially owned subsidiaries, leased facilities, outsourced operations, and other situations that can significantly affect comparability from period to period and/or between reporting organisations 96 2.16 Explanation of the nature and effect of any re-statements of information provided in earlier reports, and the reasons for such re-statement (e.g., mergers/acquisitions, change of base years/periods, nature of business, measurement methods) 96 Report Profile 2.17 Decisions not to apply GRI principles or protocols in the preparation of the report 96 2.18 Criteria/definitions used in any accounting for economic, environmental, and social costs and benefits 96 2.19 Significant changes from previous years in the measurement methods applied to key economic, environmental, and social information 96 2.22 Means by which report users can obtain additional information and reports Pirelli.com/investor about economic, environmental, and social aspects of the organisation’s relations web site activities, including facility-specific information (if available)

15 In some cases the value of the indicator is reported rather than the page reference.

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3 Governance Structure and Management Systems Structure and Governance Page 3.1 Governance structure of the organisation, including major committees under the board of directors that are responsible for setting strategy and for oversight of the organisation 52-53, 61-66, 68 3.2 Percentage of the board of directors that are independent, non-executive directors 54-55 3.6 Organisational structure and key individuals responsible for oversight, implementation, and audit of economic, environmental, social, and related policies 64 3.7 Mission and values statements, internally developed codes of conduct or principles, and polices relevant to economic, environmental, and social performance and the status of implementation 97-98 3.8 Mechanisms for shareholders to provide recommendations or direction to the board of directors 55, 101 Stakeholder Engagement 3.9 Basis for identiﬁcation and selection of major stakeholders 99, 106-112, 124-142 3.10 Approaches to stakeholder consultation reported in terms of frequency of consultations by type and by stakeholder group 65, 101, 130-131 Overarching Policies and Management Systems 3.13 Explanation of whether and how the precautionary approach or principle is addressed by the organisation 107 3.14 Externally developed, voluntary economic, environmental, and social charters, sets of principles, or other initiatives to which the organisation subscribes or which it endorses. Include date of adoption and countries/operations where applied 96-98 3.15 Principal memberships in industry and business associations, and/or national/international advocacy organisations 112 3.16 Policies and/or systems for managing upstream and downstream impacts, including: - supply chain management as it pertains to outsourcing and supplier environmental and social performance; and - product and service stewardship initiatives 117-119 3.17 Reporting organisation’s approach to managing indirect economic, environmental, and social impacts resulting from its activities 106-112, 120-121 3.18 Major decisions during the reporting period regarding the location of, or changes in, operations 7, 96 3.19 Programmes and procedures pertaining to economic, environmental, and social performance. Include discussion of: - priority and target setting; - major programmes to improve performance; 102-113, 117 - internal communication and training; - performance monitoring; - internal and external auditing; and - senior management review 3.20 Status of certiﬁcation pertaining to economic, environmental, and social management systems 102-103, 117-119, 136

5.2. GRI Performance Indicators

5.2.1. Economic Performance Indicators

ID Aspect Indicator Page EC1 Customers Net sales 5 EC2 Customers Geographic breakdown of markets 18, 100 EC3 Suppliers Cost of all goods, materials, and services purchased 100 EC5 Employees Total payroll and beneﬁts (including wages, pension, other beneﬁts, and redundancy payments) broken down by country or region 99 EC6 Providers of Capital Distributions to providers of capital broken down by interest on debt and borrowings, and dividends on all classes of shares. This includes all forms of debt and borrowings, not only long-term debt 99

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EC7 Providers of Capital Increase/decrease in retained earnings at end of period 88 EC8 Public Sector Total sum of taxes of all types paid broken down by country 99 EC9 Public Sector Subsidies received broken down by country or region None EC10 Public Sector Donations to community, civil society, and other groups broken down in terms of cash and in-kind donations per type of group 100 EC11 Suppliers Supplier breakdown by organisation and country 100

5.2.2. Environmental Performance Indicators16

ID Aspect Indicator Page EN1 Materials Total materials use other than water, by type 106 EN3 Energy Direct energy use segmented by primary source 113-114, 116 EN4 Energy Indirect energy use 113, 116 EN5 Water Total water use 113, 116 EN6 Biodiversity Location and size of land owned, leased, or managed in biodiversity-rich habitats 103 EN7 Biodiversity Description of the major impacts on biodiversity associated with activities and/or products and services in terrestrial, fresh-water, and marine environments 103 EN8 Emissions, Effluents Greenhouse gas emissions 113, 116 and Waste EN9 Emissions, Effluents Use and emissions of ozone-depleting substances 113, 116 and Waste EN10 Emissions, Effluents NOx, SOx, and other significant air emissions by type 113, 116 and Waste EN11 Emissions, Effluents Total amount of waste by type and destination 113, 116 and Waste EN13 Emissions, Effluents Significant spills of chemicals, oils, and fuels in terms and Waste of total number and total volume 103 EN14 Products and Significant environmental impacts of principal products and services 106-113 Services EN15 Products and Percentage of the weight of products sold that is reclaimable at the end Services of the products’ useful life and percentage that is actually reclaimed 111 EN16 Compliance Incidents of and fines for non-compliance with all applicable international statements/conventions/treaties, and national, sub-national, regional, and local regulations associated with environmental issues 103 EN17 Energy Initiatives to use renewable energy sources and to increase energy efficiency 123-124 EN29 Biodiversity Business units currently operating or planning operations in or around protected or sensitive areas. 103 EN31 Emissions, Effluents All production, transport, import, or export of any waste deemed and Waste “hazardous” under the terms of the Basel Convention Annex I, II, III, and VIII. 113, 116

5.2.3. Social Performance Indicators

ID Aspect Indicator Page LA117 Employment Breakdown of workforce 124 LA2 Employment Net employment creation and average turnover segmented by region/country 124 LA3 Labour/ Percentage of employees represented by independent trade union Management organisations or other bona ﬁde employee representatives broken down Relations geographically OR percentage of employees covered by collective bargaining agreements broken down by region/country 135

16 Perimeter: the indicators refer to Tyres Sector manufacturing sites accounting for more than 99% of Tyre Sector sales. 17 LA : Labour.

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LA4 Labour/ Policy and procedures involving information, consultation, Management and negotiation with employees over changes in the reporting Relations organisation’s operations (e.g. restructuring) 134 LA5 Health and Safety Practices on recording and notification of occupational accidents and diseases, and how they relate to the ILO Code of Practice on Recording and Notification of Occupational Accidents and Diseases 136 LA6 Health and Safety Description of formal joint health and safety committees comprising management and worker representatives and proportion of workforce covered by any such committees 136 LA7 Health and Safety Standard injury, lost day, and absentee rates and number of work-related fatalities (including subcontracted workers) 136 LA9 Training and Average hours of training per year per employee by category 129 Education of employee LA10 Diversity and Description of equal opportunity policies or programmes, as well as Opportunity monitoring systems to ensure compliance and results of monitoring 129-130 LA11 Diversity and Composition of senior management and corporate governance Opportunity bodies (including the board of directors), including female/male ratio and other indicators of diversity as culturally appropriate 3, 129-130 LA12 Employment Employee benefits beyond those legally mandated 133-135, 137 LA17 Training and Specific policies and programmes for skills management Education or for lifelong learning 126-129, 131-132 HR118 Strategy and Description of policies, guidelines, corporate structure, and Management procedures to deal with all aspects of human rights relevant to operations, including monitoring mechanisms and results 124, 138 HR2 Strategy and Evidence of consideration of human rights impacts as part Management of investment and procurement decisions, including selection of suppliers/contractors 108 HR3 Strategy and Description of policies and procedures to evaluate and address Management human rights performance within the supply chain and contractors, including monitoring systems and results of monitoring 108 HR4 Non-discrimination Description of global policy and procedures/programmes preventing all forms of discrimination in operations, including monitoring systems and results of monitoring 125-130 HR5 Freedom of Description of freedom of association policy and extent to which Association and this policy is universally applied independent of local laws, as well Collective as description of procedures/programmes to address this issue 135 Bargaining HR6 Child Labour Description of policy excluding child labour as defined by the ILO Convention 138 and extent to which this policy is visibly stated and applied, as well as description of procedures/ programmes to address this issue, including monitoring systems and results of monitoring 125 HR7 Forced and Description of policy to prevent forced and compulsory labour and Compulsory extent towhich this policy is visibly stated and applied as well as Labour description of procedures/programmes to address this issue, including monitoring systems and results of monitoring 134-135 HR8 Strategy and Employee training on policies and practices concerning all aspects Management of human rights relevant to operations 128-129 SO119 Community Description of policies to manage impacts on communities in areas affected by activities, as well as description of procedures/programmes to address this issue, including monitoring systems and results of monitoring. 138-142

18 HR: Human Rights 19 SO: Society

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SO2 Bribery and Description of the policy, procedures/management systems, Corruption and compliance mechanisms for organisations and employees addressing bribery and corruption 142 SO3 Political Description of policy, procedures/management systems, and compliance Contributions mechanisms for managing political lobbying and contributions 100 SO4 Community Awards received relevant to social, ethical, and environmental performance 121 SO5 Political Amount of money paid to political parties and institutions whose Contributions prime function is to fund political parties or their candidates 100 PR120 Customer Health Description of policy for preserving customer health and safety during and Safety use of products and services, and extent to which this policy is visibly stated and applied, as well as description of procedures/programmes to address this issue, including monitoring systems and results of monitoring 142

5.3. Global Compact Principles and GRI Indicators

Global Compact Principles GRI Indicators 1 Businesses should support and respect the protection of internationally proclaimed human rights; and HR1, HR2, HR3, HR4 2 Make sure that they are not complicit in human rights abuses. HR2, HR3 3 Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining HR5, LA3, LA4 4 The elimination of all forms of forced and compulsory labour HR7 5 The effective abolition of child labour; and HR6 6 The elimination of discrimination in respect of employment and occupation HR4, LA10, LA11 7 Businesses should support a precautionary approach to environmental challenges 3.13 8 Businesses should undertake initiatives to promote greater environmental EN1, EN3, EN4, EN5, responsibility; and EN6, EN7, EN8, EN9, EN10, EN11, EN13, EN14, EN15, EN15, 1.1 9 Encourage the development and diffusion of environmentally friendly technologies EN17 10 Businesses should work against all forms of corruption, including extortion and bribery S02

6. GLOSSARY Abrasion The cause of tyre tread (see entry) wear. Determined by the phenomena of friction between the tread itself and the ground. Heavily inﬂuenced by temperature and abnormal tyre inﬂation pressures. Aromatic hydrocarbons organic compounds whose structures are characterized by the presence of at least benzene ring. Atmospheric emission Any solid, liquid or gaseous substance introduced to the atmosphere from an industrial plant or any other source that may produce atmospheric pollution. Banbury A machine for the preparation of polymeric compounds used as raw materials for the production of plastic or rubber-based components. In the Banbury, the various ingredients are introduced according to pre-determined quantities and timings, mixed at pre-determined conditions of temperature and pressure to form compound subsequently extruded in granules or strips. Body-ply Basic element on which the resistant structure of the tyre carcass is constructed. Brassing Deposition on the steel wire of a very thin layer of brass (around 0.002 – 0.004 mm), necessary for the adhesion of the rubber compound to the metal cords. 20 PR: Product

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Building In the production of tyres, the assembly of the various (semi-finished) components to obtaina “green” tyre subsequently subjected to the vulcanizing process Calendering Operation that permits a sheet of rubber of a constant thickness to be obtained, or to cover one or both sides of a length of fabric with a constant thickness of rubber. Calorific power Quantity of thermal energy (or heat) released by a determined mass of fuel burning in standard conditions. Subdivided into Superior Calorific Power (SCP) representing all theenergy developed in combustion, and Inferior Calorific Power (ICP) which instead represents the difference between the total heat released and that lost through the evaporation of the water produced during combustion. Usually expressed in Joules perkilogramme (J/kg) or kilocalories per kilogramme (Kcal/kg) for solid fuels and liquids and in Joules per cubic metre (J/m3) or kilocalories per cubic metre (Kcal/m3) for gases. Carbon dioxide (CO2) Colourless, odourless and flavourless component of the atmosphere. One of the end products of the process of combustion of materials containing carbon. Contributes to the so-called “greenhouse effect” (see entry). Chlorofluorocarbons Also known as CFCs or Freon. Practically odourless and non-inflammable substances highly suitable for use as fluids in the cooling circuits of refrigerators and air conditioners and as propellants in aerosol canisters, as solvents in the electronics and mechanical industries and as reagents in the chemical industry. The widespread use of CFCs (in particular in the ’60s and ’70s) has led to their accumulation in the atmosphere and their diffusion towards the stratosphere where the action of ultraviolet radiation has provoked a progressive deterioration of the ozone layer (see entry) and the consequent drafting of anumber of international agreements regarding the gradual outlawing of these substances. Corporate Social Responsibility The integration on a voluntary basis of the companies’ social and ecological issues with their commercial operations and their relations with stakeholders. Dielectric oil Oil with a very low factor of conductivity used as insulation in electrical apparatus(transformers, capacitors…). Dipping The immersion of the bead cores in a solution composed of heptane and rubber designed to make it easier to then apply the bead. Dow Jones Sustainability Index Family of indices created in September, 1999 by the Swiss ethical rating agency, SAM Sustainability Group, together with the Dow Jones stock exchange of New York, in order to evaluate at a European and global level the share performance of those companies oriented towards sustainability. Employer Branding Defined as all the operations carried out by a business to create and communicate its own identity to a target group composed of candidates and employees, so that the brand attracts and holds onto these subjects in line with the corporate culture and values. Environmental Audit Systematic and documented verification process analysing and evaluating, with objective evidence, whether the methods of dealing with environmental questions and the procedures conform to the requisites established and accepted by an organization or parts of the same. Environmental Due Diligence Systematic verification of the environmental conditions of a site in order to establish the current or potential environmental liabilities.

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Environmental Impact Any modification to the environment, detrimental or beneficial, total or partial, as a consequence of the activities, products or services of an organization. Environmental Indicator A parameter or numerical value describing the impact of a human activity on the environment. Environmental Management System Part of the overall management system comprising the organizational structure, the planning activities, the liabilities, the practices, the procedures, the processes and the resources for developing, implementing, creating, verifying and maintaining the environmental policy. Extrusion The process of assembling the compounds on semi-finished components, through specific processes involving the fusion of the compounds themselves. FTE (Full-Time Equivalent) A way of counting part-time employees. It involves relating the working hours of a part-time employee to the working hours of a full-time employee on a unitary basis. A full-time employee corresponds to 1 FTE and a 50% part-time employee counts as 0.5 FTE. For example, two 50% part-time employees equal one full-time employee (FTE = 0.5 x 2 = 1). FTSE4GOOD An index designed to monitor the ethical, environmental and social performance of individual companies. The selection of the firms included in this index is entrusted to an independent body, the Advisory Committee, which works on the basis of the data provided by a British research institute, the Ethical Investment Research Service (EIRIS). Fuel cell Electrochemical devices that convert chemical energy into electrical energy; they are classified according to the electrolyte used in the process. Various fuels may be used (natural gas, hydrogen…). Global Reporting Initiative (GRI) The Global Reporting Initiative is an international venture to develop and provide global Guidelines on Sustainability Reporting. GRI is promoted by CERES (Coalition for Environmentally Responsible Economies) and UNEP (United Nations Environmental Programme). Greenhouse effect The phenomenon of rising terrestrial temperatures due to the excessive atmospheric presence of certain gases (mainly carbon dioxide and a number of nitrogen and ozone oxides) that prevents the dispersion of heat. Halon Organic substances containing, along with carbon and hydrogen, fluorine, chlorine, bromine and iodine. As well as actively contributing to the so- called greenhouse effect (see entry), they are also considered to be powerful ozone depleting agents. Hazardous waste Categories of waste of actual or potential danger to human health or the environment, classified on the basis of specific European norms (see also Non-hazardous waste). Hydrofluorocarbons Known as HCFCs, these organic substances contain chlorine and fluorine, along with hydrogen and carbon. Although they are ozone depleting substances, they are far less damaging than CFCs and halons (see entry). They are generally used as alternatives to CFCs. Industrial accident Damaging event due to violent causes during work and leading to death or permanent invalidity (absolute or partial) or a temporary invalidity causing absence from work.

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ISO 14001 A standard drawn up by the International Organisation for Standardization (ISO), specifying the requisites of an Environmental Management System that permits anorganization to formulate an environmental policy and to establish objectives, taking into account legislative factors and information concerning significant environmental impacts. Intermediate energy sources Energy sources deriving from the conversion of primary energy into other forms. The two most common examples are electricity and steam. Kyoto Protocol An international agreement on the reduction of the atmospheric emission of the greenhouse gases (see entry) responsible for global warming. Life Cycle Analysis, LCA A method of evaluating the overall environmental impact of a product, taking into consideration its entire life cycle, from the activities relating to the extraction and treatment of the raw materials, through to the manufacturing processes, transportation, distribution, use, recycling and re-use and disposal. LPG Liquid propane gas. MBO Management By Objectives – Yearly bonus scheme based on targets set at he beginning of the year. Nanocomposite A mixture of materials (ceramic, metals, etc.) with dimensions on the nanometric scale (10-9 m). Nanomaterials/ Nanoparticles Materials/solid particles with dimensions on the nanometric scale. Nanotechnology Technology with the aim of developing applications based on nanomaterials. Newton A unit of force in the International System (N), equal to the force required to produce acceleration of 1 m/s2 when exerted on a mass of 1 kg. Nitric oxides Gases produced by the combustion of fossil fuels. They contribute to the formation of ozone in the lower atmosphere and “acid” depositions during normal rainfall. Non-hazardous waste Categories of waste that are not dangerous to human health or the environment, classified on the basis of European Decision 2000/532/EC, modified by Decisions 2001/118/EC, 2001/119/EC and 2001/573/EC. NOx See Nitric oxides. OECD Organization for Economic Co-operation and Development. OHSAS18001 An international certification standard relating to safety at work and industrial hygiene. This standard establishes the requisites for a Health and Safety at work management system, in order to allow companies to manage its liabilities in this respect and improve its performance in the field. Organic solvent Any VOC (see entry) used alone or in combination with other agents in order to dissolve primary materials, products or waste materials, without being subject to chemical transformation, or used as cleaning agents to dissolve contaminants, or used as a solvent,a means of dispersion, a corrector of viscosity, as a corrector of surface tension, as a plasticizer or a preservative. Ozone An allotropic form of oxygen with the chemical symbol O3. It is found in small quantities throughout the atmosphere and is formed by the action of electrical discharges and ultraviolet light that convert oxygen molecules into ozone. At around 25 km from the earth’s surface there is a concentrated layer of ozone that absorbs ultraviolet rays and represents a

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vital shield (the ozonosphere). The diminution of the thickness of and creation of holes in the ozone layer appears to be linked to human activities releasing nitric oxides (see entry) and chlorofluorocarbons (see entry) into the air. Painting A chemical treatment that prevents the adhesion of the non-vulcanized tyre (the so-called “green” tyre) to the moulds and/or the vulcanizing chamber. Pascal An international unit of pressure equal to 1 Newton per square metre (Pa = N/m2). Patenting The thermal treatment necessary to restore the structure of steel wire so as to make it suitable for further deformation via cold drawing. PCB/PCT Acronyms for polychlorinated biphenyls and polychlorinated terphenyls, substances that are potentially dangerous, bioaccumulable, with insulating and fire-resistant characteristics, principally used in electrical equipment (transformers and/or capacitors – see entry). Photochemical Atmospheric pollution principally caused by the exhaust emissions of urban vehicular smog traffic; it is the result of a complex chain of photochemical oxidation reactions triggered by sunlight and favoured by particular meteorological conditions (inversion…). One of the consequences of photochemical smog is an increase in ozone in the troposphere (see entry), which thus becomes a secondary pollutant. Furthermore, the relatively non-volatile organic compounds that form may condense, creating a characteristic mist of tiny droplets. Photonics Science and technology relating to a class of devices using photons. The term photonics was introduced as an analogy with the term electronics in reference to the replacement of the electron with the photon in operations typical of electronics such as the processing, transmission and memorization of data. Pickling The elimination of the oxidization of metal surfaces (for example, copper and steel). The operation is generally conducted in baths containing solutions of phosphoric or sulphuric acid. Primary energy sourcesEnergy sources consumed while supplying final energy services (e.g. heating and transport) or generating intermediate forms of energy, like for instance electricity and steam. Examples of primary energy are: coal, natural gas, liquid propane gas, fuel oil, biomasses. Pressure A physical measurement expressing the ratio between the intensity of a force (expressed in Newtons) exerted on a surface in the normal direction and the area of that surface (expressed in square metres). Rolling resistance The component of resistance to the advancement of a vehicle wholly attributable to the tyres. SA 8000 An international standard developed by the CEPAA (Council of Economical Priorities Accreditation Agency) regarding respect for human rights, workers’ rights, safeguarding against exploitation of minors and guarantees of health and safety at work. Safety and Health at Work Management System Part of the global management system facilitating the handling of risks relating to health and safety at work associated with company’s activities. This includes the organizational structure, the planning activities, the responsibilities, the practices, the procedures, the processes and the resources for the development, actuation, realization, revision and maintenance of the policy for health and safety at work.

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Sipes Thin grooves, generally of an angular and closely paced pattern, cut into the tread of a tyre. They are designed to improve grip especially on smooth or wet road surfaces. Stakeholders All those individuals or groups (literally holding a stake), who may have a signiﬁcant interest in the organisation’s operations, or whose actions may reasonably inﬂuence the organisation’s ability to successfully implement its own strategies or reach its targets. Steering Committee CSR (Corporate Social Responsibility) It has the task of steering and co-ordinating group operations pertaining to Corporate Social Responsibility. It is composed of managers of: General Control and Administration Board, Public and Economic Business Management, Personnel Management, Health Safety and Environment Management (which also provides the Secretariat of the Committee). Stranding The mechanical process of assembling brassed wires. Sustainable development Development capable of satisfying the needs of current generations without compromising the capacity of future generations to satisfy their own. This type of development does not represent a state of pre- established harmony but rather a process of change in which the exploitation of resources, the pattern of investments and the institutional changes are rendered compatible with both the needs of the future and those of the present. tep Equivalent ton of petroleum. Conventional measuring unit of energy sources, equivalent to the thermal energy obtained from the combustion of one ton of petroleum. The conversion coefficients adopted by the Group are: 1 tep – 41.86 GJ Electricity: 1 kWh = 860 kcal = 0.000086 tep Fuel oil: 1 ton = 0.98 tep Diesel: 1 ton = 1.08 tep GPL: 1 ton = 1.10 tep Natural Gas: 1000 m3 = 0.82 tep Transformer A static electrical device (with no moving parts) that transfers electrical energy from one primary circuit to another secondary circuit, modifying its voltage and current. In its simplest form it is composed of a closed magnetic circuit made with ferrosilicon blades and two coils made by helically winding two conductors onto an insulating support. Troposphere The lowest part of the atmosphere, between the ground and the stratosphere. This is the home of the most common meteorological phenomena. Volatile Organic Compounds (VOC) Any natural or anthropic organic compound that at a temperature of 20°C has a vapour tension of 10 Pascal or greater, or that has a corresponding volatility in particular conditions of use. They may contribute to the production of photochemical smog (see entry), with impacts on human health and the environment. Vulcanization An irreversible thermal process in the solid phase through which the elastomers present in a compound pass from a prevalently “plastic” state to one that is essentially “elastic”. This is due to the formation of a series of bonds between the various polymeric chains that lead to the formation of three-dimensional molecular structures.

152

THE GROUP Consolidated Financial Statements at December 31, 2005

CONTENTS Page Consolidated balance sheet 154 Consolidated income statement 155 Consolidated statement of changes in shareholders’ equity 156 Consolidated statement of cash ﬂows 157

Notes to the consolidated financial statements 158 1. Accounting policies 158 2. Financial risk management policy 168 3. Estimates and assumptions 169 4. Transition to ias/ifrs 170 5. Segment information 175 6. Property, plant and equipment 178 7. Intangible assets 180 8. Investment properties 181 9. Investments in associates 181 10. Investments in joint ventures 183 11. Available-for-sale financial assets 185 12. Treasury shares 186 13. Deferred tax assets 186 14. Trade receivables 186 15. Other receivables 187 16. Tax receivables 187 17. Inventories 188 18. Financial assets held for trading 188 19. Cash and cash equivalents 188 20. Equity 189 21. Stock option plans 190 22. Deferred tax liabilities 197 23. Tax payables 198 24. Provisions for other liabilities and charges 198 25. Employee benefit obligations 198 26. Borrowings from banks and other financial institutions 202 27. Trade payables 204 28. Other payables 204 29. Financial instruments 204 30. Commitments and contingencies 205 31. Revenues from sales and services 208 32. Other income 208 33. Personnel costs 208 34. Amortization, depreciation and impairments 209 35. Other expenses 209 36. Financial income 209 37. Financial expenses 210 38. Dividends 210 39. Valuation of financial assets 210 40. Share of earnings (losses) of associates and joint ventures 211 41. Income taxes 211 42. Income from discontinued operations 211 43. Earnings per share 213 44. Dividends per share 213 45. Hyperinflation 214 46. Related party disclosures 214 47. Significant subsequent events 215 48. Other information 217 List of investments 218 Independent Auditors’ report 227 Preliminary information Directors’ Report Sustainability Report Consolidated Financial Statements

(in thousands of euros) CONSOLIDATED BALANCE SHEET 12/31/2005 12/31/2004 ASSETS 6 Property, plant and equipment 1,571,972 2,080,847 7 Intangible assets 476,801 512,878 9 Investments in associates 294,958 279,981 10 Investments in joint ventures 4,247,944 2,704,406 11 Available-for-sale ﬁnancial assets 1,032,317 518,612 12 Treasury shares - 4,678 13 Deferred tax assets 77,046 97,110 15 Other receivables 529,393 400,248 16 Tax receivables 18,619 79 8 Investment properties 5,140 - NON-CURRENT ASSETS 8,254,190 6,598,839 17 Inventories 681,056 1,057,964 14 Trade receivables 943,434 1,503,736 15 Other receivables 272,252 251,721 18 Financial assets held for trading 179,636 284,368 19 Cash and cash equivalents 300,331 509,056 16 Tax receivables 110,961 7,831 29 Financial instruments 67,061 103,949 CURRENT ASSETS 2,554,731 3,718,625 TOTAL ASSETS 10,808,921 10,317,464

EQUITY 20.1 Attributable to parent company shareholders: 5,204,859 3,501,999 Share capital 2,762,696 1,800,383 Other reserves 2,010,712 1,213,572 Retained earnings 104,035 237,090 Net income for the year 327,416 250,954 20.2 Attributable to minority interest: 408,947 338,960 Reserves 337,413 285,832 Net income for the year 71,534 53,128 TOTAL EQUITY 5,613,806 3,840,959 LIABILITIES 26 Borrowings from banks and other financial institutions 1,550,512 1,932,701 28 Other payables 53,196 58,887 24 Provisions for other liabilities and charges 144,734 301,886 22 Deferred tax liabilities 49,352 80,367 25 Employee benefit obligations 510,802 569,313 23 Tax payables 8,706 3,344 29 Financial instruments 2,048 - NON-CURRENT LIABILITIES 2,319,350 2,946,498 26 Borrowings from banks and other financial institutions 600,362 803,879 27 Trade payables 1,018,264 1,608,525 28 Other payables 771,538 853,416 24 Provisions for other liabilities and charges 79,826 167,927 23 Tax payables 111,501 79,074 29 Financial instruments 294,274 17,186 CURRENT LIABILITIES 2,875,765 3,530,007 TOTAL EQUITY AND LIABILITIES 10,808,921 10,317,464

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(in thousands of euros) CONSOLIDATED INCOME STATEMENT 2005 2004 31 Revenues from sales and services 4,545,669 3,966,949 32 Other income 283,612 276,312 Change in inventories of work in process, semiﬁnished and ﬁnished products 13,404 (24,102) Raw materials and consumables used (1,640,352) (1,544,051) 33 Personnel costs (1,029,880) (968,261) 34 Amortization, depreciation and impairments (215,704) (208,458) 35 Other expenses (1,612,591) (1,242,364) Increase in property, plant and equipment from internal work 10,761 12,818 OPERATING PROFIT 354,919 268,843

36 Financial income 248,310 524,083 37 Financial expenses (313,682) (596,954) 38 Dividends 26,694 20,998 39 Valuation of ﬁnancial assets (90,069) (12,745) 40 Share of earnings (losses) of associates and joint ventures 251,366 99,768 INCOME BEFORE INCOME TAXES 477,538 303,993 41 Income taxes (128,484) (87,078) INCOME FROM CONTINUING OPERATIONS 349,054 216,915 42 Income from discontinued operations 49,896 87,168 INCOME FOR THE PERIOD 398,950 304,083 Attributable to: Parent company shareholders 327,416 250,955 Minority interest 71,534 53,128

43 EARNINGS PER SHARE (euros per thousand of shares) Basic earnings per share continuing operations 55.53 48.13 discontinued operations 10.08 25.27 65.61 73.40 Diluted earnings per share continuing operations 55.32 45.78 discontinued operations 10.04 24.03 65.36 69.81

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CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (in millions of euros) attributable to Parent Company shareholders Share Share Legal Reserve for Reserve Other Total Minority Total capital premium reserve translation for reserves / attributable interest reserve differences fair value Retained to parent adjustment earnings company of AFS shareholders assets BALANCE AT JANUARY 1, 2004 1,799 500 68 - - 841 3,208 243 3,451 Total recognized income and expenses in equity: - - - 24 - (53) (29) (2) (31) - Differences on translation of foreign currency financial statements 24 24 (2) 22 - Net actuarial gains/losses regarding employee benefits (net of tax effects) (53) (53) (53) Appropriation of income as per May 11, 2004 resolution: - legal reserve 7 (7) - - - dividend payment (109) (109) - (109) Other dividends paid to minority shareholders - (23) (23) Exercise of warrants 2003-2006 1 174 175 - 175 Net income for the year 251 251 49 300 PRE stock options exercised during the period - 15 15 Sale of PRE treasury shares - 17 17 Sale of 8.37% interest in PRE on market - 36 36 Other 6 6 4 10 BALANCE AT DECEMBER 31, 2004 1,800 500 75 24 - 1,103 3,502 339 3,841 Adoption of IAS 32/39 (1) 138 137 137 BALANCE AT JANUARY 1, 2005 1,799 500 75 24 - 1,241 3,639 339 3,978 Total recognized income and expenses in equity: - - - 174 106 19 299 6 305 - Differences on translation of foreign currency financial statements 174 174 6 180 - Net actuarial gains/losses regarding employee benefits (net of tax effects) (59) (59) - (59) - Fair value adjustment of available-for-sale financial assets 106 106 - 106 - Differences on translation of foreign currency financial statements of Telecom Italia Group (Olimpia) 69 69 - 69 - Fair value adjustment of derivatives designated as cash flow hedges (Olimpia) 9 9 - 9 Appropriation of income as per April 28, 2005 resolution: - legale reserve 7 (7) - - - - dividend payment (113) (113) - (113) Other dividends paid to minority shareholders - (36) (36) Exercise of warrants 2003-2006 175 (174) 1 - 1 Pirelli & C. capital increase 789 259 1,048 - 1,048 PRE stock options exercised during the year - 88 Income for the year 327 327 72 399 Consolidation Yanzhou Evolution Tyre Co Ltd - 21 21 Other 4 4 (1) 3 BALANCE AT DECEMBER 31, 2005 2,763 759 82 198 106 1,297 5,205 409 5,614

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(in thousands of euros) CONSOLIDATED STATEMENT OF CASH FLOWS 2005 2004 Net income 349,054 216,915 Amortization, depreciation / impairment losses & reversals of intangible assets and property, plant and equipment 212,678 201,516 Financial expenses 313,682 614,140 Financial income (248,310) (550,590) Dividends (27,976) (20,998) Valuation of ﬁnancial assets 90,069 22,066 Share of earnings (losses) of associates and joint ventures (250,084) (99,768) Change in inventories (53,900) 13,650 Change in trade receivables / payables 63,927 (81,900) Change in other receivables / payables 31,415 22,800 Change in employee beneﬁt obligations / other provisions (9,265) 15,735 Other changes (3,993) (4,101)

A Net cash ﬂows provided by (used for) operating activities 467,297 349,465

Investments in property, plant and equipment (233,624) (211,321) Disposals of property, plant and equipment 8,750 13,650 Investments in intangible assets (8,835) (25,470) Disposals of intangible assets 852 3,200 Acquisition of investments in associates and joint ventures (1,405,257) (36,960) Disposals of investments in associates and joint ventures 1,317 - Acquisition of available-for-sale ﬁnancial assets (247,822) (187,038) Disposals of available-for-sale ﬁnancial assets 16,629 27,830 Dividends received 27,976 20,998

B Net cash ﬂows provided by (used for) investing activities (1,840,014) (395,111)

Change in share capital and share premium reserve 1,065,634 204,066 Expenses for share capital increase (16,820) - Purchase / sale of treasury shares - 9,968 Change in ﬁnancial payables 212,441 81,735 Change in ﬁnancial receivables (265,396) 12,551 Financial income/Financial expenses (65,372) (63,550) Effect of disposal of Cables and Systems businesses 490,000 - Dividends paid (149,542) (131,768)

C Net cash ﬂows provided by (used for) ﬁnancing activities 1,270,945 113,002

Net cash flows provided by (used for) operating activities (280,934) 263,200 Net cash flows provided by (used for) investing activities 31,178 (83,300) Net cash flows provided by (used for) financing activities (8,873) 4,547

D Total cash ﬂows from discontinued operations (258,629) 184,447

E Total cash ﬂows provided by (used) during the year (A+B+C+D) (360,401) 251,803

F Cash and cash equivalents, at beginning of year 490,005 251,737

G Exchange differences on translation of cash and cash equivalents 16,706 (13,535)

H Cash and cash equivalents, at end of year (E+F+G) (°) 146,310 490,005

(°) of wich: Cash 300,331 509,055 Bank overdrafts (154,021) (19,050)

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Pirelli & C. S.p.A. is a company organized under the laws of the Republic of Italy.

Founded in 1872 and listed on the Milan Stock Exchange, Pirelli & C. S.p.A. is a holding company which manages, coordinates and ﬁnances the operations of its subsidiaries.

At the balance sheet date, the company’s businesses are mainly represented by investments in:

• Pirelli & C. Real Estate S.p.A. - a listed company operating in the real estate sector – 50.9 percent of share capital; • Pirelli Tyre Holding N.V. - a company operating in the tyre sector – 100 percent of share capital; • Pirelli Broadband Solutions S.p.A. - a company operating in the ﬁeld of components, equipment and systems for telecommunications – 100 percent of share capital; • Olimpia - a company which holds 18 percent of the share capital of Telecom Italia S.p.A. represented by ordinary shares – 57.7 percent of share capital (under IAS/IFRS 60.5 percent); • Pirelli & C. Ambiente Holding S.p.A. - a company operating in the environmental services sector – 51 percent of share capital.

The registered office of the company is in Milan, Italy.

1. ACCOUNTING POLICIES

Basis of presentation In accordance with Regulation No. 1606 issued by the European Parliament and by the Council of the European Union in July 2002, the consolidated ﬁnancial statements of the Pirelli & C. Group have been prepared in accordance with the international accounting standards IAS/IFRS in force at December 31, 2005 and in accordance with the interpretations of the “International Financial Reporting Interpretations Committee” – IFRIC.

On November 8, 2005, the European Commission adopted Regulation No. 1910/2005 which endorses, among other things, the amendments to IAS 19 (Employee benefits) approved by the International Accounting Standards Board – IASB in December 2004. One of the amendments introduced is the option to recognize in full actuarial gains and losses on post-employment benefits of the type called defined benefits directly in a statement of recognized income and expenses. The Group elected to apply this option.

As a result of the application of this option, a change was made to the effects of the transition to IAS/IFRS published in the interim consolidated ﬁnancial statements at June 30, 2005 equal to a reduction in equity of Euros 53 million at December 31, 2004.

Specifically, paragraph 1 “Summary of significant accounting policies”, the comparative figures at December 31, 2004 and paragraph 4 “Transition to IAS/IFRS” of these notes now include the effects of the adoption of this option.

Furthermore, this effect had already been included in the quarterly report at September 30, 2005, in that the above amendments to IAS 19, even though they had not yet been adopted by the European Union, had already been approved at the date of the publication of the quarterly report. The consolidated ﬁnancial statements are audited by PricewaterhouseCoopers S.p.A. pursuant to art. 159 of Legislative Decree No. 58 dated February 24, 1998 and taking into account the Consob recommendation dated February 20, 1997, in execution of the resolution passed by the shareholders

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on April 28, 2005 which engaged the audit firm for the three years 2005-2007. The fees agreed for the audit of the consolidated financial statements for the year 2005 amount to Euros 2,896 thousand, inclusive of the fees relating to the limited review of the interim consolidated financial statements at June 30, 2005.

Consolidation

The consolidated ﬁnancial statements include the ﬁnancial statements of PIRELLI & C. S.p.A., the parent company, and the subsidiaries in which PIRELLI & C. S.p.A. holds, directly or indirectly, control.

Besides the subsidiaries, the scope of consolidation includes associates and investments in joint ventures.

The ﬁnancial statements used for purposes of consolidation are those at December 31, 2005, adjusted, where necessary, to conform to the Group Accounting Principles.

The financial statements of subsidiaries operating in countries with hyperinflationary economies have been adjusted to take into account the changed purchasing power of the local currency, in accordance with the principles for inflation accounting.

The financial statements expressed in foreign currency have been translated into euros at rates prevailing at the year-end for the balance sheet and at the average exchange rates for the income statement, with the exception of the financial statements of companies operating in countries with hyperinflationary economies, whose statements of income have been translated at year-end rates.

The differences arising from the translation of opening equity at period-end exchange rates have been recorded in the reserve for translation differences, together with the difference between the result in the income statement, translated at average rates, and result included in the balance sheet, translated at year-end rates.

Subsidiaries have been consolidated using the line-by-line consolidation method. Under this method, intragroup transactions and unrealized gains and loss, if any, are eliminated. Acquisitions of subsidiaries have been accounted for using the “purchase method” of accounting whereby the assets, liabilities and contingent liabilities acquired are measured at fair value at the date of acquisition. The excess of the cost of acquisition over the fair value of the assets and liabilities acquired is recorded as goodwill. If this difference is negative, the goodwill is recognized in the income statement.

The investment in Shared Service Center, although equal to 50 percent, qualifies as a subsidiary since Pirelli & C. S.p.A. has the power to determine the financial and operating polices of the company and it has therefore been consolidated line-by-line. In the financial statements of the parent company Pirelli & C. S.p.A., investments in subsidiaries are stated at cost net of any impairment loss.

Investments in associates are accounted for by the equity method. The carrying amount of investments in associates includes any goodwill paid on acquisition. The associates’ economic results and equity movements are recognized in the consolidated income statement and in consolidated equity, respectively. In the ﬁnancial statements of the parent company Pirelli & C. S.p.A., investments in associates are stated at cost net of any impairment loss. Investments in joint ventures or jointly controlled entities are accounted for by the equity method.

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In the ﬁnancial statements of the parent company Pirelli & C. S.p.A., investments in joint ventures are stated at cost net of any impairment loss. The effects of transactions with associates or joint ventures that have not been realized with independent parties are eliminated.

Intangible assets Intangible assets with a ﬁnite useful life are measured at cost less accumulated amortization and accumulated impairment losses. Amortization starts when the asset is available for use. Goodwill Goodwill is tested annually in order to identify any impairment. Goodwill is allocated to cash-generating units for purposes of impairment test. Trademarks and licenses Trademarks and licenses are stated at cost less accumulated amortization and accumulated impairment losses. Cost is amortized over the contract period or the useful lives of the assets, whichever is sooner. Software Software license costs, including direct incidental costs, are capitalized and recorded in the balance sheet less accumulated amortization and accumulated impairment losses. Research and development Research and development expenditures for new products and/or processes are expensed when incurred. There are no developments costs which meet the conditions for capitalization. The useful lives of intangible assets are the following: Trademarks and licenses 5 years Software not more than 3 years

Property, plant and equipment Property, plant and equipment is recorded at the cost of acquisition or production and includes directly attributable incidental expenses. Property, plant and equipment is stated at cost less accumulated depreciation and accumulated impairment losses, except for land, which is not depreciated and is stated at cost less accumulated impairment losses. Depreciation is accounted for starting from the month in which the asset is available for use, or is potentially able to provide the economic beneﬁts associated with it. Depreciation is charged monthly using the straight-line method at rates designed to write-off the assets to the end of their residual useful lives or, for disposals, until the last month of use.

Depreciation rates are as follows: Buildings 3% - 10% Plant 7% - 10% Machinery 5% - 10% Equipment 10% - 33% Furniture 10% - 33% Motor vehicles 10% - 25%

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Government investment grants relating to property, plant and equipment are recorded as deferred income and credited to the income statement over the period of depreciation of the relative assets.

Borrowing costs incurred for the purchase of an asset are expensed unless they are directly attributable to the purchase, construction or production of a qualifying asset, in which case they are capitalized.

Leasehold improvements are classiﬁed as property, plant and equipment, consistently with the nature of the cost incurred. The depreciation period corresponds to the remaining useful life of the asset or the residual period of the lease contract, whichever is sooner.

Major spare parts are capitalized and depreciated over the estimated useful life of the assets to which they refer; minor spare parts are expensed when the cost is incurred.

Assets acquired under finance lease contracts are accounted for as property, plant and equipment with a contra-entry to the relative financial liability. The lease payment is split between interest expense, recorded in the income statement, and the repayment of principal, recorded as a reduction of the financial liability.

Investment properties Investment properties are recorded at cost, including directly chargeable incidental expenses. They are stated at cost less accumulated depreciation and accumulated impairment losses.

Impairment of property, plant and equipment, intangible assets and investment properties Whenever speciﬁc indicators point to an impairment loss, property, plant and equipment, intangible assets and investment properties are tested for impairment. The test consists of an estimate of the recoverable amount of the asset and a comparison with its carrying amount. If the recoverable amount is lower than the asset’s carrying amount, the carrying amount is reduced to the recoverable amount. This reduction constitutes an impairment loss which is recognized in the income statement. For assets that are not subject to depreciation and amortization, and for intangible assets that are not yet available for use, the impairment test is performed annually, regardless of the presence of impairment indicators.

Available-for-sale ﬁnancial assets Available-for-sale ﬁnancial assets include equity investments in other companies and other securities not held for trading. They are included in non-current assets since there is no intention to dispose of them within the subsequent 12 months.

From January 1, 2004 to December 31, 2004 They are stated at the cost of acquisition adjusted, where applicable, to take into account any loss of value. Any writedowns are not maintained in future years if the reasons which gave rise to the writedown no longer apply.

From January 1, 2005 For purposes of their measurement, they are classified as available-for-sale financial assets and measured at fair value. The gains and losses are recognized in a specific reserve in equity. In case of permanent impairment losses or in the event of disposal, the gains and losses recognized

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up to that time in equity are reversed to the income statement. Any permanent impairment losses recognized on available-for-sale ﬁnancial assets in the income statement can not be reversed through the income statement. Purchases and sales of available-for sale ﬁnancial assets are recognized on the trade date.

Inventories Inventories are stated at the lower of cost, using the FIFO method, and estimated realizable value.

Construction contracts Costs and revenues relating to long-term contracts are recognized in the income statement in the years in which the work is carried out. The Group uses the percentage of completion method to determine the appropriate amount of costs and revenues to recognize in the income statement when the stage of completion can be measured and when the collection of the revenues recorded in the income statement is likely. The stage of completion is measured by reference to the costs incurred up to the balance sheet date as a percentage of total estimated costs for each contract. Contract revenues are compared to contract costs incurred to reach the stage of completion. The gross amount due from customers for contract work for all the contracts in progress and for which the costs incurred plus recognized proﬁt (less recognized losses) exceed progress billings is included in trade receivables. The gross amount due to customers for contract work for all contracts in progress for which progress billings exceed costs incurred plus recognized proﬁt (less recognized losses) is included in trade payables. When it is probable that the contract costs will exceed total revenues, the estimated loss is recognized immediately in the income statement.

Receivables From January 1, 2004 to December 31, 2004 Receivables are stated at their estimated realizable value. Receivables in currencies other than the functional currency of the individual companies are adjusted to the year-end exchange rates.

From January 1, 2005 Receivables are recognized initially at fair value. For trade receivables, fair value generally coincides with the nominal amount. Receivables are subsequently measured at amortized cost using the effective interest method, less provision for impairment. Receivables in currencies other than the functional currency of the individual companies are adjusted to the year-end exchange rates. Junior securities included in non-current assets are classified as receivables (loans and receivables) and are measured at amortized cost, less provision for impairment. Any impairment of junior securities is represented by the difference between the present value of the estimated future net cash flows on the underlying non-performing loan portfolios at the date of acquisition of the securities and the present value of the estimated future net cash flows of these same portfolios updated to the date of the preparation of the financial statements, both discounted at the effective interest rate determined at the date of the acquisition of the junior securities. If the reasons for the writedown of the junior securities no longer exist, the impairment losses recorded in previous periods will be cancelled by a credit to the income statement up to the originally recorded amount of the securities.

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Payables From January 1, 2004 to December 31, 2004 Payables are stated at nominal value. Payables in currencies other than the functional currency of the individual companies are adjusted to the year-end exchange rates.

Dal 1 gennaio 2005 Payables are stated at amortized cost. Payables in currencies other than the functional currency of the individual companies are adjusted to the year-end exchange rates.

Financial assets held for trading Financial assets held for trading include securities mainly purchased for resale in the short term. Such securities are classiﬁed as current assets.

From January 1, 2004 to December 31, 2004 Financial assets held for trading are valued at the lower of the purchase cost and the market value.

From January 1, 2005 Financial assets held for trading are measured at fair value through proﬁt and loss. Transaction costs are expensed in the income statement. Purchases and sales of ﬁnancial assets held for trading are recognized on the trade date.

Cash and cash equivalents Cash and cash equivalents include bank and postal deposits and cash and checks on hand. Cash and cash equivalents are stated at nominal value.

Provisions for other liabilities and charges Provisions for other liabilities and charges include the accruals for current obligations (legal or constructive) deriving from a past event, for the fulﬁllment of which an outﬂow of resources will probably be necessary, the amount of which can be estimated in a reliable manner.

Employee benefits Employee benefits paid subsequent to the termination of the employment relationship (post- employment benefits of the type called defined benefits) and other long-term benefits are subject to actuarial calculations. The liability recorded in the financial statements is the present value of the Group’s obligation, net of plan assets. With regard to employee benefits, the Pirelli & C. Group elected the option allowed by IAS 19 under which actuarial gains and losses are recognized in a statement of recognized income and expenses in the year in which they arise. For other long-term benefits, the actuarial gains and losses are recognized immediately in the income statement. The cost for interest is classified in personnel costs.

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Stock options Stock options are divided into two types which require different accounting treatments according to the features of the plan: • Equity-settled: are plans in which the beneficiary has the right to purchase shares of the company at a fixed price whenever specific conditions are met. In such cases, the fair value of the option, determined at the grant date, is recognized as an expense over the period of the plan with a contra- entry to increase the reserves in equity;

• Cash-settled: are plans which provide for put options on behalf of the beneficiary, combined with call options on behalf of the issuer, or plans in which the beneficiary directly receives the monetary equivalent amount of the benefit originating from the exercise of the stock option. The fair value of the liability, remeasured at the end of every reporting period, is recognized in the income statement over the vesting period. The changes in the fair value of the liability subsequent to the vesting period are recognized in the income statement.

Loans receivable From January 1, 2004 to December 31, 2004 Loans receivable are stated at estimated realizable value.

From January 1, 2005 Loans are recognized initially at fair value. They are subsequently measured at amortized cost using the effective interest method.

Loans payable From January 1, 2004 to December 31, 2004 Loans payable are stated at nominal value.

From January 1, 2005 Loans payable are recognized initially at fair value, net of any transaction costs incurred. They are subsequently measured at amortized cost using the effective interest method. They are classiﬁed as current liabilities unless the Group does not have the unconditional right to extend the term of the loan at least beyond twelve months after the end of the year.

Financial instruments From January 1, 2004 to December 31, 2004 With regard to transactions hedging exchange risks of balance sheet items expressed in currencies other than the functional currency, the difference between the spot rate at the date the contract is entered into and the spot rate at the end of the year is recognized in the income statement. With regard to transactions hedging exchange risks originating from forward transactions, the economic results (the difference between the spot rate at the transaction date and the spot rate at the closing date of the transactions) are recognized at the time of the realization of the hedged asset/liability. The difference between the spot rate and the forward rate of derivative instruments is recorded in the income statement over the relative period (accrued for over the term of the contract). Transactions hedging interest rate risks are recorded in relation to the period of interest on the relative loan.

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From January 1, 2005

Accounting for derivative ﬁnancial instruments Derivatives are recognized initially at fair value with a contra-entry to the income statement. They are subsequently remeasured at their fair value; fair value gains or losses are recognized in the income statement except for interest rate swaps designated as cash ﬂow hedges.

Derivatives that qualify as cash flow hedges In all cases in which derivatives are designated as hedging instruments for purposes of IAS 39, the Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the cash flows of hedged items. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognized directly in equity. The gain or loss relating to the ineffective portion is recognized immediately in the income statement. Amounts recognized directly in equity are reversed to the income statement in the periods when the hedged item produces an effect in the income statement. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognized when the hedged item ultimately produces an effect in the income statement. When the hedged item is no longer expected to produce an effect in the income statement, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement.

Derivatives that do not qualify for hedge accounting Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognized immediately in the income statement.

Fair value estimation The fair value of financial instruments traded in active markets is based on listed market prices at the balance sheet date. The listed market price used for financial assets is the current bid price; the appropriate listed market price for financial liabilities is the current ask price. The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques with a variety of methods and assumptions that are based on market conditions existing at each balance sheet date.

The fair value of interest-rate swaps is calculated as the present value of estimated future cash ﬂows.

The fair value of forward foreign exchange contracts is determined using the forward rate at the balance sheet date.

Income taxes Current income taxes are determined on the basis of a realistic estimate of the tax expense payable under the current tax laws of the country.

Deferred taxes are calculated on temporary differences arising between the asset and liability amounts in the balance sheet and their tax bases (full liability method). They are classiﬁed in non- current assets and liabilities.

Deferred tax assets are recognized only when their future recoverability is probable.

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Equity Treasury shares From January 1, 2004 to December 31, 2004 Treasury shares are valued at purchase cost, adjusted for any permanent impairment in value. An undistributable reserve for an amount corresponding to the book value is recorded in shareholders’ equity. They are classified as non-current assets. From January 1, 2005 Treasury shares are classified as a deduction from equity. In the event of sale, re-issue or cancellation, the gains and losses as a result thereof are classified in equity.

Costs of equity transactions From January 1, 2004 to December 31, 2004 Costs directly attributable to equity transactions of the parent company are recognized in the income statement. From January 1, 2005 Costs directly attributable to equity transactions of the parent company are recognized as a deduction from equity.

Income statement The Pirelli & C. Group has elected to classify costs by nature.

Recognition of revenues Revenues are measured at the fair value of the consideration received for the sale of the products or services.

Sales of products Revenues from sales of products are recognized when all the following conditions are met: • the significant risks and the rewards of ownership of the goods are transferred to the buyer; • the effective control over the goods has ceased; • the amount of revenues is determined in a reliable manner; • it is probable that the economic benefits deriving from the sale will flow to the company; • the costs incurred or to be incurred are determined in a reliable manner.

Rendering of services Revenues from services rendered are recognized by reference to their completion at the balance sheet date. With regard speciﬁcally to the revenues from the services rendered to Telecom Italia S.p.A. (an associate of the jointly controlled company Olimpia S.p.A whose share of the results is included in the consolidated ﬁnancial statements by the equity method – please refer to the following Note 10), the revenues for activating telephone services and the recharging of prepaid telephone cards (as well as the relative costs) are deferred over the estimated duration of the relationship with the customer. Costs for the acquisition and retention of customers are recognized in the income statement in the year incurred.

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Dividend income Dividend income is recognized when the right to receive payment is established, which normally corresponds to the resolution passed by the shareholders’ meeting for the distribution of dividends. Dividends received from associates are recognized as a deduction from the value of the investment.

Segment information The business segment (primary reporting segment) is a distinctly identiﬁable part of the Group which supplies a single product or service or an aggregate of related products and services and is subject to risks and rewards different from those of the other business segments of the Group. The geographical segment (secondary reporting segment) is a distinctly identiﬁable part of the Group which supplies a single product or service or an aggregate of related products and services and is subject to risks and rewards different from those relating to the components which operate in other economic environments.

Accounting principles for hyper-inflationary countries The companies of the Group operating in high-inflation countries redetermine the amounts in their original respective financial statements to eliminate distorting effects due to the loss of the purchasing power of the currency. The inflation rate used for purposes of the adoption of inflation accounting corresponds to the consumer price index. The companies operating in countries in which the cumulative inflation rate over a three-year period approximates or exceeds 100 percent adopt inflation accounting and discontinue it in the event the cumulative inflation rate over a three-year period falls below 100 percent. Gains and losses on monetary positions are recognized in the income statement.

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2. FINANCIAL RISK MANAGEMENT POLICY

Financial risk management is an integral part of the management of the Group’s operations. Risk management is carried out centrally using policies defined by the General Finance Department and approved by the Managing Director. Such policies define the categories of risk and specify the procedures and operating limits for each type of transaction and/or instrument. In accordance with these policies, the Group uses derivative contracts in relation to underlying financial assets or liabilities or future transactions. Risk management is carried out by a central department, Group Treasury, the one body with the task of evaluating and hedging risks. Group Treasury operates directly on the market on behalf of the Operating Units and, where it cannot operate directly because of external restrictions, coordinates with the Local Treasury Unit.

Type of risk covered

Foreign exchange risk The Group operates internationally and is exposed to foreign exchange risk, managed centrally by Group Treasury. The Operating Units are responsible for gathering all the information inherent to the positions subject to foreign exchange risk which are managed by forward contracts stipulated with Group Treasury. Group Treasury is responsible for evaluating and managing the net position for every currency, consistent with policies and restrictions, by negotiating derivative contracts on the market, generally forward contracts. Forward contracts between the Operating Units and Group Treasury as well as those between Group Treasury and the market are not designated as hedging instruments as deﬁned by IAS 39 although they are in place for the purposes of managing risks.

Credit risk The Group has no signiﬁcant concentrations of credit risk. The policies in place ensure a proper evaluation of the ﬁnancial soundness of the customers.

Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and/or short-term securities that can be readily converted into liquidity, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, the Group aims to maintain ﬂexibility in funding by keeping committed credit lines available.

Interest rate risk The Group’s interest-rate risk arises from long-term borrowings. Borrowings issued at floating rates expose the Group to cash flow interest-rate risk. Borrowings issued at fixed rates expose the Group to fair value interest-rate risk. Group policy is to maintain approximately 70 percent of its long-term borrowings in fixed rate instruments. The Group manages its cash flow interest-rate risk by using derivative contracts, generally floating-to- fixed interest-rate swaps. The designation of such derivatives as hedging instruments under IAS 39 is decided case by case and authorized centrally by the General Finance Department and the General Administration and Control Department.

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3. ESTIMATES AND ASSUMPTIONS

The preparation of consolidated ﬁnancial statements requires management to make estimates and assumptions which could affect the carrying amounts of some assets and liabilities, costs and revenues, as well as the disclosure related to contingent assets and liabilities at the balance sheet date.

The estimates and assumptions will generally refer to the measurement of the recoverable amounts of intangible assets, the deﬁnition of the useful lives of property, plant and equipment, the recoverability of receivables and the recognition and measurement of provisions. The estimates and assumptions are based upon data which reﬂects the current state of available knowledge.

Estimates and assumptions that have a signiﬁcant risk of causing adjustments to the carrying amounts of assets and liabilities are:

a) Olimpia The investment in Telecom Italia S.p.A. (hereinafter TI), held by Pirelli through Olimpia S.p.A., a jointly-controlled investment, constitutes a number of shares that is able to exercise a significant influence, but not control, over the associate TI (so-called control-oriented shares). Consequently, Olimpia consolidates the investment in TI at equity, and Pirelli, in transparency: a) in the IAS/IFRS consolidated financial statements, consolidates the TI investment at equity in accordance with IAS 28 and the carrying amount is subject to an annual impairment test on the basis of the criteria in IAS 36; b) in the separate IAS/IFRS financial statements, accounts for the TI investment at cost.

The impairment test in the Pirelli consolidated financial statements IAS 36 Impairment of assets establishes that the amount to be adopted for the impairment test of investments carried at equity is the recoverable amount. The Standard defines the recoverable amount as the higher of the fair value, less costs to sell, and the value in use. The Standard also states that it is not necessary to estimate both amounts since it is sufficient to verify that one of the two amounts is higher than the carrying amount in order to establish the absence of an impairment. In the specific case, the carrying amount is represented by the carrying amount of the Telecom Italia ordinary shares implicit in the valuation at equity (in the consolidated financial statements) and at cost (in the separate financial statements) of the investment in Olimpia. The reference amount used for the impairment test of the investment in Olimpia (and in transparency in Telecom Italia) is fair value less costs to sell. Since the exchange of control-oriented share in the European incumbent telephone sector does not constitute an active market under IAS/IFRS, the estimate of the fair value of the investment in Telecom Italia is based on the application of an estimation technique. IAS 36.BCZ15 establishes that in the absence of an active market – which is the case of control-oriented shares – in order to estimate the recoverable amount of the financial asset (to be compared with its carrying amount for the impairment test), reference should be made to IAS 39 which discusses unlisted financial instruments. IAS 39.AG74 explains that the estimation of the fair value of a financial instrument which is not listed on an active market should be based on estimation techniques such as multiples of comparable companies and of comparable transactions, DCF and option pricing models.

IAS 39.AG75 clarified that the purpose of the estimation model must be the estimate of the feasible price of the financial instrument assuming its disposal at the balance sheet date and the estimation model must make maximum use of market input. More specifically, the estimation model must incorporate all the factors which market participants would consider in establishing the price of the specific financial instrument (in our case, the ordinary shares constituting a control-oriented parcel of shares) and must be consistent with the economic pricing model of the financial securities.

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The estimation techniques used to estimate fair value, less costs to sell, of the investment in Olimpia and in transparency in Telecom Italia made reference to main families of criteria: multiples of comparable companies and of comparable transactions and the option pricing models.

b) Goodwill The Group tests annually as to whether goodwill should be impaired in accordance with the accounting policies. The recoverable amounts have been determined on the basis of value-in-use calculations. These calculations require the use of estimates.

4. TRANSITION TO IAS/IFRS

4.1. Basis for the preparation of the opening balance sheet The opening balance sheet at the date of transition to IAS/IFRS (January 1, 2004) has been prepared according to the following criteria: • all the assets and liabilities which require recognition under IAS/IFRS have been recorded; • those assets and liabilities which are not allowed to be recognized under IAS/IFRS have not been recorded; • appropriate reclassifications have been made to ensure proper classification under IAS/IFRS; all assets and liabilities recognized have been measured in accordance with IAS/IFRS; • all adjustments resulting from the first-time adoption of IAS/IFRS have been recorded with a contra-entry to equity.

The recognition and measurement of accounting amounts are based upon IAS/IFRS in force at December 31, 2005 and on their current “interpretation” resulting from the documents issued to date by the “International Financial Reporting Interpretations Committee – IFRIC”.

Attached is the report on the audit veriﬁcation work conducted by the independent auditors, PricewaterhouseCoopers S.p.A., on the IAS/IFRS opening balance sheet at January 1, 2004, on the IAS/IFRS net equity at December 31, 2004 and the net income for the year 2004 and on the IAS/IFRS opening net equity at January 1, 2005 as a result of the introduction of IAS 32 and IAS 39.

The Pirelli Group has applied the accounting policies disclosed in the preceding paragraph 1 retrospectively, save for exceptions to retrospective application allowed by IFRS 1 and in the case in which it chose to apply the exemptions allowed by IFRS 1.

Exceptions to retrospective application allowed by IFRS 1 relate to: 1. derecognition of financial assets and liabilities: the provisions of IAS 39 must be applied prospectively starting from January 1, 2004; 2. accounting of hedging transactions: hedge accounting must be applied to transactions which meet the requisites provided by IAS 39 prospectively starting from the date of transition to IAS 32 and IAS 39 (January 1, 2005); 3. estimates: estimates made in accordance with IAS/IFRS at the date of transition to IAS/IFRS must agree with those made at the same date under previous GAAP, unless there is objective proof that such estimates were incorrect and except for the adjustments necessary to reflect any differences in accounting policies; 4. non-current assets held for sale and discontinued operations: in the event the transition date to IAS/IFRS is before January 1, 2005, IFRS 5 requires that the classification of non-current assets as held for sale or discontinued operations must be applied prospectively starting from January 1, 2005.

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The optional exemptions elected by the Group are indicated below: 1. business combinations: the Pirelli & C. Group has elected to adopt IFRS 3 prospectively beginning from January 1, 2004; 2. reserve for currency translation differences: the Pirelli & C. Group has elected to use the exemption allowed by IFRS 1 which provides, at the date of transition, for resetting the reserve for currency translation differences in the consolidated financial statements at December 31, 2003 to zero with a contra-entry to other reserves in net equity; 3. financial instruments: the Pirelli & C. Group has elected to use the exemption for the deferral to January 1, 2005 of the adoption of IAS 32 and IAS 39 for the recognition and measurement of financial instruments. All financial instruments as defined by IAS 32 and IAS 39 have thus been measured consistently with the principles applied in the consolidated financial statements drawn up in accordance with Italian GAAP for purposes of the preparation of the IAS/IFRS opening balance sheet at January 1, 2004, the income statement for the year 2004 and the balance sheet at December 31, 2004; 4. designation of financial instruments: the Pirelli & C. Group has elected to use the exemption which allows it to designate the financial assets and liabilities at fair value through profit and loss or as available-for-sale at the transition date (January 1, 2005) instead of at the initial recognition date provided by IAS 39; 5. measurement of property, plant and equipment: IFRS 1 allows property, plant and equipment to be measured at fair value and to use that value as the deemed cost at the date of transition to IAS/IFRS (January 1, 2004). The Pirelli & C. Group has elected to take such exemption. The other exemptions provided by IFRS 1 are not applicable to the Pirelli & C. Group.

4.2. Reconciliation of net equity at January 1, 2004, at December 31, 2004, at January 1, 2005 and of the 2004 net income (in milions of euros) 1/1/2004 Net Dividends Other 12/31/2004 adoption 1/1/2005 income 2004 changes IAS 32/39 Total net equity - Italian GAAP 3,678 274 (132) 268 4,088 - 4,088 1 Goodwill - 36 36 36 2 Other intangible assets (25) 1 (24) (24) 3 Impairment (22) 4 (18) (18) 4 Spare parts (27) (2) (29) (29) 5 Employee beneﬁts (157) 9 (53) (201) (201) 6 Revenues recognition on real estate sales (9) (2) (11) (11) 7 Stock options - (6) 1 (5) (5) 8 Valuation of Olimpia (21) 1 (20) (31) (51) 9 Other (10) (8) 2 (16) (16) 10 Treasury shares (5) (5) 11 Measurement of securities at fair value 242 242 12 Financial instruments (69) (69) Deferred taxes 44 (3) 41 41 Italian GAAP - IAS/IFRS difference on total net equity (227) 30 (50) (247) 137 (110) Total net equity - IAS/IFRS 3,451 304 (132) 218 3,841 137 3,978 Net equity attributable to minority interests - Italian GAAP 249 57 (23) 69 352 352 Italian GAAP - IAS/IFRS difference on net equity attributable (6) (4) (3) (13) (13) Net equity attributable to minority interests - IAS/IFRS 243 53 (23) 66 339 339 Net equity attributable to parent company - Italian GAAP 3,429 217 (109) 199 3,736 3,736 Italian GAAP - IAS/IFRS difference on net equity attributable (221) 34 (47) (234) 137 (97) Net equity attributable to parent company - IAS/IFRS 3,208 251 (109) 152 3,502 137 3,639

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4.3 Explanatory notes to the reconciliation prepared in accordance with IFRS 1

The main adjustments, as a result of the adoption of IAS/IFRS, to net equity at January 1, 2004, at December 31, 2004 and at January 1, 2005 due to the introduction of IAS 32 and IAS 39, as well as to 2004 net income, are presented as follows:

Effects on net equity at January 1, 2004, on 2004 net income and on net equity at December 31, 2004

1. Goodwill: in accordance with IAS/IFRS (IAS 38), goodwill may no longer be amortized systematically in the income statement but should be subject to a test, carried out at least annually, in order to identify any impairment in value (impairment test). This different accounting policy results in a higher net income for the year 2004 of Euros 36 million, due to the reversal of the amortization charge recorded during the year under Italian GAAP.

2. Other intangible assets: certain types of costs, that can be capitalized under Italian GAAP, do not meet the requisites for recognition under IAS 38 (for example, formation costs, start-up costs, costs of equity transaction, etc.). The opening balance sheet at January 1, 2004 shows a reduction in shareholders’ equity due to the effect of the derecognition of such intangible assets of Euros 25 million. The positive effect on 2004 net income is Euros 1 million, due to lower amortization charges for the year net of uncapitalized expenses of the year.

3. Impairment (property, plant and equipment): the impairment test models provided by IAS 36 have been adopted through: - identification of the cash-generating unit; - allocation of goodwill, if any, to the cash-generating units; - in the presence of impairment indicators, calculation of the value in use of the cash-generating unit and comparison with the carrying amount in order to assess any impairment; - following the above calculations, impairments were identified to be allocated to two units operating in the Energy Cables and Systems Sector (Turkey and Indonesia), which constitute cash-generating units; - impairments were allocated to goodwill and the assets of the two cash-generating units in accordance with the criteria established by IAS 36; - therefore, the opening balance at January 1, 2004 includes the impairment of certain fixed assets equal to Euros 22 million (of which Euros 15 million is allocated to property, plant and equipment and Euros 7 million to goodwill); - the 2004 net income benefits from Euros 4 million of lower depreciation and amortization.

4. Spare parts: in accordance with IAS 16, major spare parts relating to plant and machinery should be capitalized and depreciated over the useful life of the asset to which they refer. Minor spare parts should be expensed in the income statement when the expense is incurred. The balance sheet at January 1, 2004 shows a reduction in opening shareholders’ equity of Euros 27 million. The 2004 net income is Euros 2 million lower.

5. Employee benefits: in accordance with IAS 19, post-employment benefits of the defined benefit type and other long-term benefits are subject to actuarial calculations to express the present value of the benefit obbligation at the balance sheet date. The opening balance sheet at January 1, 2004 shows a reduction in

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shareholders’ equity of Euros 157 million basically referring to plans existing in the U.K. and the U.S.A.. The 2004 net income beneﬁts from Euros 9 million of lower costs for the year due to the full recognition of the actuarial losses at transition, previously allocated over the remaining lives of the participants in the plans. The shareholders’ equity at December 31, 2004 shows a further reduction of Euros 53 million due to the recognition of actuarial gains and losses in 2004.

6. Recognition of revenues on real estate sales: in accordance with IAS 18, revenues on real estate sales should normally be recognized when ownership is transferred to the buyer. In some cases, the sale may not interrupt a certain involvement of the seller, therefore the risks and rewards of ownership are not, in fact, transferred. The nature and degree of the seller’s involvement establishes how the transaction should be recorded. The opening balance sheet at January 1, 2004 under IAS/IFRS shows a reduction in shareholders’ equity due to the deferral of part of the result of certain real estate transactions equal to Euros 9 million. The 2004 net income shows a reduction of Euros 2 million.

7. Stock options: IFRS 2 provides for the recognition of the cost in the income statement for stock options granted to employees. The opening balance sheet at January 1, 2004 shows a reduction in shareholders’ equity as a result of the recognition of costs connected with the plans for stock options granted by the Pirelli & C. Real Estate group of Euros 0.2 million. The 2004 net income presents a reduction of Euros 6.4 million due to the recognition of such costs with a contra-entry for an increase in the reserves in shareholders’ equity of Euros 0.7 million (relating to equity-settled stock options) and an increase in liabilities of Euros 5.7 million (relating to cash-settled stock options).

8. Valuation of Olimpia: Olimpia, in accordance with IAS 31, qualifies as a jointly-controlled investment and is accounted for by the equity method; therefore, the attributable net equity of Olimpia must be determined in accordance with IAS/IFRS. As defined by IAS 28, the investment held by Olimpia in Telecom Italia qualifies as an associate and must therefore be accounted for by the equity method. Under IAS/IFRS, Olimpia’s commitment to purchase 124.1 million Telecom Italia shares (shown in the memorandum accounts in the Olimpia financial statements in accordance with Italian GAAP) must be accounted for as an investment at the cost of purchase with a contra-entry to liabilities. The liability should then be discounted to present value at the date of the signing of the contract (November 2001). The financial expenses generated up to the date of transition to IAS/IFRS (January 1, 2004) must be shown as a direct deduction from the shareholders’ equity of Olimpia (Euros 41 million). The reduction in Pirelli’s share of net equity is equal to Euros 21 million. The IAS/IFRS 2004 net income of Olimpia shows a reduction of Euros 2 million due to the valuation by the equity method of the associate, Telecom Italia S.p.A., (an increase of Euros 17 million) and the accounting for financial expenses resulting from discounting the liability for the aforementioned forward share purchase to present value (a reduction of Euros 19 million). The effect on the financial statements of Pirelli & C. is a reduction in the share of Olimpia’s result equal to Euros 1 million. Furthermore, in accordance with IAS/IFRS (IAS 38), goodwill may no longer be amortized systematically in the income statement but should be subject to a test, carried out at least annually, in order to identify any impairment in value (impairment test). This different accounting policy determines a higher result for the year 2004 of Euros 2 million, due to the reversal of the amortization charge recorded on Olimpia. The net effect on the 2004 Pirelli & C. financial statements arising from the valuation of Olimpia is thus an increase in the result of Euros 1 million.

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Effects on net equity at January 1, 2005 due to the introduction of IAS 32 and IAS 39

8. Valuation of Olimpia: the opening balance sheet shows a reduction in shareholders’ equity of Euros 31 million for the effect of Pirelli’s share of the interest rate swap measured at fair value held by Olimpia.

10. Treasury shares: in accordance with IAS/IFRS, treasury shares may no longer be recorded as an asset but should be recorded as a deduction from shareholders’ equity (for the par value) and retained earnings (for the excess amount). The balance sheet at January 1, 2005 shows a reduction in shareholders’ equity for the effect of this different presentation in the ﬁnancial statements under IAS/IFRS of Euros 5 million.

11. Measurement of securities at fair value: the increase in shareholders’ equity at January 1, 2005 of Euros 242 million is due to the following effects: - investments included in financial assets under Italian GAAP are classified, in accordance with IAS/IFRS, as available-for-sale financial assets and should be measured at fair value with a contra-entry to shareholders’ equity (IAS 39). The balance sheet at January 1, 2005 benefits from an increase in shareholders’ equity of Euros 226 million; - in accordance with IAS/IFRS, securities held for trading purposes are classified as financial assets held for trading and should be measured at fair value with a contra-entry to the income statement. The balance sheet at January 1, 2005 benefits from an increase in shareholders’ equity of Euros 16 million.

12. Financial instruments: the reduction in shareholders’ equity at January 1, 2005 of Euros 69 million is mainly due to the deadlock premium granted to Hopa under Olimpia shareholders’ agreements. This premium, accounted for on a prorata basis in accordance with Italian GAAP, has the nature of a liability under IAS/IFRS (IAS 32), and must therefore be recognized in the liabilities of the Group, at its present value, with a contra-entry to shareholders’ equity.

4.4. Analysis of the effects of the application of IAS/IFRS on the net ﬁnancial position (a non-IAS/IFRS ﬁnancial measure)

The main effects on the consolidated net ﬁnancial debt position at December 31, 2004 due to the introduction of IAS/IFRS and at January 1, 2005 following the adoption of IAS 32 and IAS 39 are as follows: (in millions of euros) Net debt position - Italian GAAP 12/31/2004 1,469 1 Effect of Olimpia put options held by banks 130 2 Effects on Pirelli & C. Real Estate group 5 Other (3) 132 Net debt position - IAS/IFRS 12/31/2004 1,601 3 Financial assets held for trading (16) Net debt position - IAS/IFRS 1/1/2005 1,585

1. Olimpia put options held by the shareholder banks: in accordance with IAS/IFRS, a part of the put options on Olimpia S.p.A., held by the shareholders banks, implies that the economic beneﬁts connected to the ownership of the investment in Olimpia are, for the major part, transferred immediately to Pirelli. This results in an increase in the investment with a contra-entry to the liability inclusive of the derivative for Euros 130 million.

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2. Effects on the Pirelli & C. Real Estate group: such effects are mainly due to the recognition of a financial liability equal to the benefit on the net financial position which previously originated on the sale of interests in subsidiaries which, under IAS/IFRS, may not be recognized due to the commitments deriving from the put options granted and the call options obtained, for Euros 5 million.

3. Measurement at fair value of ﬁnancial assets held for trading: due to the adoption of IAS 39, the fair value adjustment of securities held for trading results in an improvement in the net ﬁnancial position at January 1, 2005 of Euros 16 million.

5. SEGMENT INFORMATION

For the Pirelli & C. Group, the business segment constitutes the primary segment whereas the geographical segment represents the secondary segment.

a) primary reporting format – business segments At December 31, 2005, continuing operations of the Group are divided into ﬁve main business segments: - Tyres - Broadband - Environment - Real Estate (Pirelli & C. Real Estate) - Olimpia Investment

Other group operations comprise ﬁnancial companies and other service companies. None of these constitutes a reportable segment.

Segment results of continuing operations for the year ending December 31, 2005 are as follows:

CONTINUING OPERATIONS (in thousands of euros) Tyres Broadband Environment Real Estate Olimpia Other TOTAL 2005 Sales to third parties 3,632,667 112,155 59,907 690,330 50,610 4,545,669 Sales to the Group 256 19 1,562 9,849 (11,686) - TOTAL SALES 3,632,923 112,174 61,469 700,179 38,924 4,545,669 GROSS OPERATING PROFIT 518,060 (6,330) (2,034) 92,845 (34,944) 567,597 Depreciation of property, plant and equipment (181,816) (644) (582) (5,224) (8,772) (197,038) Amortization of intangible assets (7,462) (51) (1,007) (3,743) (3,377) (15,640) OPERATING PROFIT (LOSS) 328,782 (7,025) (3,623) 83,878 (47,093) 354,919 Share of earnings (losses) of companies value by the equity method 17,579 98,787 152,486 (17,486) 251,366 Financial income (expenses) (65,372) Dividends 26,694 Valuation of ﬁnancial assets (90,069) INCOME BEFORE INCOME TAXES 477,538 Income taxes (128,484) NET INCOME 349,054

175 Preliminary information Directors’ Report Sustainability Report Consolidated Financial Statements

Segment results of continuing operations for the year ending December 31, 2004 are as follows:

CONTINUING OPERATIONS (in thousands of euros) Tyres Broadband Environment Real Estate Olimpia Other TOTAL 2004 Sales to third parties 3,252,910 62,997 1,921 576,835 72,286 3,966,949 Sales to the Group 284 - - 9,394 (9,678) - TOTAL SALES 3,253,194 62,997 1,921 586,229 62,608 3,966,949 GROSS OPERATING PROFIT 452,461 (8,018) (1,979) 49,914 (22,019) 470,359 Depreciation of property, plant and equipment (168,188) (215) (33) (5,301) (8,031) (181,768) Amortization of intangible assets (9,481) (165) (140) (5,580) (4,382) (19,748) OPERATING PROFIT (LOSS) 274,792 (8,398) (2,152) 39,033 (34,432) 268,843 Share of earnings (losses) of companies valued by the equity method 30 93,763 6,572 (597) 99,768 Financial income (expenses) (72,871) Dividends 20,998 Valuation of ﬁnancial assets (12,745) INCOME BEFORE INCOME TAXES 303,993 Income taxes (87,078) NET INCOME 216,915

The method of valuing sales among the sectors is the same as that applied for sales to third parties.

Segment assets, liabilities and capital expenditures at December 31, 2005 are as follows:

(in thousands of euros) Tyres Broadband Environment Real Estate Olimpia Other TOTAL 2005 Segment assets 2,716,447 39,172 32,395 723,544 458,290 3,969,848 Investments in associates and joint ventures 3,992 - 642 239,200 4,247,944 51,124 4,542,902 Unallocated assets 2,296,171 TOTAL ASSETS 2,720,439 39,172 33,037 962,744 4,247,944 509,414 10,808,921 Segment liabilities 1,538,913 56,947 16,304 452,598 - 745,697 2,810,459 Unallocated liabilities 2,384,656 TOTAL LIABILITIES 1,538,913 56,947 16,304 452,598 - 745,697 5,195,115 Capital expenditures- property, plant and equipment 208,326 3,377 510 7,932 - 13,479 233,624 Capital expenditures - intangible assets 4,004 242 531 3,108 - 950 8,835

Segment assets, liabilities and capital expenditures at December 31, 2004 are as follows:

(in thousands of euros) Tyres Broadband Environment Real Olimpia Discontinued Other TOTAL Estate operations 2004 Segment assets 2,256,844 41,092 29,909 579,911 - 1,868,874 439,664 5,216,294 Investments in associates and joint ventures 4,927 - - 206,919 2,704,406 18,492 49,643 2,984,387 Unallocated assets 2,116,783 TOTAL ASSETS 2,261,771 41,092 29,909 786,830 2,704,406 1,887,366 489,307 10,317,464 Segment liabilities 1,128,411 48,850 11,412 340,074 - 1,099,321 442,176 3,070,244 Unallocated liabilities 3,406,261 TOTAL LIABILITIES 1,128,411 48,850 11,412 340,074 - 1,099,321 442,176 6,476,505 Capital expenditures - property, plant and equipment 190,452 1,312 344 4,731 - 85,120 14,471 296,430 Capital expenditures - intangible assets 10,417 - - 17,495- 7,701 3,847 39,460

176 Preliminary information Directors’ Report Sustainability Report Consolidated Financial Statements

The “discontinued operations” segment refers to the Energy and Telecom Cables and Systems Sectors, sold during 2005. Segment assets mainly consist of property, plant and equipment, intangible assets, assets under finance leases, trade receivables and other receivables and exclude financial receivables, available- for-sale financial assets, securities held for trading and current and deferred tax assets. Segment liabilities mainly include trade payables and other payables, advances from customers, provisions for other liabilities and charges and employee benefit obligations and exclude financial payables and current and deferred tax liabilities. Capital expenditures mainly refer to the purchase of plant and machinery.

b) secondary reporting format – geographical segments Sales by geographical area, allocated on the basis of the country in which the customer resides, are as follows:

(in thousands of euros) Geographical areas 2005 2004 Europe: - Italy 1,438,741 31.65% 1,248,559 31.48% - Other European countries 1,627,949 35.81% 1,416,428 35.69% North America 320,483 7.04% 245,383 6.19% Central and South America 773,939 17.03% 729,657 18.40% Oceania, Africa and Asia 384,557 8.47% 326,922 8.24% 4,545,669 100% 3,966,949 100%

Assets by geographical area, allocated on the basis of the country in which the assets are located, are as follows:

(in thousands of euros) 31/12/2005 31/12/2004 Assets Europe - Italy 8,119,258 6,191,569 - Other European countries 1,850,562 2,707,108 North America 142,698 348,374 Central and South America 621,373 913,059 Oceania, Africa and Asia 75,030 157,354 10,808,921 10,317,464

Capital expenditures by geographical area, allocated on the basis of the country in which the assets are located, are as follows:

(in thousands of euros) 31/12/2005 31/12/2004 Capital expenditures Europe - Italy 60,133 82,617 - Other European countries 85,426 70,052 North America 7,100 9,400 Central and South America 87,600 77,200 Oceania, Africa and Asia 2,200 3,800 Discontinued operations - 92,821 242,459 335,890

177 Preliminary information Directors’ Report Sustainability Report Consolidated Financial Statements

6. PROPERTY, PLANT AND EQUIPMENT

The composition and movements in property, plant and equipment are as follows:

(in thousands of euros) 31/12/2005 31/12/2004 Gross book AccumulatedNet carrying Gross book Accumulated Net carrying amount Depreciation amount amount Depreciation amount Land and improvements 67,272 - 67,272 127,834 - 127,834 Buildings 616,589 (274,890) 341,699 983,891 (452,466) 531,425 Plant and machinery 2,421,571 (1,449,690) 971,881 3,550,203 (2,441,975) 1,108,228 Industrial and commercial equipment 509,673 (387,135) 122,538 524,285 (404,222) 120,063 Other property, plant and equipment 249,667 (181,085) 68,582 490,477 (297,180) 193,297 3,864,772 (2,292,800) 1,571,972 5,676,690 (3,595,843) 2,080,847

(in thousands of euros) Movements in the gross carrying amount 12/31/2004 12/31/04 Change in Exchange Increase Decrease Reclassi- Other 12/31/2005 Discon- scope of differences ﬁcations tinued consoli- operations dation Land and improvements 127,834 (64,014) 2,178 2,118 (3,410) 964 1,602 67,272 Buildings 983,891 (445,107) 30,813 49,800 (15,335) 1,553 10,974 616,589 Plant and machinery 3,550,203 (1,538,035) 72,333 178,380 120,706 (29,836) 11,631 56,189 2,421,571 Industrial and commercial equipment 524,285 (96,449) 27,134 34,460 (9,392) 14,976 14,659 509,673 Other property, plant and equipment 490,477 (221,919) 13,870 26,540 (14,696) (29,124) (15,481) 249,667 5,676,690 (2,365,524) 72,333 252,375 233,624 (72,669) - 67,943 3,864,772

(in thousands of euros) Movements in accumulated depreciation 12/31/2004 12/31/04 Change in Exchange Reclassi- Decrease Deprecia- Other 12/31/2005 Discon- scope of differences ﬁcations tion and tinued consoli- impair- operations dation ments Buildings (452,466) 214,915 (15,547) 138 5,828 (21,490) (6,268) (274,890) Plant and machinery (2,441,975) 1,202,630 (75,253) 1,192 20,172 (119,617) (36,839) (1,449,690) Industrial and commercial equipment (404,222) 83,559 (19,710) (3) 5,022 (40,891) (10,890) (387,135) Other property, plant and equipment (297,180) 129,342 (7,018) (1,327) 12,076 (18,066) 1,088 (181,085) (3,595,843) 1,630,446 - (117,528) - 43,098 (200,064) (52,909) (2,292,800)

(in thousands of euros) Movements in the net carrying amount 31/12/2004 12/31/04 Change in Exchange Increase Decrease Reclassi- Deprecia- Other 12/31/2005 Discon- scope of diffe- ﬁcations tion and tinued consoli- rences impair- operations dation ments Land and improvements 127,834 (64,014) 2,178 2,118 (3,410) 964 - 1,602 67,272 Buildings 531,425 (230,192) 15,266 49,800 (9,507) 1,691 (21,490) 4,706 341,699 Plant and machinery 1,108,228 (335,404) 72,333 103,127 120,706 (9,663) 12,824 (119,617) 19,348 971,881 Industrial and commercial equipment 120,063 (12,889) 7,424 34,460 (4,370) 14,973 (40,891) 3,767 122,538 Other property, plant and equipment 193,297 (92,578) 6,852 26,541 (2,620) (30,452) (18,066) (14,390) 68,582 2,080,847 (735,078) 72,333 134,847 233,624 (29,570) - (200,064) 15,033 1,571,972

178 Preliminary information Directors’ Report Sustainability Report Consolidated Financial Statements

The ratio of additions during the year to depreciation is 1.19. Assets under construction at December 31, 2005 amount to Euros 58,892 thousand (Euros 149,378 thousand at December 31, 2004 – of which Euros 91,402 thousand related to discontinued operations). Impairments in 2005, included in the column “Depreciation and impairments”, amount to Euros 3,026 thousand (Euros 6,942 in 2004) and are recorded in the income statement under “Amortization, depreciation and impairments” (Note 34).

Restrictions on the ownership of the assets are as follow: - machinery and plant for Euros 16,985 thousand are used as collateral to secure a loan from the National Bank of Egypt obtained by the subsidiary Pirelli Tyres Alexandria Co.; - machinery and land for Euros 76,411 thousand are used as collateral to secure loans obtained by the subsidiary Pirelli Pneus S.A..

6.1. LEASING

Buildings, plant, machinery and other goods purchased by the Group under ﬁnance leases are included in the respective categories of property, plant and equipment.

Details are as follows:

(in thousands of euros) 12/31/2005 12/31/2004 Capitalized Accumulated Net book Capitalized Accumulated Net book cost depreciation amount cost depreciation amount (*) Buildings leased 75,778 (18,711) 57,067 88,288 (18,967) 69,321 Other property, plant and equipment leased 10,796 (341) 10,455 10,818 (314) 10,504 Plant and machinery leased 146 (146) - 552 (470) 82 86,720 (19,198) 67,522 99,658 (19,751) 79,907 '(*) Including discontinued operations equal to Euros 10,997 thousand.

Details of the most important contracts regarding buildings leased are as follows:

Italy: • the subsidiary Pirelli Pneumatici S.p.A. has a leasing contract with a syndicate of banks (DEUTSCHE BANK LEASING S.p.A. - now SG LEASING S.p.A. - Franﬁnance leasing Italia; SOGELEASE ITALIA S.p.A. – now SG LEASING S.p.A. - Franﬁnance Leasing Italia; LOCAT S.p.A.) on the building which houses the structures of the company and the R&D activities of the Tyres Sector. The contract, signed in May 2000, has a term of 13 years and a purchase option at expiration. The net book amount of the building is equal to Euros 45,221 thousand (Euros 46,872 thousand at December 31, 2004).

Germany: • the subsidiary Pirelli Deutschland GmbH has a leasing contract with the company DAL-Florenta on the distribution warehouse located in Breuberg. The term of the contract is divided into two periods: the first period has a term of 15 years from January 1, 1995 to December 31, 2009; the second period has a term of another 7.5 years. The contract has a purchase option. • the subsidiary Pneumobil GmbH has five leasing contracts with the company DAL on the buildings of five points of sale in Germany. The terms of the contracts are between 20 and 25 years. All the contracts expire between 2008 and 2010. The contracts have purchase options.

The net carrying amount of the buildings total Euros 9,183 thousand (Euros 9,648 thousand at December 31, 2004).

179 Preliminary information Directors’ Report Sustainability Report Consolidated Financial Statements

Finance lease payables associated with the above signiﬁcant contracts are included in ﬁnancial payables (Note 26). Minimum lease payments due (that is, the payments requested by the lessor over the remaining lease period) can be analyzed as follows:

(in thousands of euros) 12/31/2005 Germany Italy Total due within 1 year 1,181 5,189 6,370 due between 1 and 5 years 9,642 16,603 26,245 due beyond 5 years - 20,794 20,794 Total 10,823 42,586 53,409 Future ﬁnancial expenses (2,099) (9,717) (11,816) Leases payable 8,724 32,869 41,593 Other contracts 60 Total in the ﬁnancial statements (Note 26) 41,653

The following table shows ﬁnance leases payable associated with the above signiﬁcant contracts divided by expiration date:

(in thousands of euros) 12/31/2005 Germany Italy Total due within 1 year 607 3,001 3,608 due between 1 and 5 years 8,117 11,111 19,228 due beyond 5 years - 18,757 18,757 Total 8,724 32,869 41,593 Other contracts 60 Total in the ﬁnancial statements (Note 26) 41,653

7. INTANGIBLE ASSETS

The composition and movements in intangible assets are as follows:

(in thousands of euros) 12/31/2004 12/31/2004 Exchange Increase Decrease Amorti- Other 12/31/2005 Discontinued differences zation operations Patents and intellectual property rights 2,294 (42) - 113 (96) (1,274) (3) 992 Concessions, licenses and trademarks 21,819 (104) - 1,653 (104) (2,010) 76 21,330 Goodwill 460,028 (15,262) 118 - - - (4,316) 440,568 Software 24,742 (5,526) 151 5,569 - (12,057) (442) 12,437 Other intangible assets 3,995 (3,137) 42 1,500 (618) (299) (9) 1,474 512,878 (24,071) 311 8,835 (818) (15,640) (4,694) 476,801

“Goodwill” includes: - an amount of Euros 348,129 thousand which was allocated entirely to the Tyres segment, considered as a cash-generating unit; - an amount of Euros 28,512 thousand which was allocated entirely to the Truck activities of the Tyres segment; - an amount of Euros 51,835 thousand relating to companies purchased by the Pirelli & C. Real Estate group. The companies in which goodwill has been recorded are considered as cash-generating units for the purpose of impairment testing.

180 Preliminary information Directors’ Report Sustainability Report Consolidated Financial Statements

The test consists of estimating the recoverable amount of the cash-generating unit and comparing it with the net carrying amount of the relative assets including goodwill.

The recoverable amount of the cash-generating unit has been determined on the basis of the value in use, that is, the present value of future cash ﬂows which is estimated will be associated with the cash-generating unit.

Cash flows used to determine the value in use are based on projections approved by management covering a five-year period. Cash flows beyond that period are extrapolated by projecting the flows of the last year of the projection.

The discount rate applied to projected future cash ﬂows is equal to 6.9 percent.

On the basis of the results of the tests performed, no impairment arose.

8. INVESTMENT PROPERTIES

The item refers to a former industrial structure denominated “Hangar Bicocca” owned by the company Progetto Grande Bicocca S.r.l. (now merged in Lambda S.r.l.), reclassiﬁed from “inventories” after the decision taken by board of directors of Pirelli & C. Real Estate S.p.A. in December 2005 to create a permanent exhibition center for contemporary art. This building, which seems particularly suited for this use will be sold during 2006 to Pirelli & C. Real Estate S.p.A.. At December 31, 2005, this building was stated at cost, equal to fair value.

9. INVESTMENTS IN ASSOCIATES

Investments in associates are equal to Euros 294,958 thousand compared to Euros 279,981 thousand at December 31, 2004. (in thousands of euros) Beginning balance at January 1, 2005 279,981 Discontinued operations (18,492) Acquisition/change in share capital and reserves 67,869 Adoption of IAS 1/1/2005 (964) Distribution of dividends (132,046) Share of earnings 98,786 Other (176) Closing balance at December 31, 2005 (294,958)

Details of the balance are as follows: (in thousands of euros) 12/31/2005 12/31/2004 real estate group Afrodite S.à.r.l. 923 - Aree Urbane S.r.l. (ex Ortensia S.r.l.) 8,167 8,296 Bernini Immobiliare S.r.l. 1,323 1,968 Colombo S.à r.l. 1,346 - Continuum S.r.l. 6,226 3,484 Credit Servicing S.p.A. 9,001 - Delta S.p.A. - 1,291 Dixia S.r.l. 5,822 6,132 Domogest S.r.l. 908 1,355 Doria S.à r.l. 1,357 - Erice S.r.l. 1,053 - Esedra S.r.l. - 2,186 Geolidro S.r.l. 10,497 5,661

181 Preliminary information Directors’ Report Sustainability Report Consolidated Financial Statements

Immobiliare Prizia S.r.l. 4,178 4,391 IN Holding Italy S.a.r.l. 2,184 4,372 Induxia S.r.l. 2,307 2,319 Ininm Due S.a.r.l. 2,192 2,364 Iniziative Immobiliari S.r.l. 14,188 50,224 Massetto 1 B.V. 23,163 19,819 M.S.M.C. Italy Holding B.V. 17,533 22,018 M.S.M.C. Solferino S.à.r.l. - 2,054 Mirandia Trading e Consultoria Lda 41,607 30,471 MP Facility S.r.l. 2,062 544 Orione Immobiliare Prima S.p.A. 12,946 3,365 Popoy B.V. 15,489 14,348 Quadrifoglio Milano S.p.A. 5,509 - Rinascente/Upim S.r.l. 9,819 - Sci Roev Partners L.P. 2,125 2,149 Solaris S.r.l. 9,463 3,282 Spazio Industriale B.V. 1,936 626 Spazio Industriale II B.V. 3,674 - Tamerice Immobiliare S.r.l. 3,475 - Trixia S.r.l. 2,359 4,307 Tronador - Consultoria Economica Lda 3,593 3,426 Turismo e Immobiliare S.p.A. 4,061 - Vespucci S.a.r.l. 1,348 - Other minor companies 4,443 3,543 236,277 203,995 industrial group STIP Tunisi (Tunisia) 1,206 2,410 SMP Melﬁ S.r.l. (Italy) 1,807 1,807 Other 978 710 3,991 4,927 Eurostazioni S.p.A. 53,861 51,740 I.D.E.A. Granda Società consortile 642 640 Corimav 104 104 Aree Urbane S.r.l. 83 83 Other 54,690 52,567 Discontinued operations 18,492 294,958 279,981

Key data taken from the ﬁnancial statements of principal associates are as follows: (in thousands of euros) Company Country Fiscal Total Total Equity Revenues Net % holding year assets liabilities (excluding from income at results sales and (loss) 12/31/2005 for the services for the year) year Masseto I B.V. (*) Holland 01/01/2005 121,531 38,255 18,556 - 64,720 33.00 12/31/2005 M.S.M.C. Italy Holding B.V. (*) Holland 01/01/2005 100,368 22,601 31,831 - 45,936 25.00 12/31/2005 Orione Immobiliare Prima S.p.A. Italy 01/01/2005 536,934 501,785 6,634 326,040 28,515 40.10 12/31/2005 Popoy Holding B.V. (*) Holland 01/01/2005 153,334 82,353 29,539 - 41,442 25.05 12/31/2005 Tamerice Immobiliare S.r.l. (**) Italy 01/01/2005 800,413 782,724 11,823 42,621 5,866 20.00 12/31/2005 Eurostazioni S.p.A. (***) Italy 164,878 166 160,792 - 3,920 32.71 Notes: (*) Financial statements prepared in accordance with IAS/IFRS. (**) Company set up on October 3, 2005 after the partial spin-off of the company Rinascente/Upim S.r.l. (ex-Tamerice S.r.l.) (***) Financial statements adjusted to take into account the valuation of the associate Grandi Stazioni using the equity method.

182 Preliminary information Directors’ Report Sustainability Report Consolidated Financial Statements

(in thousands of euros) Company Country Fiscal Total Total Equity Revenues Net % holding year assets liabilities (excluding from income at results for sales and (loss) for 12/31/2004 the year) services the year Masseto I B.V. (*) Holland 01/01/2004 162,181 77,438 10,504 - 74,239 33.00 12/31/2004 M.S.M.C. Italy Holding B.V. (*) Holland 01/01/2004 112,387 20,679 (31,109) - 122,817 25.00 12/31/2004 Orione Immobiliare Prima S.p.A. Italy 06/01/2004 371,854 364,060 6,634 50,950 1,160 35.00 12/31/2004 Popoy Holding B.V. (*) Holland 01/01/2004 12/31/2004 182,306 102,695 50,562 - 29,049 25.05 Tamerice Immobiliare S.r.l. (**) Italy ------Eurostazioni S.p.A. (***) Italy 158,385 159 154,223 - 4,003 32.71 Notes: (*) Financial statements prepared in accordance with IAS/IFRS. (**) Company set up on October 3, 2005 after the partial spin-off of the company Rinascente/Upim S.r.l. (ex-Tamerice S.r.l.) (***) Financial statements adjusted to take into account the valuation of the associate Grandi Stazioni using the equity method.

Investments in associates include goodwill of Euros 2,005 thousand of the company Credit Servicing S.p.A., purchased during 2005.

10. INVESTMENTS IN JOINT VENTURES

Investments in joint ventures total Euros 4,247,944 thousand compared to Euros 2,704,406 thousand at December 31, 2004. The amount refers to the investment in Olimpia S.p.A. (under IAS equal to 60.45 percent) which has been accounted for using the equity method. Although the percentage of ownership under IAS is higher than 50 percent, the investment qualiﬁes as a being under joint control by virtue of the shareholders’ agreements. In particular, Pirelli, although it has the absolute majority of voting rights (57.7 percent), can not appoint more than ﬁve out of the ten directors (art. 13 of the bylaws). Moreover, art. 17 of the same bylaws provides that for the resolutions of the board to be valid the majority of the directors in office must be present and resolutions must be passed by the absolute majority of votes. Lastly, art. 12 of the bylaws establishes that the extraordinary session of the shareholders’ meeting shall be duly constituted and shall pass resolutions with the favorable vote of so many shareholders as those representing at least 83.5 percent of the share capital. For the validity of the resolutions amending or eliminating the voting clause regarding slates for the appointment of directors, or the amendment of the number of members of the board of directors, the extraordinary shareholders’ meeting shall pass resolutions with so many shareholders as those representing 91 percent of the share capital.

The investment held by Olimpia S.p.A. in Telecom Italia, although equal to 13.05 percent under IAS, qualifies as an associate since, when considering Telecom Italia’s broad shareholder base, this percentage allows Olimpia to exercise a significant influence. Therefore, the investment is consolidated by the equity method.

Olimpia, under IAS, holds 2,531,475,296 Telecom Italia S.p.A. ordinary shares equal to a 13.05 percent investment (18.93 percent of voting rights).

The amount in the ﬁnancial statements, in transparency, for Pirelli, of the Telecom Italia S.p.A. shares held through Olimpia S.p.A. is equal to about Euros 4 per share.

The impairment test on the Telecom Italia S.p.A. investment held by Olimpia S.p.A. was performed as described in point 3 under “Estimates and Assumptions”.

183 Preliminary information Directors’ Report Sustainability Report Consolidated Financial Statements

For purposes of the impairment test, the recoverable amount of Telecom Italia S.p.A. shares was determined by making reference to fair value less costs to sell. This amount was estimated on the basis of four criteria referring to two principal families: multiples of comparable companies and of comparable transactions and option pricing models. The application of the models made ample use of market input. The principal input considered and to which the results of the technical valuation are more sensitive are the following: a) the current market prices of the Telecom Italia ordinary shares of the minority shareholders; b) the target prices expressed by the financial market analysts for the same shares of the minority shareholders during the period November 2005 to January 2006; c) the discounts practiced by the analysts themselves in the estimate of the intrinsic value of the Telecom Italia shares to reflect the diversification (or Holding) discount that affects shares of minority shareholders but not the control-oriented shares; d) the premiums on average seen in our country on public takeovers (like proxy of the nuisance value on shares of minority shareholders); e) the daily annualized volatility of Telecom Italia shares in the last ten years; f) the volatility (current) implicit in the call options on the Telecom Italia shares listed on the Eurex; g) the premiums paid in comparable transactions for deals over Euros 10 billion carried out in the Telecom Sector in Europe in 2005 and in February 2006; h) the breakdown between the divisible and the indivisible component (private benefits of control) of the premiums paid in transactions carried out in Italy for shares which make it possible to reach an investment threshold equal to or more than 20 percent.

No estimation model showed an impairment.

The data which follows refers to the ﬁnancial statements of the company Olimpia S.p.A. adjusted in accordance with IAS/IFRS:

(in millions of euros) 12/31/2005 12/31/2004 Assets Non-current 10,493 8,479 Current 52 31 10,545 8,510 Liabilities Non-current 3,490 3,223 Current 28 397 3,518 3,620

Revenues 452 114 Costs (200) (98) Net income 252 16

Performance of the company Telecom Italia S.p.A. (an associate of Olimpia) during 2005 The consolidated net income of the Telecom Italia Group in 2005 is Euros 3,216 million (Euros 3,690 million before minority interests). In 2004, the consolidated net income was Euros 1,815 million (Euros 2,834 million before minority interests). The change in consolidated net income (Euros 1,401 million) is due to the following factors: - a lower operating income by Euros 104 million; - higher share of the earnings (losses) of investments in associates valued by the equity method (Euros 28 million); - net ﬁnancial expenses basically unchanged (+Euros 5 million); - lower income taxes of Euros 259 million; - higher net income from discontinued operations/assets held for sale of Euros 668 million,

184 Preliminary information Directors’ Report Sustainability Report Consolidated Financial Statements

inclusive of Euros 410 million relating to net gains realized on the disposal of Tim Hellas and Euros 120 million relating to the net gain realized on the disposal of Tim Perù; - higher net income attributable to the parent originating from minority shareholders (Euros 545 million), mainly in connection with the integration of Tim (tender offer and merger), which led to full control over mobile telecommunications.

The net ﬁnancial debt position amounts to Euros 39,858 million, with an increase of Euros 6,996 million compared to Euros 32,862 million at the end of 2004.

The board of directors of Telecom Italia put forward a motion to the shareholders’ meeting to pay out dividends equal to Euros 0.14 per each ordinary share (+28 percent compared to the dividends distributed in 2005).

11. AVAILABLE-FOR-SALE FINANCIAL ASSETS

Available-for-sale ﬁnancial assets amount to Euros 1,032,317 thousand compared to Euros 518,612 thousand at December 31, 2004.

Movements during the year are as follows:

(in thousands of euros) Beginning balance at January 1, 2005 518,612 Discontinued operations (10,787) Adoption of IAS 32/39 225,667 Increase 231,153 Decrease (12,567) Impairment (22,391) Gains/losses for fair value adjustments recognized in equity 106,028 Other (3,398) Closing balance at December 31, 2005 1,032,317

Available-for-sale ﬁnancial assets include: • Euros 831,798 thousand of shares listed on the stock market and held in the portfolio of Pirelli & C. S.p.A. and Pirelli Finance (Luxembourg) S.A.. Such shares refer to Mediobanca, Società Metallurgica Italiana, Generale Industrie Metallurgiche S.p.A., Capitalia, Telecom Italia and RCS Mediagroup S.p.A.; • Euros 151,825 thousand of unlisted shares; • Euros 47,442 thousand of shares of closed-end property investment funds held by Pirelli & C. Real Estate Società di Gestione del Risparmio S.p.A; • Euros 1,252 thousand of other securities.

The change, from last year, is mainly due to the purchase of Telecom Italia S.p.A. ordinary shares (Euros 127,098 thousand) and purchases of RCS Mediagroup S.p.A. ordinary shares (Euros 58,868 thousand), the subscription of ordinary shares of Generale Industrie Metallurgiche S.p.A. (Euros 9,570 thousand), F.C. Internazionale Milano S.p.A. (Euros 15,320 thousand) and Istituto Europeo di Oncologia S.r.l. (Euros 923 thousand) and the purchase of closed-end property investment funds (Tecla, Cloe and Olinda) by Pirelli & C. Real Estate SGR for Euros 15,959 thousand.

In addition to the increases, there were decreases for the sale of Gemina S.p.A. ordinary shares (Euros 5,705 thousand) and writedowns made to the investments in F.C. Internazionale Milano S.p.A. (Euros 15,000 thousand), Euroqube S.A. (Euros 2,185 thousand), Generale Industrie Metallurgiche S.p.A. (Euros 3,220 thousand), GWS Photonics Inc (Euros 1,013 thousand) and Istituto Europeo di Oncologia S.r.l. (Euros 969 thousand).

185 Preliminary information Directors’ Report Sustainability Report Consolidated Financial Statements

Measurement at fair value at December 31, 2005 mainly regards securities in the portfolio of Pirelli & C. S.p.A..

For listed securities and closed-end property investment funds, the fair value corresponds to the market prices at December 31, 2005.

For unlisted securities and closed-end property investment funds, the fair value has been estimated using appropriate estimation techniques.

12. TREASURY SHARES

Treasury shares amounting to Euros 4,678 thousand at December 31, 2004 have been reclassiﬁed as a direct deduction of equity at January 1, 2005 in accordance with IAS 32.

13. DEFERRED TAX ASSETS

Deferred tax assets amount to Euros 77,046 thousand (of which Euros 25,382 thousand is recoverable within 12 months and Euros 51,664 thousand is recoverable beyond 12 months) compared to Euros 97,110 thousand at December 31, 2004.

Movements during the year are as follows:

(in thousands of euros) Beginning balance at January 1, 2005 97,110 Discontinued operations (11,706) Exchange differences 1,750 Change in scope of consolidation (130) Movements through the income statement (9,615) Movements through equity 7,372 Excess amount released to income (1,814) Reclassiﬁcations (6,562) Other movements 641 Closing balance at December 31, 2005 77,046

Deferred tax assets mainly pertain to writedowns of equity investments recorded in prior years, tax loss carryforwards, accruals to provisions for other liabilities and charges, actuarial gains and losses on employee benefits and other temporary tax differences. Movements through equity are due to the tax effects connected with actuarial gains and losses on employee benefits and the adjustment of available-for-sale financial assets to fair value, recognized directly in equity.

14. TRADE RECEIVABLES

Trade receivables are detailed as follows:

(in thousands of euros) 12/31/2005 12/31/2004 Total Non Current Total (*) Non Current current current Associates 69,237 - 69,237 44,989 - 44,989 Others 868,863 - 868,863 1,449,885 - 1,449,885 Receivables on construction contracts 5,334 - 5,334 8,862 - 8,862 943,434 - 943,434 1,503,736 - 1,503,736 (*) Inclusive of discontinued operations of Euros 672,689 thousand.

186 Preliminary information Directors’ Report Sustainability Report Consolidated Financial Statements

The costs incurred and the proﬁt recognized on contracts in existence at December 31, 2005 amount to Euros 66,079 thousand (Euros 103,409 thousand at December 31, 2004).

The writedown of receivables, equal to Euros 9,808 thousand (Euros 10,749 thousand at December 31, 2004), is recognized in the income statement under “Other expenses” (note 35).

15. OTHER RECEIVABLES

Other receivables can be analyzed as follows:

(in thousands of euros) 31/12/2005 31/12/2004 Total Non- Current Total (*) Non- Current current current associates - financial receivables 262,497 262,187 310 190,434 190,434 - - other receivables 1,015 - 1,015 3,875 213 3,662 financial receivables from others 232,860 206,254 26,606 129,939 75,837 54,102 trade and other accrued income and prepaid expenses 17,069 250 16,819 43,542 435 43,107 financial accrued income and prepaid expenses 14,845 6,176 8,669 16,560 508 16,052 receivables for capital subscription rights not called up - - - 458 458 - receivables from employees 5,241 2,308 2,933 322 - 322 receivables from social security agencies 2,554 - 2,554 592 - 592 other receivables 265,564 52,218 213,346 266,247 132,363 133,884 801,645 529,393 272,252 651,969 400,248 251,721 (*) Inclusive of discontinued operations of Euros 131,007 thousand.

Financial receivables from associates, equal to Euros 262,497 thousand, are almost entirely held by the Pirelli & C. Real Estate group, and are classified as non-current since the collection times, connected to the plans for the disposal of the properties held directly and indirectly by the companies, will be realized over a period of between two and five years. . Non-current financial receivables from others mainly include a fixed-rate vendor loan of a nominal amount of Euros 135,000 thousand maturing on January 28, 2016 granted to GSCP Athena (Lux) S.à.r.l. under the agreement reached on July 28, 2005 between Pirelli and Goldman Sachs Capital Partners regarding the sale of the Pirelli Energy and Telecom Cables and Systems businesses. The recorded amount approximates fair value.

Other receivables include mainly receivables for the non-performing loan portfolios of Euros 160,429 thousand, of which Euros 120,820 thousand relates to a portfolio of receivables previously owned by Banca Nazionale del Lavoro, for which Pirelli & C. Real Estate S.p.A. signed an irrevocable purchase commitment.

There are no concentrations of credit risk since the Group has a large number of customers distributed internationally.

16. TAX RECEIVABLES

Tax receivables amount to Euros 129,580 thousand (of which Euros 18,619 thousand is non-current) compared to Euros 7,910 thousand at December 31, 2004 (of which Euros 79 thousand is non-current).

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17. INVENTORIES

Inventories may be analyzed as follows:

(in thousands of euros) 12/31/2005 12/31/2004 Energy Cables and Systems Sector - 390,967 Telecom Cables and Systems Sector - 39,841 Tyres Sector 546,287 436,900 Real Estate - Pirelli & C. Real Estate 128,768 192,088 Other 6,001 (1,832) 681,056 1,057,964

12/31/2005 12/31/2004 Raw materials, auxiliaries and consumables 161,812 291,124 Sundry materials 4,086 25,390 Work in process and semiﬁnished products 94,686 217,809 Finished products 172,581 320,843 Merchandise purchased for resale 201,420 157,998 Land to be developed 22,102 34,687 Advances 24,369 10,113 681,056 1,057,964

Inventories include capitalized borrowing costs of Euros 2,017 thousand at December 31, 2005 (Euros 879 thousand at December 31, 2004).

18. FINANCIAL ASSETS HELD FOR TRADING

Financial assets held for trading amount to Euros 179,636 thousand and include the following: - Euros 96,971 thousand of fixed rate bonds issued and guaranteed by banking institutions; - Euros 287 thousand of floating rate bonds issued and guaranteed by banking institutions; - Euros 8,970 thousand of floating rate bonds issued and guaranteed by governments of various countries; - Euros 64,371 thousand of equity securities intended for sale; - Euros 8,868 thousand of zero coupon bonds; - Euros 169 thousand of other securities.

The positions are held at leading banks.

For listed securities, the fair value corresponds to market price at December 31, 2005. For unlisted securities, the fair value was estimated using appropriate estimation techniques.

The fair value adjustments are recognized in the income statement under “valuation of ﬁnancial assets” (note 39).

19. CASH AND CASH EQUIVALENTS

(in thousands of euros) 12/31/2005 12/31/2004 (*) Bank and postal deposits 297,916 506,781 Cash on hand 2,415 2,275 300,331 509,056 (*) Inclusive of discontinued operations of Euros 115,858 thousand.

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“Bank and postal deposits” are concentrated in the ﬁnancial companies, holding companies and subholding companies of the Group. Available liquidity is mainly invested in the short-term deposits market at leading banking counterparts primarily at interest rates reﬂecting market rates.

At the end of the statement of cash ﬂows, the balance of cash and cash equivalents is shown net of bank overdrafts, equal to Euros 154,021 thousand at December 31, 2005 and Euros 19,050 thousand at December 31, 2004.

20. EQUITY

20.1 ATTRIBUTABLE TO PARENT COMPANY SHAREHOLDERS

Share capital amounts to Euros 2,762,696 thousand at December 31, 2005 and consists of 5,178,112,143 ordinary shares and 134,764,429 savings shares, all with a par value of Euros 0.52 per share and normal dividend rights. The changes in share capital are detailed below:

Number Number Number Ordinary Savings Treasury Total of ordinary of savings of treasury shares shares shares shares shares shares (thousand) (thousand) (thousand) (? thousand) (? thousand) (? thousand) (? thousand) Balance at December 31, 2004 3,324,893 134,764 2,618 1,728,945 70,077 1,361 1,800,383 Adoption of IAS 32 and 39 (2,618) (1,361) (1,361) Balance at January 1, 2005 3,324,893 134,764 - 1,728,945 70,077 - 1,799,022 hare capital increase 1,517,672 789,190 789,190 Exercise of warrants 2003-2006 335,547 174,484 174,484 Balance at December 31, 2005 5,178,112 134,764 - 2,692,619 70,077 - 2,762,696

20.2 ATTRIBUTABLE TO MINORITY INTEREST

The minority interest in shareholders' equity went from Euros 338,960 thousand at December 31, 2004 to Euros 408,947 thousand at December 31, 2005. The change is mainly due to the combined effect of the net income for the year 2005, the payment of last year’s dividends and the impact of the translation of foreign currency ﬁnancial statements to euros.

The major percentages of investments held by minority interests are as follows:

12/31/2005 12/31/2004 Shared Service Center s.c.a r.l. (Italy) 50.00% 50.00% Celikord A.S. (Turkey) 49.00% 49.00% Pirelli & C Ambiente Holding S.p.A. (Italy) 49.00% 49.00% Turk Pirelli Lastikleri A.S. (Turkey) 36.94% 36.94% Pirelli & C. Real Estate S.p.A. (Italy) 46.74% 46.06% Alexandria Tire Co. S.A.E. (Egypt) 13.19% 13.21% Pirelli de Venezuela C.A. (Venezuela) 3.78% 3.78% S.C. Cord Romania S.r.l. (Romania) 20.00% 20.00% Yanzhou Evolution Tyre CO. Ltd (China) 40.00% - Auto Cables Tunisie S.A. (Tunisia) - 49.00% Sicable S.A. (Ivory Coast) - 49.00% Pirelli Baosheng Cable Co. Ltd (China) - 33.00% Tianjin Pirelli Power Cables Co. Ltd (China) - 33.00% Turk Pirelli Kablo ve Sistemleri A.S. (Turkey) - 16.25% Pirelli Telecom Cables Co. Ltd Wuxi (China) - 13.29%

189 Preliminary information Directors’ Report Sustainability Report Consolidated Financial Statements

21. STOCK OPTION PLANS

Plans relating to Pirelli & C. S.p.A. During the year ended December 31, 2005, the company did not introduce any stock option plans. Pirelli & C. has two existing stock option plans for the senior executives and staff of Pirelli & C. and other companies in the Group which were granted option rights, not transferable to third parties, for the subscription/purchase of Pirelli & C. S.p.A. ordinary shares. The following disclosure is provided on the above plans called Pirelli to People and Group Senior Executives.

Pirelli to People Group Senior Executives

Features of the plan Option rights granted, non-transferable to third Option rights granted, non-transferable to third parties, for the subscription of future new issues parties, for the subscription of future new issues of Pirelli & C. ordinary shares or, as decided by of Pirelli & C. ordinary shares or, as decided by the latter, for the purchase of treasury shares of the latter, for the purchase of treasury shares of Pirelli & C. Pirelli & C.

Beneﬁciaries at 309 employees (senior executives, cadres, 31 senior executives of the companies of the December 31, 2005 employees with high potential) of the companies Group. of the Group. Originally 51 persons at the date of approval of Originally 725 persons at the date of approval of the plan. the plan.

Conditions for exercising Continuance of employment. (a) continuance of employment, and (b) the options reaching, in the two-year period 2001-2002, of speciﬁc targets, assigned to each beneﬁciary.

Subscription/purchase Each option right granted gives the right to Each option right granted gives the right to price per share subscribe/purchase one Pirelli & C. ordinary subscribe/purchase one Pirelli & C. ordinary share at the price of Euros 1.150 (1). share at the price of Euros 1.150 (1).

Vesting period of Up to nine years from the date the options are As regards the options granted on November 5, options granted (which took place on November 5, 2001, up to nine years from the date the options 2001), but not before one year has passed from are granted, but not before one year has passed that date for 50 percent of the options granted, from that date for 50 percent of the options, two two years for another 25 percent and three years years for another 25 percent and three years for for the remaining 25 percent. the remaining 25 percent. For the options granted deﬁnitively on May 10, 2002, up to May 31, 2009 but not before June 1, 2002 for 50 percent of the options and not before January 1, 2003 for the remaining 50 percent.

Maximum number of 36,826,541 options equal to about 1.11 percent of 17,399,309 options equal to about 0.52 percent of options for which the outstanding ordinary shares destined for 530 outstanding ordinary shares destined for 40 offer was open at beneﬁciaries. beneﬁciaries. December 31, 2004

Maximum number of 21,693,205 options equal to about 0.4 percent of 13,986,882 options equal to about 0.27 percent of options for which the outstanding ordinary shares destined for 309 outstanding ordinary shares destined for 31 offer was open at beneﬁciaries. beneﬁciaries. December 31, 2005

Options forfeit during the 15,133,336 3,412,427 year 2005 as a result of persons leaving the Group

Shares issued during the None None year

(1) This amount was changed (from Euros 1.284) on the basis of the adjustment factor established by AIAF on February 7, 2005 following the capital increase voted by the extraordinary shareholders’ meeting held on January 21, 2005, in accordance with the Regulations of those Stock Option Plans in the event of transactions involving share capital.

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The following table shows the changes in the above plans (also as a result of the reduction in the number of beneﬁciaries following the disposal of the Cables and Systems Sector of the Group), the number of option rights and the exercise price.

Pirelli to People Table 1 Year 2005 Year 2004 Number Average Market price Number Average Market price of shares exercise price in ? of shares exercise price in ? in ? in ? Rights existing at 1/1/2005 36,826,541 1.284 0.99 39,112,407 1.284 0.82 Rights granted during year ------(rights exercised during year) ------(Rights forfeit during the year 2005 as a result of persons leaving the Group) 15,133,336 - - 2,285,866 - - Rights existing at December 31, 2005 21,693,205 1.15 (1) 0.77 36,826,541 1.284 0.99

Table 2 Rights granted - existing at December 31, 2005 Exercise price Remaining contractual life Of which exercisable >2 years * Total From 11/5/2004 ? 1,15 (1) 21,693,205 21,693,205 21,693,205

* until 11/5/2010 (1) This amount was changed to Euros 1.150 on the basis of the adjustment factor established by AIAF on February 7, 2005 following the capital increase voted by the extraordinary shareholders’ meeting held on January 21, 2005, in accordance with the Regulations of those Stock Option Plans in the event of transactions involving share capital.

Group Senior Executives Table 1 Year 2005 Year 2004 Number Average Market price Number Average Market price of shares exercise price in ? of shares exercise price in ? in ? in ? Rights existing at 1/1/2005 17,399,309 1.284 0.99 17,853,283 1.284 0.82 Rights granted during year ------(rights exercised during year) ------(Rights forfeit during the year 2005 as a result of persons leaving the Group) 3,412,427 - - 453,974 - - Rights existing at December 31, 2005 13,986,882 1.15 (1) 0.77 17,399,309 1.284 0.99

Table 2 Rights granted - existing at December 31, 2005 Exercise price Remaining contractual life Of which exercisable >2 years * Total From 11/5/2004 ? 1,15 (1) 13,986,882 13,986,882 13,986,882

* until 5/31/2009 (1) This amount was changed to Euros 1.150) on the basis of the adjustment factor established by AIAF on February 7, 2005 following the capital increase voted by the extraordinary shareholders’ meeting held on January 21, 2005, in accordance with the Regulations of those Stock Option Plans in the event of transactions involving share capital.

191 Preliminary information Directors’ Report Sustainability Report Consolidated Financial Statements

The following tables indicates the number of rights granted under the above-described incentive plans, held at December 31, 2005, directly and indirectly, by the members of the board of directors, the board of statutory auditors and the general managers of the Company.

Name Rights held Rights granted Right exercised Rights held at 1/1/2005 during year 2005 during year 2005 at 12/31/2005 N. of Average N. of Average N. of Average N. of Average rights exercise rights exercise rights exercise rights exercise price price price price Carlo Buora 1,333,334(1) 1.284 - - - - 1,333,334(1) 1.15(3) Claudio De Conto 778,774(1) 1.284 - - - - 778,774(1) 1.15(3) 410,667(2) 1.284 - - - - 410,667(2) 1.15(3) Luciano Gobbi 778,774(1) 1.284 - - - - 778,774(1) 1.15(3) 360,000(2) 1.284 - - - - 360,000(2) 1.15(3) Francesco Gori 533,334(1) 1.284 - - - - 533,334(1) 1.15(3) 666,667(2) 1.284 - - - - 666,667(2) 1.15(3) (1) Group Senior Executives incentive plan. (2) Pirelli to People incentive plan. (3) This amount was changed to Euros 1.150 on the basis of the adjustment factor established by AIAF on February 7, 2005 following the capital increase voted by the extraordinary shareholders’ meeting held on January 21, 2005, in accordance with the Regulations of those Stock Option Plans in the event of transactions involving share capital.

Giovanni Ferrario (general manager of the company since December 2004) holds 1,333,334 option rights granting the right to subscribe/purchase the same number of Pirelli & C. S.p.A. ordinary shares at the price of Euros 1.15 each.

Valerio Battista (general manager of the company since December 2004) holds 1,650,134 option rights granting the right to subscribe/purchase the same number of Pirelli & C. S.p.A. ordinary shares at the price of Euros 1.15 each.

During 2005, effective January 2006, a new stock option plan was approved by the boards of directors of Pirelli & C. Ambiente S.p.A. and Pirelli & C. Ambiente Holding S.p.A. (its parent) which provides for granting nine beneﬁciaries – including the managing director and general manager of Pirelli & C. Ambiente S.p.A., Nicolò Dubini, – an option to purchase a total of 306,000 Pirelli & C. Ambiente S.p.A. shares, equal to 10 percent of the share capital of the latter company, at a price per share of Euros 1.85, on the basis of an appraisal speciﬁcally performed for that purpose.

All the above option rights may be exercised in April 2009, after having reached speciﬁc corporate targets by the date of December 31, 2008, or, in September 2009, in the case of reaching the same targets by June 30, 2009. The shares resulting from the exercise of the option rights can be sold by the beneﬁciaries to Pirelli & C. Ambiente Holding S.p.A. within one month of having exercised the rights at a price that will take into account the net asset revaluation of the company during that time.

The previous stock option plan of Pirelli & C. Ambiente S.p.A. expired on December 31, 2005 without any rights having been exercised.

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Plans put in place by the subsidiary Pirelli & C. Real Estate S.p.A. and by the companies it controls During 2000 and 2001, plans were put in place denominated Plan 2000 and Plan 2001.

Both plans provided for the right of acceleration and repurchase by the parent company Pirelli & C. S.p.A. in the event the company decided to introduce a single pre-planned program for the stable involvement of employees and management in the growth of value of Pirelli & C. Real Estate S.p.A. once the phase of reorganization and personnel aggregation started in 2000 had ended.

Since these conditions were fulﬁlled, the company approved a stock option plan on May 9, 2002 (hereinafter “Plan 2002”) with these features and Pirelli & C. S.p.A. took advantage of the right to accelerate and repurchase all the shares assigned to the beneﬁciaries of the Plan 2000 and Plan 2001.

On February 24, 2004, the company – taking into account of the expiration date of the exercise periods for Plan 2002 – approved a new stock option plan (hereinafter “Plan 2004”) on behalf of the directors and employees of the Pirelli RE group (hereinafter “Group”), as an added incentive and to increase a sense of loyalty, partly with view towards the development of new business areas – among which, the placement of mutual funds and non-performing loan activities – that the Group is pursuing.

Lastly, on December 16, 2005 – having taken note of the approval of the new Three-year Plan 2006- 2008 by the board of directors of the company on October 18, 2005 – a new stock option plan was put into place (hereinafter “Plan 2006”) for directors and employees of the Group. The plan is an added incentive to increase their loyalty while bearing in mind the important targets ﬁxed in that Plan which provide – besides a renewed dynamics in the development and in the consolidation of the traditional residential and commercial sectors, specialist services, the promotion and management of property investment funds – also: (i) an appreciable growth in the non-performing loan sectors; (ii) a clear and signiﬁcant slant towards foreign markets; (iii) the innovative promotion and management of speculative funds; (iv) the growth of the franchising network’s contribution to the Group’s overall results and, in general (v) an overall annual increase in the long-term component of the business as compared to the traditional short-term component, with an annual growth in results of 10 percent – 15 percent. The new Plan 2006 was also designed by considering the expiration dates of the exercise periods of Plan 2004.

The most important information about the stock option plans of the Group are provided as follows:

PLAN 2002 Plan features: granting of option rights, non-transferable to third parties, for the subscription of Pirelli & C. Real Estate S.p.A. ordinary shares. Beneficiaries: 88 persons (directors, executives and cadres) of Pirelli & C. Real Estate S.p.A. and its subsidiaries. Conditions for exercising the options rights: (a) continuance of the employment relationship with one of the above companies, (b) continued status of the company, in which the person is an employee or a director, as a company of the Group headed by Pirelli & C. S.p.A. (c) achievement of the specific targets assigned to each beneficiary during the three-year period 2002-2004. Per share subscription price: Euros 26; this price may vary as a result of share capital increases unconnected with the Plan or in the case of mergers, spin-offs or amendments to the bylaws affecting the rights of the beneficiaries. Option exercise period: 50 percent of the options can be exercised from July 1, 2004 to December 15, 2006 and the remaining 50 percent from July 1, 2005 to December 15, 2006; all options must be exercised by December 15, 2006.

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Maximum number of shares covered by the plan: 2,150,000, of which 2,053,000 have been assigned. There were 1,491,500 rights remaining at January 1, 2005; during 2005, 52,750 rights were forfeit as a result of the termination of employment and 908,500 were exercised. Consequently, there were 530,250 options granted remaining at December 31, 2005. IFRS 2 has therefore not been adopted for this plan since it was approved before November 7, 2002.

PLAN 2004 Plan features: granting of option rights, non-transferable to third parties, for the purchase of Pirelli & C. Real Estate S.p.A. ordinary shares held as treasury shares. Beneficiaries: 50 persons (directors, executives and cadres) of Pirelli & C. Real Estate S.p.A. and its subsidiaries. Conditions for exercising the options rights: (a) continuance of the employment relationship or status as a director with Pirelli & C. Real Estate S.p.A. or another company controlled, directly or indirectly, by the same company (b) share performance by Pirelli & C. Real Estate S.p.A. shares better than the European Public Real Estate Association (EPRA), Europe Return Index, separately for the reference periods of the two periods covered by the Plan. Per share purchase price: Euros 26.75, which corresponds to the fair value of the share on the grant date; this price may vary as a result of share capital increases or other extraordinary transactions, but in every case ensuring the equivalent rights held by the beneficiaries before those transactions. Option exercise period: 50 percent of the options can be exercised from July 1, 2006 to December 15, 2007 (first tranche) and the remaining 50 percent from July 1, 2007 to December 15, 2007 (second tranche); all options must be exercised by December 15, 2007. Maximum number of shares covered by the plan: 1,000,000. There were 1,000,000 rights remaining at January 1, 2005; during 2005, 53,000 rights were forfeit as a result of the termination of employment. Consequently, there were 947,000 options granted remaining at December 31, 2005. The fair value of the options on the grant date, equal to Euros 2.5 for the first tranche and Euros 2.69 for the second tranche, was determined using the Monte-Carlo model. The assumptions that were considered in the model take into account the fair value of the shares at the grant date (Euros 26.75) equal to the exercise price of these same shares, as well as expected volatility of 22 percent determined on the basis of the historical volatility of the price of the shares from the time Pirelli & C. Real Estate S.p.A. was listed until the grant date of this plan.

PLAN 2006 Plan features: granting of option rights, non-transferable to third parties, for the purchase of Pirelli & C. Real Estate S.p.A. ordinary shares held as treasury shares. Beneﬁciaries: 70 persons (directors, executives and other key resources) of Pirelli & C. Real Estate S.p.A. and its subsidiaries. Conditions for exercising the options rights: (a) continuance of the employment relationship or status as a director in the companies of the Pirelli Group (b) the reaching/exceeding, when the rights are exercised, of a minimum market price of the Pirelli RE share, which must not be lower than Euros 55.00 [market restriction], (c) average annual growth of the Operating Result Parameter (PBIT) + Income from investment holdings (IEP) not less than 10 percent [operating restriction]. Per share purchase price: Euros 46.50, which corresponds to the fair value of the share on the grant date; this price may vary as a result of share capital increases or other extraordinary transactions, but in every case ensuring the equivalent rights held by the beneﬁciaries before those transactions.

194 Preliminary information Directors’ Report Sustainability Report Consolidated Financial Statements

Option exercise period: 40 percent of the options can be exercised from July 1, 2008 to December 15, 2009 (ﬁrst tranche) and the remaining 60 percent from July 1, 2009 to December 15, 2009 (second tranche); all options must be exercised by December 15, 2009. The options may be exercised in advance, in the event of a "change of control” and, as a result of which, Pirelli & C. S.p.A. would no longer be the majority shareholder of the company. However, the market and operating restrictions remain in place, with predetermined criteria to be applied in relation to the exercise of the options if the event should occur. Maximum number of shares covered by the plan: 1,800,000. The fair value of the options on the grant date, equal to Euros 5.9 for the ﬁrst tranche and Euros 5.27 for the second tranche, was determined using the Black-Scholes model. The assumptions that were considered in the model take into account the fair value of the shares at the grant date (Euros 46.50) equal to the exercise price of these same shares, as well as expected volatility of 23 percent determined on the basis of the historical volatility of the price of the shares from the time Pirelli & C. Real Estate S.p.A. was listed until the grant date of this plan.

The table below – in conformity with Scheme 2 of appendix 3C of Consob Regulation No. 11971/1999 – shows the movements in the stock options held by the directors and general managers Pirelli & C. Real Estate S.p.A. during 2005.

Options Options Options Options forfeit/ Options heald at granted exercised held during held at 1/1/2005 in 2005 in 2005 the year 12/31/2005 (A) (B) (1) (a) (2) (3) (4) (b) (5) (6) (7) (8) (9) (10) (11)=(1) (12) (c) +(4)-(7) (10) Name Position Number Average Due Number Average Due Number Average Average Number of options Number Average of exercise date of exercise date of exercise exercise of exercise options price options price options price market options price price Carlo Alessandro Deputy Chairmain1,110,000 26.41 12/15/07 300,000 46.50 12/15/09 427,500 26.00 40.88 982,500 32.45 Puri Negri and Managing Director - Chief Executive Officer Carlo Bianco Deputy Chairmain 148,000 26.44 12/15/07 140,000 46.50 12/15/09 31,000 26,00 45,72 257,000 37.42 Emilio Biffi Managing 148,000 26.44 12/15/07 140,000 46.50 12/15/09 62,000 26.00 47.67 226,000 38.98 Director - Chief Technical Officer General Manager Olivier de Director 200,000 26.75 12/15/07 200,000 46.50 12/15/09 - - - - 400,000 36.63 Poulpiquet General Manager Investment & Asset Management Marc Petit (d) 29,000 26.00 12/15/06 - - - 29,000 26.00 44.44 - - - Giorgio Fantoni (e) 71,500 26.00 12/15/06 - - - - 26.00 - 71,500 - -

(a) options granted under plans 2002 and 2004 (b) options granted under plan 2006 (c) the average exercise price takes into account the average values referring plans 2002/2004 and 2006 (d) ex Special Projects General Manager ended relations with the company on July 31, 2005 and, conseguently, resigned his position (e) ex Service General Manager ended relations with the company on January 31, 2005 and, conseguently, resigned his position

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Stock option plans of subsidiaries On July 31, 2003, Giulio Malfatto, a director of Pirelli & C. Real Estate S.p.A., upon his appointment as the managing director of Pirelli & C. Real Estate Società di Gestione del Risparmio S.p.A., was offered an option for the purchase of ordinary shares representing 3 percent of the share capital of Pirelli & C. Real Estate Società di Gestione del Risparmio S.p.A., to be executed by a share capital increase to service this option. The option is an integral part of Giulio Malfatto’s compensation as the managing director of Pirelli & C. Real Estate Società di Gestione del Risparmio S.p.A.. The option will be exercisable: a) at the expiry of the first three-year term of his appointment as the managing director of Pirelli & C. Real Estate Società di Gestione del Risparmio S.p.A. and for the following six months, or b) from an earlier date in the case of revocation without a just cause, or dismissal with a just cause from the post of managing director of Pirelli & C. Real Estate Società di Gestione del Risparmio S.p.A., until the expiry date mentioned in point a), or c) within three months from December 31, 2005, if at that date the value of the assets managed by Pirelli & C. Real Estate Società di Gestione del Risparmio S.p.A. is lower than Euros 3 billion. The exercise of the option, in the event indicated in the previous letter a), is subject to the verification of having reached certain targets (in terms of profitability, assets managed, etc.) established by the same board of directors of Pirelli & C. Real Estate Società di Gestione del Risparmio S.p.A..

The exercise price of the option is equal to the fair value of 3 percent of Pirelli & C. Real Estate Società di Gestione del Risparmio S.p.A. shares at the date of July 31, 2003, resulting from a speciﬁc appraisal. This price may vary in relation to subsequent increases in share capital, if any, voted and subscribed to, in order for the managing director to have an option right equal to 3 percent of the resulting capital at the date of the exercise of the option. There were no movements in the options granted during the year 2005 and at December 31, 2005 the options total 246,750.

The board of directors of Pirelli & C. Real Estate S.p.A., on November 7, 2003, also approved stock option plans for 33 executive and directors of some wholly-owned service companies of Pirelli & C. Real Estate S.p.A.. These plans do not include the directors and general managers of Pirelli RE.

For all the approved plans, the exercise prices were determined on the basis of speciﬁc appraisals to determine the fair value of the companies. The option rights can be exercised in the months of April 2005 and April 2006, but are subject to several factors, including the reaching of performance targets that are higher than those established in the Plan 2003-2005. Furthermore, there is a put and call mechanism in place for the repurchase of the shares connected with the exercise, if any, of the options.

There were 72,615 option rights granted on January 1, 2005 to various service companies; during 2005, 11,331 option rights were forfeit as a result of the termination of employment, 4,520 option rights were exercised and 15,604 thousand rights lapsed. Consequently, there were 41,160 option rights granted remaining at December 31, 2005.

The board of directors of Pirelli & C. Real Estate Franchising Holding S.r.l. approved a stock option plan for 10 directors and employees of its wholly-owned subsidiary Pirelli & C. Real Estate Franchising S.p.A. on June 29, 2004. This plan does not include the directors and general managers of Pirelli RE. The plan provides for granting 12,167 option rights for the purchase of Pirelli & C. Real Estate Franchising S.p.A. shares (equal to 2.43 percent of the share capital) at the exercise price per share of Euros 119.90. The exercise price was determined on the basis of a speciﬁc appraisal to determine the fair value of the company. The option rights can be exercised in the months of April 2006 (ﬁrst tranche) and April 2007 (second tranche) but are contingent on several factors, including the reaching of performance

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targets. Furthermore, there is a put and call mechanism in place for the repurchase of the shares connected with the exercise, if any, of the options. There were 9,609 option rights granted on January 1, 2005; during 2005, 189 option rights were forfeit. Consequently, there were 9,420 option rights granted remaining at December 31, 2005. The board of directors of Pirelli & C. Real Estate S.p.A. approved a stock option plan for executives and other employees of Pirelli & C. Real Estate Società di Gestione del Risparmio S.p.A., a subsidiary of Pirelli & C. Real Estate S.p.A. on July 28, 2004. This plan does not include the directors and general managers of Pirelli & C. Real Estate S.p.A.. The plan was adopted at a later date, compared to the other service subsidiaries, in order to include the executives and other employees of Pirelli & C. Real Estate Società di Gestione del Risparmio S.p.A. in incentive mechanisms that had not been included in the previous plans introduced by Pirelli RE, since these companies had been in the start-up phase, and bring their compensation schemes in line with a consistent policy within the Group.

The stock option plan for the subsidiary Pirelli & C. Real Estate Società di Gestione del Risparmio S.p.A. is for 11 executives and other employees and provides for a maximum of 170,523 options to be granted for the purchase of the Pirelli & C. Real Estate Società di Gestione del Risparmio S.p.A. shares (equal to 2.07 percent of the share capital) at the exercise price per share of Euros 17.47. In this case, too, the exercise price was determined on the basis of a speciﬁc appraisal to determine the fair value of the company. The options can be exercised during the period April 1, to April 30, 2007, but are contingent on several factors, including the reaching of performance targets. Furthermore, there is a put and call mechanism in place for the repurchase of the shares connected with the exercise, if any, of the options. There were 104,771 option rights remaining on January 1, 2005 granted to various service companies; during 2005, 31,487 option rights were forfeit as a result of the termination of employment. Consequently, there were 73,284 option rights granted remaining at December 31, 2005. At December 31, 2005, the fair value of the cash-settled open stock options plans relating to subsidiaries amount to Euros 11,743 thousand (Euros 5,842 thousand at December 31, 2004).

22. DEFERRED TAX LIABILITIES

Deferred tax liabilities amount to Euros 49,352 thousand (of which Euros 2,600 thousand is recoverable within 12 months and Euros 46,752 thousand is recoverable beyond 12 months) compared to Euros 80,367 thousand at December 31, 2004.

Movements during the year are as follows:

(in thousands of euros) Beginning balance at January 1, 2005 80,367 Discontinued operations (21,429) Exchange differences 3,404 Change in scope of consolidation (271) Movements through the income statement (5,690) Movements through equity (2,725) Reclassiﬁcations (6,562) Other movements 2,258 Closing balance at December 31, 2005 49,352

Deferred tax liabilities mainly refer to the amortization of goodwill which has not been charged to the consolidated income statement of the year since it is subject to impairment tests in accordance with IAS/IFRS. Movements through equity are due to the tax effects connected with actuarial gains and losses on employee beneﬁts plans and the adjustment of available-for-sale ﬁnancial assets to fair value, recognized directly in equity.

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23. TAX PAYABLES

Tax payables amount to Euros 120,207 thousand (of which Euros 8,706 thousand is non-current) compared to Euros 82,418 thousand at December 31, 2004 (of which Euros 3,344 thousand is non- current).

24. PROVISIONS FOR OTHER LIABILITIES AND CHARGES

The movements during the year in provisions for risks is presented in the following table:

(in thousands of euros) Provisions for other liabilities and charges - non-current Beginning balance at December 31, 2004 301,886 Adoption of IAS 32/39 (233,000) Exchange differences 17,387 Increase 47,023 Utilization (5,557) Excess amount released (2,929) Other 19,924 Ending balance at December 31, 2005 144,734

(in thousands of euros) Provisions for other liabilities and charges - current Beginning balance at December 31, 2004 167,927 Discontinued operations (74,083) Exchange differences (489) Increase 26,183 Utilization (40,428) Excess amount released (872) Other 1,588 Ending balance at December 31, 2005 79,826

The effect of the adoption of IAS 32 and IAS 39 from January 1, 2005 refers to the classiﬁcation of the “Provision for liabilities relating to the options granted to the shareholder banks of Olimpia” to the item “ﬁnancial instruments”.

At December 31, 2005, these provisions mainly consist of accruals for litigation, industrial risks and claims, product warranties and other contingencies.

25. EMPLOYEE BENEFIT OBLIGATIONS

These include:

(in thousands of euros) of which, relating to discontinued operations 12/31/2005 12/31/2004 12/31/2004 Pension funds: - funded 236,536 197,064 9,366 - unfunded 104,889 146,970 44,838 Employees' leaving indemnity 100,099 136,014 32,089 Medical assistance plans 33,386 46,528 18,216 Other beneﬁts 35,892 42,737 21,918 510,802 569,313 126,427

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- Pension funds The composition of pension funds, at December 31, 2005, is as follows:

(in thousands of euros) 12/31/2005 Germany Total unfunded USA UK Total funded pension pension funds funds Funded Present value of funded obligations 169,606 924,787 1,094,393 Fair value of plan assets (117,610) (740,247) (857,857) Unfunded Present value of unfunded obligations 104,889 104,889 Net liability in the balance sheet 104,889 104,889 51,996 184,540 236,536

The composition of pension funds, at December 31, 2004, is as follows:

(in thousands of euros) 12/31/2004 Germany Total unfunded Canada USA UK Total funded pension pension funds funds Funded Present value of funded obligations 14,725 172,511 745,473 932,709 Fair value of plan assets (14,237) (112,934) (608,474) (735,645) Unfunded Present value of unfunded obligations 146,970 146,970 Net liability in the balance sheet 146,970 146,970 488 59,577 136,999 197,064 of which, relating to discontinued operations 44,838 44,838 488 8,878 - 9,366

The main features of the pension plans in existence at December 31, 2005 are as follows: • Germany: this is an unfunded defined benefit plan based on the most recent remuneration. It guarantees another pension besides the government pension. The plan was closed in October 1982; consequently, the participants in the plan are employees who were hired prior to that date. • USA: this is a funded defined benefit plan based on the most recent remuneration. It guarantees another pension besides the government pension. The plan is under the administration of a trust. The plan was closed in 2001 and frozen in 2003 for those employees who passed over to a defined contribution scheme. None of the current participants in the plan are in service. • UK: these are funded defined benefit plans based on the most recent remuneration. They guarantee another pension besides the government pension. The plans are under the administration of a trust. The plans were closed in 2001; consequently, the participants in the plan are employees who were hired prior to that date.

The changes during the year in the present value of the liabilities for pension funds (funded and unfunded) are as follows:

(in thousands of euros) Beginning balance at January 1, 2005 1,079,679 Discontinued operations (80,475) Exchange differences 45,378 Movements through the income statement 62,281 Actuarial (gains)/losses recognized in equity 148,562 Employee contribution 2,854 Beneﬁts paid (58,997) Closing balance at December 31, 2005 1,199,282

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The changes during the year in the fair value of the pension plan assets are as follows:

(in thousands of euros) Beginning balance at January 1, 2005 (735,645) Discontinued operations 26,271 Exchange differences (33,627) Movements through the income statement (55,026) Actuarial (gains)/losses recognized in equity (75,420) Employer contribution (33,484) Employee contribution (2,854) Beneﬁts paid 51,928 Closing balance at December 31, 2005 (857,857)

The composition of the funded pension plan assets is presented in the following table:

12/31//2005 UK USA Shares 80% 68% Bonds 17% 30% Deposits 1% 2% Other 2% 0% 100% 100%

The effective return of pension plan assets is as follows:

(in thousands of euros) USA UK Total Effective return 2005 5,843 125,006 130,849 Effective return 2004 5,257 52,319 57,576

The amounts recognized in the income statement relating to pension funds are as follows:

(in thousands of euros) 12/31/2005 12/31/2004 Current service costs 7,006 11,740 Interest cost 55,342 54,559 Expected return on plan assets (55,093) (56,375) Curtailments and settlements - (240) 7,255 9,684

The amounts recognized in the income statement are included in the item “Personnel costs” (Note 33).

The contributions which are expected to be paid during 2006 for pension funds amount to Euros 33,147 thousand.

- Employees’ leaving indemnity fund The changes during the year in employees’ leaving indemnity are as follows:

(in thousands of euros) Beginning balance at January 1, 2005 136,014 Discontinued operations (32,089) Change in the consolidation area (348) Movements through the income statement 16,576 Actuarial (gains)/losses recognized in equity (6,090) Payments / advances (14,093) Transfers 196 Other (67) Closing balance at December 31, 2005 100,099

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- Medical care plans The composition of the medical care plans is as follows:

(in thousands of euros) USA Canada TOTAL Liability in the balance sheet at 12/31/2005 33,386 33,386 Liability in the balance sheet at 12/31/2004 44,924 1,604 46,528 amount at 12/31/2004 relating to discontinued operations 16,612 1,604 18,216

The medical care plan existing in the United States covers white-collars and blue-collars, in service and retired. The plan is structured according to “pre-medicare” and “post-medicare”, with the latter referring to participants over the age of 65. Contributions are paid by both the employer and the employee. The changes during the year in the liabilities recognized in the ﬁnancial statements for medical care plans are the following:

(in thousands of euros) Beginning balance at January 1, 2005 46,528 Discontinued operations (18,216) Exchange differences 4,478 Movements through the income statement 1,725 Actuarial (gains)/losses recognized in equity 2,071 Beneﬁts paid (3,200) Closing balance at December 31, 2005 33,386

The effect of a one percentage point increase or decrease in the estimated rates for the costs of medical care is as follows:

(in thousands of euros) 12/31/2005 1% increase 1% decrease - Effect on current service cost and interest cost 50 (45) - Effect on liabilities recognized in the balance sheet 835 (763)

The amounts recognized in the income statement relating to medical care plans are as follows:

(in thousands of euros) 12/31/2005 12/31/2004 Current service costs 60 43 Interest cost 1,665 2,040 Curtailments and settlements - 2,568 1,725 4,651

The amounts recognized in the income statement are included in the item “Personnel costs” (Note 33).

- Other information Actuarial gains and losses generated in 2005 and recognized directly in equity amount to Euros 69,123 thousand (Euros 52,978 thousand at December 31, 2004, of which Euros 8,101 thousand relates to discontinued operations). The cumulative amount at December 31, 2005 of Euros 116,468 thousand is made up as follows:

(in thousands of euros) Cumulative amount at 12/31/2004 (52,978) Exchange differences (2,468) Discontinued operations 8,101 Year 2005 (69,123) Cumulative amount at 12/31/2005 (116,468)

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The breakdown by country is as follows:

(in thousands of euros) cumulative 12/31/2005 Italy Germany USA UK Total Pension funds - (7,999) (16,505) (94,811) (119,314) Medical care plans - - (3,244) - (3,244) Employees' leaving indemnity 6,090 - - - 6,090 Total actuarial gains/(losses) recognized in equity 6,090 (7,999) (19,749) (94,811) (116,468)

The actuarial assumptions used at December 31, 2005 for the determination of the estimated cost for the year 2006 are as follows:

Italy Germany UK USA Discount rate 4.0% 4.25% 4.75% 5.50% Inﬂation rate 2.0% 2.0% 2.50% - Expected return on plan assets - - 6.85% 7.0% Expected remuneration increase rate 3.2% 2.50% 2.50% - Medical care cost trend rate - initial - - - 9.5% Medical care cost trend rate - ﬁnal - - - 4.5%

The actuarial assumptions used at December 31, 2004 for the determination of the estimated cost for the year 2005 are as follows:

Italy Germany UK USA Canada Discount rate 4.5% 4.75% 5.50% 5.75% 5% - 6% Inﬂation rate 2.0% 2.0% 2.50% - 4% - 4.50% Expected return on plan assets - - 7.46% 7.0% 6.25% Expected remuneration increase rate 3.1% 2.50% 2.50% 0% 4.50% Medical care cost trend rate - initial - - - 10% - Medical care cost trend rate - ﬁnal - - - 4.5% -

26. BORROWINGS FROM BANKS AND OTHER FINANCIAL INSTITUTIONS

The analysis of borrowings from banks and other financial companies is as follows: (in thousands of euros) 12/31/2005 12/31/2004 Total Non-current Current Total (*) Non-current Current associates - - - 18,152 - 18,152 others 24,606 351 24,255 162,330 136,525 25,805 bonds 1,150,000 1,150,000 - 1,150,000 1,150,000 - borrowings from banks 836,109 311,999 524,110 1,274,378 573,763 700,615 borrowings from other financial companies 53,947 50,117 3,830 37,639 31,439 6,200 finance lease payables 41,653 38,045 3,608 44,751 40,974 3,777 financial accrued liabilities and deferred income 44,559 - 44,559 49,330 - 49,330 2,150,874 1,550,512 600,362 2,736,580 1,932,701 803,879 (*) Inclusive of discontinued operations of Euros 677,640 thousand.

These liabilities are secured by real guarantees (liens and mortgages) for Euros 107,230 thousand. Current borrowings from banks include a part of the put options on Olimpia S.p.A., held by shareholder banks. Such options imply that the economic beneﬁts relating to ownership of the investment in Olimpia are, for the predominant part, transferred immediately to Pirelli. This entails the increase of the investment in Olimpia S.p.A. with a contra-entry to the liability inclusive of the derivative for an amount equal to Euros 130,000 thousand.

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Bonds refer to Pirelli & C. S.p.A. 1998-2008 bonds of Euros 500,000 thousand, issued on October 21, 1998, paying interest at 4.875 percent and repayable in a one-off payment on October 21, 2008. The caption also includes bonds of Euros 500,000 thousand issued in 2002 by the subsidiary Pirelli Finance (Luxembourg) S.A., paying interest at a ﬁxed rate of 6.5 percent, expiring April 4, 2007, and bonds of Euros 150,000 thousand issued by Pirelli & C. S.p.A. in 1999, paying interest at 5.125 percent, expiring April 7, 2009.

The fair value of the bonds compared to the carrying amount is as follows:

(in thousands of euros) Carrying amount Fair value 12/31/2005 12/31/2004 12/31/2005 12/31/2004 Pirelli & C. Spa 1998-2008 500,000 500,000 512,300 514,875 Pirelli & C. Spa 1999-2009 150,000 150,000 153,503 154,523 Pirelli Finance (Luxembourg) S.A. 2002-2007 500,000 500,000 511,825 520,225 1,150,000 1,150,000 1,177,628 1,189,623

Fair value corresponds to the official market prices, respectively, at December 31, 2005 and at December 31, 2004.

For the current payables and the other non-current payables, the carrying amount approximates the fair value.

The amount due within one year, amounting to Euros 600,362 thousand, includes the current portion of long-term ﬁnancial payables for Euros 382,046 thousand.

The breakdown of payables by interest rate is as follows:

(in thousands of euros) Fixed rate Floating rate TOTAL Current 109,618 490,744 600,362 Non-current 1,360,047 190,465 1,550,512 Total 1,469,665 68% 681,209 32% 2,150,874

The maturities of non-current payables can be summarized as follows:

(in thousands of euros) between 1 and 2 years 612,950 between 2 and 5 years 889,525 beyond 5 years 48,037 1,550,512

The composition of current and non-current loans outstanding at the balance sheet date by currency is the following:

(in thousands of euros) Current Non-current TOTAL EUR 522 1,464 1,986 USD 3 54 57 BRL (Brazil Real) 38 33 71 CNY (Chinese Renminbi) 37 37 600 1,551 2,151

For ﬁnance lease payables, please refer to Note 6.1 “Leasing”.

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27. TRADE PAYABLES

The analysis of trade payables is as follows:

(in thousands of euros) 12/31/2005 12/31/2004 Total Non-current Current Total (*) Non-current Current associates 7,321 - 7,321 12,089 - 12,089 others 906,545 - 906,545 1,521,582 - 1,521,582 notes payable 104,398 - 104,398 74,854 - 74,854 1,018,264 - 1,018,264 1,608,525 - 1,608,525 (*) Inclusive of discontinued operations of Euros 766,900 thousand.

28. OTHER PAYABLES

The analysis of other payables is as follows:

(in thousands of euros) 12/31/2005 12/31/2004 Total Non-current Current Total (*) Non-current Current associates 315 - 315 553 - 553 trade and other accrued liabilities and deferred income 147,564 10,955 136,609 259,573 851 258,722 payables to employees 125,884 50 125,834 30,319 - 30,319 payables to social security agencies 38,977 1,481 37,496 4,608 - 4,608 payables for stock options 11,743 - 11,743 5,892 - 5,892 dividends payable 905 - 905 862 - 862 advances from customers 4,410 29 4,381 34,271 81 34,190 other payables 494,936 40,681 454,255 576,225 57,955 518,270 824,734 53,196 771,538 912,303 58,887 853,416 (*) inclusive of discontinued operations of Euros 303,820 thousand.

Current accrued liabilities and deferred income include revenues (Euros 20,000 thousand) relating to the following year in respect of the utilization of the Pirelli brand by the Prysmian group. This conforms to the terms of the agreement, executed on July 28, 2005, between Pirelli & C. S.p.A. and Goldman Sachs Capital Partner for the sale to the latter of the Pirelli Energy and Telecom Cables and Systems businesses. The portion referring to the year 2007 (Euros 10,000 thousand) is included in non-current accrued liabilities and deferred income.

The other payables mainly include the accrual for the risks associated with the rights granted to Hopa under the shareholders’ agreements (Euros 162,925 thousand), the payables originating from the purchase, on the part of CFT Finanziaria S.p.A., of the non-performing loan portfolio of Banca Popolare di Intra (which will later become part of a securitization transaction) for an amount, net of advances paid, of Euros 23,310 thousand, and the net commitment on the purchase of a portfolio of loans previously owned by Banca Nazionale del Lavoro of Euros 120,820 thousand.

29. FINANCIAL INSTRUMENTS

Financial instruments can be analyzed as follows:

(in thousands of euros) 12/31/2005 12/31/2004 Assets Liabilities Assets Liabilities Non-current ﬁnancial instruments - 2,048 - - Current ﬁnancial instruments 67,061 294,274 103,949 17,186

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Current ﬁnancial instruments at December 31, 2005 include: Assets • measurement at fair value of forward currency purchases and sales in place at December 31, 2005 for Euros 35,218 thousand. These are derivative transactions which, although used for hedging purposes, are not designated as such under IAS/IFRS. The fair value is determined by using the forward exchange rate at the balance sheet date; • measurement at fair value of the premiums on Convertible Bond Asset Swaps on Telecom Italia S.p.A. 2010 convertible bonds, Share Swap Transactions on Telecom Italia S.p.A. shares – Telecom Italia S.p.A. 2010 convertible bonds and call options on Telecom Italia shares, held by the subsidiary Pirelli Finance (Luxembourg) S.A. (Euros 31,843 thousand). Liabilities • measurement at fair value of forward currency purchases and sales in place at December 31, 2005 (Euros 61,274 thousand current and Euros 2,048 thousand non-current). These are derivative transactions which, although used for hedging purposes, are not designated as such under IAS/IFRS. The fair value is determined by using the forward exchange rate at the balance sheet date; • measurement at fair value of the put option granted to the shareholder banks of Olimpia under the shareholders’ agreements (Euros 233,000 thousand).

30. COMMITMENTS AND CONTINGENCIES

Personal guarantees

Sureties Pirelli & C. Real Estate S.p.A. provided sureties to guarantee loans made by credit institutions to associates for a total of Euros 68,149 thousand consisting of the shares of the associates pledged for an amount of Euros 66,909 thousand. Various sureties have also been provided mainly in reference to contract performance by the companies of the Pirelli & C. Real Estate S.p.A. group for a total of Euros 204,164 thousand.

Other guarantees Pirelli & C. Real Estate S.p.A. is committed to cover the proportionate share of any negative difference between the flows from rental income and interest expense due to the lender banks by Tiglio I S.r.l. and Tiglio II S.r.l. on their credit lines expiring in 2009. At the moment, on the basis of available information, the projected revenue flows are higher than the estimated interest expense. Pirelli & C. Real Estate S.p.A. is also committed, for a total of Euros 1,085 thousand, to proportionately cover the difference between the flows from rents and from interest expense of the indirect associate Ganimede S.r.l. (in liquidation); this commitment is in place until April 30, 2006. Guarantees have also been provided by certain companies of the Pirelli & C. Real Estate S.p.A. group to guarantee income for a total of Euros 3,584 thousand on the sale of the buildings for commercial use, for which it is believed that no further expenses will be incurred in the future. Pirelli & C. Real Estate S.p.A. also provided, for its commitments as part of the contribution of certain properties to the closed-end fund Pirelli RE Fund – Raissa Fondo Comune di Investimento Immobiliare and to the closed-end speculative fund Spazio Industriale Fondo Comune di Investimento Immobiliare Speculativo on the part of the Telecom Italia Group, guarantees for a maximum total of Euros 5,436 thousand in connection with the successful outcome of the transaction.

Commitments for purchases of ﬁxed assets

Commitments for the purchase of ﬁxed assets refer to the commitment to purchase a part of the buildings owned by Imser 60 S.r.l. for a total amount of Euros 320,000 thousand. The purchase price

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of these buildings is established by contract at about 20 percent of their market value. This option may be exercised by the counterpart up to May 31, 2022. Moreover, during 2005, the Pirelli & C. Real Estate group signed commitments for the purchase of certain buildings located in Berlin for an amount of Euros 87,316 thousand. The guarantees for an amount of Euros 72,500 thousand are no longer required as of January 2006 owing to the payment of the purchase price by P&K Real Estate GmbH.

There are also commitments for the purchase of property, plant and equipment already ordered by the Tyres Sector for an amount of Euros 99 million, mainly relating to the companies in Brazil, Romania and China.

Commitments for purchases of investments

Sales options held by third parties These commitments mainly refer to: • Euros 5,693 thousand for the prorata purchase commitment undertaken by Pirelli & C. Real Estate S.p.A. in favor of Cordusio Immobiliare S.r.l. in respect of the option to sell the shares held by the latter in Modus S.r.l. to the indirect associates Aida S.r.l. and M.S.M.C. Immobiliare 4 S.r.l.. Furthermore, as part of the Cordusio deal, Pirelli & C. Real Estate S.p.A. provided guarantees on behalf of the indirect associates M.S.M.C. Immobiliare 4 S.r.l. for Euros 9,438 thousand and Aida S.r.l. for Euros 18,421 thousand. • Euros 22,500 thousand for the purchase commitment undertaken by Pirelli & C. Real Estate S.p.A. in respect of the option to sell, exercisable starting from January 1, 2008, in favor of Morgan Stanley Real Estate Funds, with reference to the purchase of 52.63 percent of the investment in Servizi Immobiliari Banche SIB. S.p.A.. • Euros 3,512 thousand relating to the commitment to repurchase the investment held by Simest S.p.A. in the subsidiary Alexandria Tire Co (Egypt), expiring in June 2006.

Pirelli & C. Real Estate S.p.A. also signed a contract with the third-party shareholder of the subsidiary Pirelli & C. Real Estate Società di Gestione del Risparmio S.p.A. for an option to purchase, in favor of Pirelli & C. Real Estate S.p.A., as well as an option to sell, in favor of the third-party shareholder, 10 percent of the shares of that company. The contract provides that the exercise price should be equal to the market value at the exercise date as determined by a leading audit ﬁrm.

Put options given to third parties - the put options granted to the shareholders banks of Olimpia S.p.A., Banca Intesa S.p.A. and Unicredito Italiano S.p.A. (hereinafter, the “Banks”) under the shareholders’ agreement signed on September 14, 2001 and subsequently amended (“Banks’ Agreement”). These options can be exercised from September 2006, or before that date, in the case of irremediable dissent among the shareholders (so-called “Deadlock”) or in the case of withdrawal by Pirelli & C. from the Banks’ Agreement. Under this Agreement, the put options can be exercised by the Banks at a price equal to the value of the economic capital of Olimpia plus a premium (the “Price”). This Price shall be determined by the parties and shall not be less than the outlays made by the Banks (Floor) nor higher than such sum, less any dividends received, increased by an annual IRR, before income taxes, equal to 15 percent (Cap). The valuation of the put options – at Euros 584,680 thousand for each Bank – was carried out, for Euros 520,000 thousand of that amount, by reference to the outlays effected by the Banks (Floor). As for the remaining amount of Euros 64,680 thousand (outlays effected by each Bank for Olimpia’s capital increase in December 2003), the valuation was based – in accordance with what

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was agreed in one of the amendments to the Banks’ Agreement (specifically, the amendment dated December 16, 2003) – on the exercise price of the put on the shares that came to the Banks from the aforementioned capital increase, determined in an amount equal to the higher of Euros 3.53 and the weighted average official price recorded by the Telecom Italia shares in the 30 days of trading prior to the request of sale, multiplied by 18,322,946 shares. The put option, relating to the shares coming from the above capital increase, was accounted for in the financial statements as an investment with a contra-entry to liabilities, in accordance with IAS/IFRS, since the economic benefits relating to ownership of the investment in Olimpia were for the major part transferred immediately to Pirelli (Euros 130 million). As a result, Pirelli’s investment in Olimpia is indicated at 60.4 percent (the effective investment is equal to 57.7 percent). Liabilities are carried in the financial statements for Euros 233 million for the options granted to the banks, considered as a whole. - the put option granted to Edizione Finance International S.A./Edizione Holding S.p.A. (“Edizione”), under the shareholders’ agreement signed on August 7, 2001, and subsequently amended. This put option can be exercised in the case of a (I) deadlock situation among the shareholders, (II) withdrawal on the part of Pirelli & C. S.p.A. from the shareholders’ agreements and the occurrence of a substantial change in the controlling structure of Pirelli & C. S.p.A., (III) by which is meant the exercise by parties other than those currently holding the determining power to appoint the majority of the members of the management board, with a consequent potential modification of the strategic guidelines. The exercise price of the put option is equal, respectively, under the assumption (I) to the price equal to the value of the economic capital of Olimpia increased by a premium (the “Price”), in the case of (II) to the Price increased by an amount equal to 50 percent of the Price and in the case of (III) to the Price increased by an amount equal to 200 percent of the Price. In this case, however, there is no expectation of a Floor or Cap as in the Banks’ Agreement. - the irrevocable put option in favor of Marzotto S.p.A. for the transfer to Pirelli & C. Real Estate S.p.A. of the entire residual receivable for principal and interest due, at the date of December 31, 2005, by the same Marzotto S.p.A. from the associate Aree Urbane S.r.l. for amounts shown as loans from shareholders. Subject to the exercise of that option, a call option in favor of Pirelli & C. Real Estate S.p.A. can be exercised for the purchase of the investment held by Marzotto S.p.A. in Aree Urbane S.r.l. (32.5 percent).

Forward securities purchases

These refer to the commitment undertaken by Pirelli Finance (Luxembourg) S.A. for the forward purchase (expiration on November 23, 2006) of 200,000,000 Telecom Italia S.p.A. 2001-2010 convertible bonds signed with Credit Agricole Lazard Financial Products Bank (Euros 200,000 thousand) and the commitment for the forward purchase of 47,155,300 Telecom Italia S.p.A. shares (expiration date of December 2006) signed with JP Morgan for an amount of Euros 142,100 thousand.

*** Furthermore, - on the basis of the shareholders’ agreement between Hopa S.p.A. (Hopa), Pirelli & C. S.p.A., Edizione Finance S.A., Olimpia S.p.A. (“Olimpia”) and the Banks (in February 2003) (“Hopa Agreement”) - in the event of dissent over certain matters, such as investments, trading, loans or resolutions convening the extraordinary shareholders’ meeting (so-called “Deadlock”), or in the event of failure to renew the Hopa Agreement at expiration, Hopa shall have the right to obtain the spin-off of Olimpia, receiving a proportional share of the assets and liabilities (including the Telecom Italia shares) owned by Olimpia, except that the shareholders of Olimpia other than Hopa have the right to proceed to make a cash settlement (and, that is, to become the buyers, on a proportionate basis, unless other determined, of Hopa’s entire investment in Olimpia).

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Olimpia shall have the consequent right to obtain the spin-off of Holinvest S.p.A., receiving a proportional share of the assets and liabilities (including the Telecom Italia shares) owned by Holinvest S.p.A., except that Hopa shall have the right to proceed to make a cash settlement (and, that is, become the buyer of Olimpia’s investment in Holinvest). Hopa will also have the right to receive a premium which - in accordance with an agreement amending the Hopa Agreement signed on January 28, 2005 - was determined as an all-inclusive amount of Euros 208 million in the event the spin-offs occur as a result of a Deadlock or the Hopa Agreement is not renewed at its expiration date of May 8, 2006. The spin-offs cannot take place until 36 months have passed since the Hopa Agreement came into force (May 2006), unless extraordinary events occur of unusual severity (so-called “Accelerated Deadlock”), such as, for example, Olimpia reduces its investment ownership in Telecom Italia S.p.A. below a percentage existing as of the time of signing the Hopa Agreement, or a resolution is passed to merge Olimpia or Telecom Italia S.p.A. with companies other than those controlled directly or indirectly, or if certain ratios are not met by Olimpia: 1:1 debt to equity ratio. Under these assumptions, Hopa S.p.A. would have the right to obtain the execution of the spin-off of Olimpia at the earliest possible date and a premium provided by the Hopa Agreement and Olimpia would have the right to consequently obtain the spin-off of Holinvest S.p.A.. A liability of Euros 163 million is accounted for the ﬁnancial statements for this commitment.

31. REVENUES FROM SALES AND SERVICES

Revenues from sales and services for the year 2005 can be analyzed as follows:

(in thousands of euros) 2005 2004 Revenues from sales of products 3,967,530 3,365,523 Revenues from services 566,429 585,269 Revenues on construction contracts 11,710 16,157 4,545,669 3,966,949

32. OTHER INCOME

Other income amounts to Euros 283,612 thousand compared to Euros 276,312 thousand at December 31, 2004 and includes rent income, commissions, royalties, compensation, insurance refunds and other minor items. The item includes commissions for the use of the Pirelli brand (Euros 42,762 thousand) and the sale of the patents and brands for the part of the Cables and Systems activities sold during the year (Euros 20,000 thousand).

33. PERSONNEL COSTS

Personnel costs consist of the following:

(in thousands of euros) 2005 2004 Salaries and wages 767,302 730,756 Stock option costs 7,247 6,411 Social security costs 183,605 166,097 Leaving indemnity 16,576 16,844 Pension and similar 26,280 18,921 Other costs 19,890 14,897 Costs relating to pension funds 7,255 9,684 Costs relating to medical care plans 1,725 4,651 1,029,880 968,261

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For the amounts relating to pension funds, employees’ leaving indemnity and medical care plans recognized in the income statement, please refer to “Employee beneﬁt obligations” (Note 25) in the balance sheet.

34. AMORTIZATION, DEPRECIATION AND IMPAIRMENTS

Amortization, depreciation and impairments are as follows:

(in thousands of euros) 2005 2004 amortization of intangible assets 15,640 19,748 depreciation of property, plant and equipment 197,038 181,768 impairment of property, plant and equipment 3,026 6,942 215,704 208,458

35. OTHER EXPENSES

Other expenses amount to Euros 1,612,591 thousand (Euros 1,242,364 thousand at December 31, 2004). Details are as follows:

(in thousands of euros) 2005 2004 receivables writedown 9,808 10,749 other accruals 36,744 27,090 operating lease payments 6,403 5,574 rent and hires 56,095 43,902 EDP expenses 41,114 45,316 consulting fees 146,900 136,838 insurance 28,918 29,318 maintenance 90,352 88,943 selling expenses 255,858 203,310 cleaning expenses 34,806 29,882 contractual work expenses 32,138 32,309 traveling expenses 38,322 37,422 advertising expenses 145,270 111,250 ﬂuids and power 131,586 102,832 other 558,277 337,629 1,612,591 1,242,364

R&D expenses went from Euros 171 million in 2004 (4.3 percent of sales) to Euros 174 million in 2005 (3.8 percent of sales). They are entirely expensed to income. There are no development expenditures which meet the conditions for capitalization under IAS/IFRS.

36. FINANCIAL INCOME

Financial income is composed as follows:

(in thousands of euros) 2005 2004 Interest 68,736 87,329 Other ﬁnancial income 15,465 39,738 Gains on exchange 142,961 338,856 Gains on disposal of available-for-sale ﬁnancial assets 9,443 58,160 Gains on disposal of securities held for trading 11,705 - 248,310 524,083

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Gains on exchange include the adjustment of open items at the balance sheet date expressed in currencies other than the functional currency and the gains realized on closed positions.

37. FINANCIAL EXPENSES

Financial expenses are composed as follows:

(in thousands of euros) 2005 2004 Interest to associates 74 3,759 Bank interest 126,392 145,518 Other ﬁnancial expenses 39,222 96,438 Losses on exchange 146,416 351,173 Losses on disposal of available-for-sale ﬁnancial assets 1,552 66 Losses on the disposal of securities held for trading 26 - 313,682 596,954

Losses on exchange include the adjustment of open items at the balance sheet date expressed in currencies other than the functional currency and the losses realized on closed positions.

38. DIVIDENDS

Dividends primarily refer to those received from Telecom Italia S.p.A. (Euros 10,050 thousand), from Capitalia S.p.A. (Euros 3,355 thousand), from Mediobanca S.p.A. (Euros 6,777 thousand), from Fin. Priv. S.r.l. (Euros 937 thousand), from RCS MediaGroup S.p.A. (Euros 853 thousand), from Fondiaria (Euros 1,834 thousand) and from Milano Assicurazioni S.p.A. (Euros 1,558 thousand).

39. VALUATION OF FINANCIAL ASSETS

The valuation of ﬁnancial assets includes:

(in thousands of euros) 2005 2004 Impairment loss of available-for-sale ﬁnancial assets (22,391) (21,988) Measurement of securities held for trading at fair value 15,923 - Measurement of currency derivatives at fair value (19,640) 9,243 Measurement of other derivatives at fair value (63,961) - (90,069) (12,745)

The “impairment loss of available-for-sale ﬁnancial assets” includes the writedown of the investments in F.C. Internazionale Milano S.p.A. (Euros 15,000 thousand), G.I.M. – Generale Industrie Metallurgiche S.p.A. (Euros 3,220 thousand), Euroqube S.A. (Euros 2,185 thousand), GWS Photonics Inc (Euros 1,013 thousand) and Istituto Europeo di Oncologia S.r.l. (Euros 969 thousand).

The “measurement at fair value of securities held for trading” refers to the fair value adjustment at year-end of listed securities classified under IAS as financial assets at fair value through profit and loss.

The “measurement at fair value of other derivative instruments” relates to the premiums on Convertible Bond Asset Swaps on Telecom Italia S.p.A. 2010 convertible bonds, Share Swap Transactions on Telecom Italia S.p.A. shares, Telecom Italia S.p.A. 2010 convertible bonds and call options on Telecom Italia shares, held by the subsidiary Pirelli Finance (Luxembourg) S.A..

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40. SHARE OF EARNINGS (LOSSES) OF ASSOCIATES AND JOINT VENTURES

The share of earnings (losses) of associates and joint ventures valued by the equity method amounts to earnings of Euros 251,366 thousand (Euros 99,768 thousand in 2004). The item mainly includes the earnings of Olimpia of Euros 152,486 thousand (Euros 6,572 thousand in 2004) and the earnings of the equity investments in the real estate sector valued by the equity method (Pirelli & C. Real Estate group) of Euros 98,787 thousand (Euros 93,763 thousand in 2004).

41. INCOME TAXES

Income taxes for the period are composed as follows:

(in thousands of euros) 2005 2004 current income taxes 122,745 111,350 deferred income taxes 5,739 (24,272) 128,484 87,078

The reconciliation between theoretical and effective taxes is as follows:

(in thousands of euros) Income before taxes 477,538 Share of earnings of associates and joint ventures (251,366) Total taxable income 226,172 Theoretical income taxes 103,392 Main reasons for differences between theoretical and effective income taxes: Non-taxable income (139,653) Non-deductible costs 156,213 Utilization of tax losses carryforward (16,860) Unrecognized deferred taxes 36,525 Other (11,133) Effective income taxes 128,484

The percentage of the theoretical tax charge of the Group for 2005 is equal to 45.7 percent and is higher than the average nominal rate existing in the countries in which the Group operates because of the presence of tax losses carryforward in countries with a lower-than-average tax rate and largely connected with the disposal of the Energy and Telecom Cables and Systems activities. The nominal tax rates in the countries in which the major companies of the Group operate are as follows:

Europe: North America: Italy 37.25% USA 40% Spain 35% South America: Germany 41.4% Argentina 35% United Kingdom 30% Brazil 34% Turkey 30% Venezuela 34%

42. INCOME FROM DISCONTINUED OPERATIONS

On July 28, 2005, after obtaining approval from the relevant authorities, the June 1, 2005 agreement was executed between Pirelli & C. S.p.A. and Goldman Sachs Capital Partners for the purchase of Pirelli’s Energy and Telecom Cables and Systems activities by Goldman Sachs Capital Partners.

These activities were valued for a total amount of approximately Euros 1.3 billion inclusive of the intellectual property rights and a license for the use of the Pirelli trademark for two years.

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Pirelli was also assigned a warrant, expiring on January 28, 2016, entitling it to obtain economic beneﬁts equivalent to 5 percent of the capital of the vehicle company used by Goldman Sachs Capital Partners for the transaction; this will allow Pirelli to take advantage of any opportunities arising from the future growth of the business.

Economic benefits could flow to under certain circumstances such as, for example: - the listing of the company - change in control of the company - wind-up and liquidation of the company This was not measured in the financial statements.

The agreement provides that the pension funds of the affiliates in the United Kingdom will be carried by Pirelli, with an effect of approximately Euros 98 million.

In economic terms, on consolidation, taking into account the transaction costs, the accruals for the price adjustment still under discussion and for guarantees provided, for a total of approximately Euros 80 million, the impact is a gain of Euros 27 million, of which Euros 10 million relates to the license for use of the trademark.

The “income from discontinued operations” includes the net income at June 30, 2005 of the discontinued operations (Euros 32,773 thousand) and the impact from the disposal (Euros 17,123 thousand), for a total of Euros 49,896 thousand.

The analysis of “income from discontinued operations” is as follows:

(in thousands of euros) Discontinued operations 12/31/2005 12/31/2004 Revenues from sales and services 1,791,298 3,378,680 Other income 20,089 128,395 Changes in inventories of work in process, semifinished and finished products 21,700 (10,857) Raw materials and consumables used (1,070,772) (2,046,259) Personnel costs (263,045) (522,900) Amortization and depreciation (45,254) (97,664) Other expenses (381,617) (699,019) Increase in property, plant and equipment from internal work 139 146 Operating profit 72,538 130,523 Income before income taxes 49,006 95,617 Income taxes (16,233) (8,449) Income from discontinued operations 32,773 87,168 Impact of the disposal 17,123 - TOTAL INCOME FROM DISCONTINUED OPERATIONS 49,896 87,168

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43. EARNINGS PER SHARE

Basic earnings per share is calculated by dividing the income attributable to the parent company (adjusted for the minimum dividends due to savings shares) by the weighted average number of outstanding ordinary shares during the year, excluding ordinary treasury shares.

December December 31, 2005 31, 2004 Income from continuing operations for the year attributable to the parent company 278 167 Income attributable to savings shares considering the extra 2% (8) (7) Adjusted income from continuing operations for the year attributable to the parent company 270 160 Weighted average number of outstanding ordinary shares (in thousands) 4,861,900 3,324,027 Basic earnings per ordinary share from continuing operations (in euros per thousand of shares) 55.53 48.13

December December 31, 2005 31, 2004 Income from discontinued operations for the year attributable to the parent company 49 84 Income attributable to savings shares considering the extra 2% (1) 3 Adjusted income from discontinued operations for the year attributable to the parent company 48 87 Weighted average number of outstanding ordinary shares (in thousands) 4,861,900 3,323,927 Basic earnings per ordinary share from discontinued operations (in euros per thousand of shares) 10.08 25.27

Diluted earnings per share is calculated by adjusting the weighted average number of outstanding ordinary shares to assume conversion of all dilutive potential ordinary shares. The company has two classes of dilutive potential ordinary shares: warrants and stock options. The warrants are assumed to have been exercised. Since the price to exercise the stock options is higher than market value, the stock options are assumed not to have been exercised.

December December 31, 2005 31, 2004 Income from continuing operations for the year attributable to the parent company 278 167 Income attributable to savings shares considering the extra 2% (8) (7) Adjusted income from continuing operations for the year attributable to the parent company 270 160 Weighted average number of outstanding ordinary shares (in thousands) 4,861,900 3,324,027 Adjustment for the issue of warrants 18,963 171,268 Adjusted weighted average number of outstanding ordinary shares (in thousands) 4,880,863 3,495,295 Diluted earnings per ordinary share from continuing operations (in euros per thousand of shares) 55.32 45.78

December December 31, 2005 31, 2004 Income from discontinued operations for the year attributable to the parent company 49 84 Weighted average number of outstanding ordinary shares (in thousands) 4,861,900 3,324,027 Adjustment for the issue of warrants 18,963 171,268 Adjusted weighted average number of outstanding ordinary shares (in thousands) 4,880,863 3,495,295 Diluted earnings per ordinary share from discontinued operations (in euros per thousand of shares) 10.04 24.03

44. DIVIDENDS PER SHARE

The company paid dividends of Euros 108,737 thousand on the ordinary shares (Euros 0.0210 per share) and Euros 4,905 thousand on the savings shares (Euros 0.0364 per share).

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45. HYPERINFLATION

The subsidiaries with headquarters in Turkey and Venezuela use inflation account to prepare their consolidated financial statements at December 31, 2005. In accordance with the Group accounting principles with regard to the criteria for starting and discontinuing use of inflation accounting, Turkey will cease to use inflation accounting in 2006. The gains and losses on the net monetary position are recognized in the income statement under “Other expenses” (Note 35) for Euros 125 thousand (Euros 2,624 thousand in 2004) for the part relating to the monetary adjustment relative to non-financial factors and under “Financial income” (Note 36) for Euros 56 thousand (Euros 87 thousand in 2004) and under “Financial expenses” (Note 37) for Euros 2,899 thousand (Euros 4,977 thousand in 2004) for the part relative to financial factors.

46. RELATED PARTY DISCLOSURES

Related party transactions, including intragroup transactions, are neither unusual nor exceptional but fall under the normal business operations of the Group companies. Such transactions, when not concluded at standard conditions or dictated by speciﬁc laws, are in any case conducted at arm’s length.

The economic and balance sheet effect of transactions with related parties on the consolidated ﬁnancial statements of the Pirelli Group at December 31, 2005 are as follows:

Transactions with associates:

Revenues for goods and services 118 These mainly refer to the supply of services to the associates of Pirelli & C. Real Estate Costs for goods and services 6 Financial income 13 Trade receivables and other receivables 69 These mainly refer to receivables from the associates of Pirelli & C. Real Estate Financial receivables 262 These refer to receivables from the associates of Pirelli & C. Real Estate Trade payables and other payables 7 These mainly refer to payables to the associates of Pirelli & C. Real Estate

Transactions with parties related to Pirelli through directors (Telecom Italia Gropu, Camﬁn Group and F.C. Internazionale Milano S.p.A.):

Revenues for goods and services 266 These refer to services rendered by Pirelli & C S.p.A., Shared Service Center s.c.r.l. and Pirelli & C. Real Estate S.p.A. to the Telecom Italia Group (Euro 259 million), services rendered by Pirelli Ambiente Tecnologie S.p.A. to the Camfin Group (Euro 4 million) and services rendered by Polo Viaggi S.p.A. to F.C. Internazionale Milano S.p.A. (Euro 3 million) Costs for goods and services 86 These refer to telephone, computer and power services by the Telecom Italia Group (Euros 32 million), the supply of natural gas by the Camfin Group (Euros 47 million) and costs for the sponsorship of F.C. Internazionale Milano S.p.A. (Euros 7 million) Trade receivables and other receivables 56 These refer to receivables for the supply of the above services (to the Telecom Italia Group for Euros 52 million, to the Camfin Group Euro 2 million and to F.C. Internazionale Milano S.p.A. Euro 2 million) Trade payables and other payables 16 These refer to payables for the supply of the above services (to the Telecom Italia Group for Euros 6 million, the Camfin Group for Euros 9 million and F.C. Internazionale Milano S.p.A. for Euros 1 million)

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Beneﬁts to executives with key responsibilities in the company

Executives with key responsibilities in the company, that is, those individual who have the power and the responsibility, directly or indirectly, to plan, direct and control the operations of Pirelli & C. S.p.A., including the directors are as follows:

Marco Tronchetti Provera Chairman Alberto Pirelli Deputy Chairman Carlo Alessandro Puri Negri Deputy Chairman Carlo Buora Managing Director Luciano Gobbi Director Claudio De Conto Director Francesco Gori Director

At December 31, 2005, the compensation to which the executives with key responsibilities are entitled amount to Euros 16,687 thousand (Euros 18,465 thousand at December 31, 2004).

47. SIGNIFICANT SUBSEQUENT EVENTS

• On February 6, 2006, Olimpia S.p.A. and the shareholders Pirelli & C. S.p.A., Edizione Finance International S.A., Edizione Holding S.p.A., Banca Intesa S.p.A. and Unicredito Italiano S.p.A. sent Hopa S.p.A. the statement rescinding from the agreement signed among the parties in 2003. Therefore, at the expiration date (May 8, 2006), this agreement will not be renewed.

• On February 14, 2006, the Pirelli & C. S.p.A. board of directors voted to undertake a course of action that would lead to the best way of increasing the value of the tyres division (“Pirelli Tyres”), including its listing on the Electronic Trading Market of Borsa Italiana, with the understanding that Pirelli & C. S.p.A. would still hold the majority of the shares of Pirelli Tyres. The performance of the most important markets and segments in which the Tyres Sector of the Group operates continues to show a favorable economic trend, especially in the premium range of products where the Pirelli brand enjoys the acknowledged position of world leadership. This constitutes the premise for a further growth by Pirelli Tyres over and above that posted in the last few years. In addition to the project to increase the value of Pirelli Tyres, the board of directors also approved a plan to further concentrate resources in the strategic businesses of the Group by disposing of ﬁnancial equity investments for an equivalent amount of about Euros 400 million at present value, equal to about a half of this portfolio. The strengthening of the economic and equity position as a result of these transactions will allow the Group to fully focus on its various core businesses.

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extremely low cost. The competitive advantage derives from the fact that this system uses integration technology similar to that used in the ﬁeld of microelectronics, making it possible to mass-produce the triplexer on silicon wafers using a highly automated process. In the United States, the diffusion of optical ﬁber to the home is growing rapidly. Currently the market is worth several billion dollars a year and is destined to expand further in the future.

• On January 12, 2006, after winning the bid for the purchase of a residential property portfolio in Berlin at the price of Euros 72.5 million, which ended on October 14, 2005, ownership was formally transferred to Tizian Wohnen 1 and Tizian Wohnen 2 – holdings of the subsidiary P&K Real Estate, in which Pirelli RE has a 60 percent stake in share capital. The properties purchased were part of the Corpus Immobiliengruppe property portfolio.

• On January 30, 2006, the board of directors of Pirelli RE SGR approved the interim management accounts at December 31, 2005 of Tecla Fondo Uffici, Berenice Fondo Uffici and Olinda Fondo Shops and passed resolutions on the following: - for Tecla Fondo Uffici, for the second half of 2005, the payment of dividends of Euros 21.92 per share (equal to 80 percent of distributable income) with a semiannual yield of 4.6 percent. Considering the full-year 2005, the dividend yield is equal to 9.3 percent, above the annual target dividend yield of 5.5 percent indicated at the time of placement. Also taking into account the previous years, the Fund has had an average annual yield of 8.6 percent on dividends paid alone since its placement; - for Olinda Fondo Shops, for the second half of 2005, the payment of dividends of Euros 19.54 per share (equal to 80 percent of distributable income) with a semiannual yield of 3.9 percent. Considering the full-year 2005, the dividend yield is equal to 7.3 percent, above the annual target dividend yield of 5.5 percent indicated at the time of placement. Also taking into account the previous years, the Fund has had an average annual yield of 6.7 percent on dividends paid alone since its placement; - for Berenice Fondo Uffici, with a mid-July 2005 placement, for the second half of 2005, the payment of dividends of Euros 15.05 per share (equal to 86 percent of distributable income) with a yield of 3 percent which corresponds to an annualized yield of 6.3 percent, above the annual target dividend yield of 4.75 percent indicated at the time of placement.

With regard to the closed-end unlisted reserved property investment funds, the annual dividend yield for Cloe Fondo Uffici was 15.3 percent, above the target dividend yield of 9.7 percent indicated at placement. For Teodora, operating only since mid-October 2005, the annualized dividend yield is 10.3 percent, above the target dividend yield of 7.5 percent indicated at the time of placement. For the subscribers of Clarice Light Industrial, the annual dividend yield is in line with the target yield of 9 percent indicated at the time of placement.

• On February 20, 2006, Pirelli RE and Merrill Lynch signed a binding agreement to set up a joint venture (with a 35 percent stake by Pirelli RE and a 65 percent stake by Merrill Lynch) for the investment of Euros 1.5 billion in the hotel tourism sector in Italy over the next ﬁve years.

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48. OTHER INFORMATION

Exchange rates

The main exchange rates used for consolidation are as follows:

(local currency against euros) Year-end Change Average Change 12/31/2005 12/31/2004 in % 2005 2004 in % Europe British pound 0.6853 0.7051 (2.80%) 0.6838 0.6787 0.75% Swiss franc 1.5551 1.5429 0.79% 1.5482 1.5438 0.29% Slovakian koruna 37.8800 38.7450 (2.23%) 38.6031 40.0218 (3.54%) North America American dollar 1.1797 1.3621 (13.39%) 1.2444 1.2439 0.04% Canadian dollar 1.3725 1.6416 (16.39%) 1.5092 1.6168 (6.65%) South America Brazilian real 2.7613 3,6156 (23.63%) 3.0289 3.6393 (16.77%) Venezuela Bolivar 2,536.3550 2,615.2320 (3.02%) 2,628.8349 2,321.6896 13.23% Argentinean peso 3.5769 4.0577 (11.85%) 3.6377 3.6597 (0.60%) Oceania Australian dollar 1.6109 1.7459 (7.73%) 1.6320 1.6905 (3.46%) Asia Chinese renminbi 9.5181 11.2734 (15.57%) 10.1915 10.2955 (1.01%) Singapore dollar 1.9628 2.2262 (11.83%) 2.0707 2.1016 (1.47%) Africa Egyptian pound 6.7567 8.2543 (18.14%) 7.1891 7.7001 (6.64%)

Net ﬁnancial position

Although it is a non-IAS/IFRS ﬁnancial measure, the composition of the net ﬁnancial position is provided below for purposes of continuity of information with previous periods:

(in millions of euros) Net financial position 12/31/2005 12/31/2004 (*) - Borrowings from banks and other financial companies - current 556 755 - Financial accrued liabilities and deferred income - current 62 49 - Cash and cash equivalents (300) (509) - Financial assets held for trading (180) (284) - Financial receivables - current (27) (54) - Financial accrued income and prepaid expenses - current (12) (17) Net short-term (liquidity)/debt 99 (60) - Borrowings from banks and other financial companies - non-current 1,551 1,933 - Financial receivables - non-current (468) (267) - Financial accrued income and prepaid expenses - non-current (5) (1) - Other securities - (4) Net medium/long-term (liquidity)/debt 1,078 1,661 Total net financial (liquidity)/debt position 1,177 1,601 (*) Inclusive of discontinued operations of Euros 456 million.

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List of investments

Companies consolidated line-by-line

Company Business Headquarters Share Capital Percentage Percen- Held by ownership tage of vote Europe Austria Pirelli Gesellschaft mbH Tyre Vienna Euro 726,728 100.00% Pirelli Tyre (Europe) S.A. Belgium Pirelli Tyres Belux S.A. Tyre Brussels Euro 700,000 100.00% Pirelli Tyre (Europe) S.A. France Pirelli & C. Ambiente Gecam France S.a.S Enviroment Paris Euro 450,000 83.34% Tecnologie S.p.A. Pneus Pirelli S.a.S Tyre Roissy en France Euro 1,515,858 100.00% Pirelli Tyre (Europe) S.A. Germany Deutsche Pirelli Reifen Holding Gmbh Financial Breuberg/Odenwald Euro 7,694,943 100.00% Pirelli Tyre Holding N.V. Drahtcord Saar Geschaeftsfuehrungs Gmbh Tyre Merzig D. M. 60,000 50.00% Pirelli Deutschland Gmbh Drahtcord Saar GmbH & Co. K.G. Tyre Merzig D. M. 30,000,000 50.00% Pirelli Deutschland Gmbh Deutsche Pirelli Reifen Driver Fleet Solution Gmbh Tyre Breuberg/Odenwald Euro 26,000 100.00% Holding Gmbh P&K Real Estate Gmbh Real Estate Berlin Euro 35,000 60.00% Pirelli & C. Real Estate S.p.A. Deutsche Pirelli Reifen Pirelli Deutschland Gmbh Tyre Breuberg/Odenwald Euro 26,334,100 100.00% Holding Gmbh Deutsche Pirelli Reifen Pirelli Personal Service Gmbh Tyre Breuberg/Odenwald Euro 25,000 100.00% Holding Gmbh Deutsche Pirelli Reifen PK Grundstueckverwaltung Gmbh Tyre Hoechst/Odenwald Euro 26,000 100.00% Holding Gmbh Deutsche Pirelli Reifen Pneumobil Gmbh Tyre Breuberg/Odenwald Euro 259,225 100.00% Holding Gmbh Resident Berlin 1 P&K Gmbh Real Estate Berlin Euro 125,000 100.00% P&K Real Estate Gmbh Resident Berlin Zwei P&K Gmbh Real Estate Berlin Euro 100,000 100.00% P&K Real Estate Gmbh Greece Elastika Pirelli S.A. Tyre Athens Euro 785,370 99.90% Pirelli Tyre (Europe) S.A. 0.10% Pirelli Pneumatici S.p.A. Pirelli Hellas S.A. (in liquidation) Tyre Athens US $ 22,050,000 79.86% Pirelli Tyre Holding N.V. Hungary Pirelli Hungary Tyre Trading and Services Ltd Tyre Budapest Hun. Forint/000 3,000 100.00% Pirelli Tyre (Europe) S.A. Ireland Pirelli Finance Pirelli Reinsurance Company Ltd Reinsurance Dublin US $ 7,150,000 100.00% (Luxembourg) S.A. Italy Acquario S.r.l. (in liquidation) Real Estate Genoa Euro 255,000 100.00% Pirelli & C. Real Estate S.p.A. Alfa S.r.l. Real Estate Milan Euro 2,600,000 100.00% Pirelli & C. Real Estate S.p.A. Altoﬁm S.r.l. Real Estate Milan Euro 78,000 100.00% Pirelli & C. S.p.A. Asset Management NPL S.r.l. Real Estate Milan Euro 10,000 75.00% Pirelli & C. Real Estate S.p.A. Partecipazioni Beta S.r.l. Real Estate Milan Euro 26,000 100.00% Real Estate S.p.A. Botticino S.r.l. Real Estate Milan Euro 10,000 100.00% Pirelli & C. Real Estate S.p.A. Pirelli & C. Real Estate Casaclick S.p.A. Real Estate Milan Euro 299,000 100.00% Agency S.p.A. Centrale Immobiliare S.p.A. Real Estate Milan Euro 5,200,000 100.00% Pirelli & C. Real Estate S.p.A. Centro Servizi Amministrativi Pirelli S.r.l. Services Milan Euro 51,000 100.00% Pirelli & C. S.p.A. Partecipazioni CFT Finanziaria S.p.A. Real Estate Florence Euro 10,010,000 100.00% Real Estate S.p.A. Pirelli & C. Real Estate Project Consorzio Stabile Pirelli RE Servizi Real Estate Milan Euro 200,000 50.00% Management S.p.A. Pirelli & C. Real Estate Facility 40.00% Management S.p.A. 10.00% Somogi S.r.l.

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Company Business Headquarters Share Capital Percentage Percen- Held by ownership tage of vote Driver Italia S.p.A. Commercial Milan Euro 200,000 59.39% Pirelli Pneumatici S.p.A. Edilnord Gestioni S.p.A. Real Estate Milan Euro 517,000 100.00% Pirelli & C. Real Estate S.p.A. Elle Uno Società Consortile a.r.l. Real Estate Milan Euro 100,000 60.00% Edilnord Gestioni S.p.A. Erato Finance S.r.l. Real Estate Milan Euro 600,000 53.85% Pirelli & C. Real Estate S.p.A. Esedra S.r.l. Real Estate Milan Euro 2,376,234 55.00% Pirelli & C. Real Estate S.p.A. Pirelli & C. Real Estate FIM - Fabbrica Italiana di Mediazione S.r.l. Real Estate Milan Euro 100,000 100.00% Agency S.p.A. Golfo Aranci S.p.A. - Società di trasformazione Urbana Real Estate Milan Euro 1,000,000 50.09% Pirelli & C. Real Estate S.p.A. Pirelli & C. Real Estate Real Estate Milan 1.20% Project Management S.p.A. Real Estate Milan 5.00% Centrale Immobiliare S.p.A. Iniziative Immobiliari 3 S.r.l. (before Pirelli Submarine Telecom Systems Italia S.p.A.) Real Estate Milan Euro 10,000 100.00% Iniziative Immobiliari 3 B.V. Lambda S.r.l. Real Estate Milan Euro 578,760 100.00% Pirelli & C. Real Estate S.p.A. Telecom- Pirelli Broadband Maristel S.p.A. munications Milan Euro 1,020,000 100.00% Solutions S.p.A. NewCo RE 1 S.r.l. Real Estate Milan Euro 30,000 100.00% Pirelli & C. Real Estate S.p.A. NewCo RE 2 S.r.l. Real Estate Milan Euro 10,000 100.00% Pirelli & C. Real Estate S.p.A. NewCo RE 4 S.r.l. Real Estate Milan Euro 10,000 100.00% Pirelli & C. Real Estate S.p.A. NewCo RE 5 S.r.l. Real Estate Milan Euro 40,000 100.00% Pirelli & C. Real Estate S.p.A. NewCo RE 6 S.r.l. Real Estate Milan Euro 40,000 100.00% Pirelli & C. Real Estate S.p.A. NewCo RE 7 S.r.l. Real Estate Milan Euro 40,000 100.00% Pirelli & C. Real Estate S.p.A. NewCo RE 8 S.r.l. Real Estate Milan Euro 40,000 100.00% Pirelli & C. Real Estate S.p.A. NewCo RE 9 S.r.l. Real Estate Milan Euro 40,000 100.00% Pirelli & C. Real Estate S.p.A. Pirelli & C. Real Estate Facility P.I.T. - Promozione Imprese e Territorio S.c.r.l. Real Estate Pozzuoli (Na) Euro 25,823 100.00% Management S.p.A. Parcheggi Bicocca S.r.l. Real Estate Milan Euro 1,500,000 75.00% Pirelli & C. Real Estate S.p.A. Partecipazioni Real Estate S.p.A. Real Estate Milan Euro 1,360,280 100.00% Pirelli & C. Real Estate S.p.A. PBS S.C.a.r.l. Real Estate Milan Euro 100,000 60.00% Edilnord Gestioni S.p.A. Pirelli & C. Ambiente Pirelli & C. Ambiente S.p.A. Enviroment Milan Euro 3,060,000 100.00% Holding S.p.A. Pirelli & C. Ambiente Boniﬁche S.r.l. Pirelli & C. Ambiente (before Progetto Ambiente Gamma S.r.l.) Enviroment Milan Euro 155,700 100.00% Holding S.p.A. Pirelli & C. Ambiente Holding S.p.A. Enviroment Milan Euro 23,120,000 51.00% Pirelli & C. S.p.A. Pirelli & C. Ambiente Pirelli & C. Ambiente Tecnologie S.p.A. Enviroment Milan Euro 2,080,000 100.00% Holding S.p.A. Pirelli & C. Opere Generali S.p.A. Real Estate Milan Euro 104,000 100.00% Pirelli & C. Real Estate S.p.A. Pirelli & C. Real Estate Agency S.p.A. Real Estate Milan Euro 832,000 100.00% Pirelli & C. Real Estate S.p.A. Pirelli & C. Real Estate Facility Pirelli & C. Real Estate Energy S.p.A. Real Estate Milan Euro 120,000 100.00% Management S.p.A. Pirelli & C. Real Estate Facility Management S.p.A. Real Estate Milan Euro 5,561,000 100.00% Pirelli & C. Real Estate S.p.A. Pirelli & C. Real Estate Franchising Holding S.r.l. Real Estate Milan Euro 120,000 70.00% Pirelli & C. Real Estate S.p.A. Pirelli & C. Real Estate Pirelli & C. Real Estate Franchising S.p.A Real Estate Milan Euro 500,000 100.00% Franchising Holding S.r.l. Pirelli & C. Real Estate Franchising Servizi Finanziari S.r.l. (before Pirelli & C. Real Estate Pirelli & C. Real Estate Franchising Agenzia Assicurativa S.r.l.) Real Estate Milan Euro 10,000 100.00% Franchising Holding S.r.l. Pirelli & C. Real Estate Opportunities Società di Gestione del Risparmio S.p.A. (before Pirelli & C. Real Estate Società di Gestione del Risparmio S.p.A. Private) Real Estate Milan Euro 1,000,000 100.00% Pirelli & C. Real Estate S.p.A. Pirelli & C. Real Estate Project Management S.p.A. Real Estate Milan Euro 520,000 100.00% Pirelli & C. Real Estate S.p.A.

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Company Business Headquarters Share Capital Percentage Percen- Held by ownership tage of vote Pirelli & C. Real Estate Property Management S.p.A. Real Estate Milan Euro 114,400 100.00% Pirelli & C. Real Estate S.p.A. Pirelli & C. Real Estate S.p.A. Real Estate Milan Euro 21,037,491 50.93% Pirelli & C. S.p.A. 4.06%0.00% Pirelli & C. Real Estate S.p.A. Partecipazioni 0.17%0.00% Real Estate S.p.A. Pirelli & C. Real Estate Società di Gestione del Risparmio S.p.A. Real Estate Milan Euro 23,725,000 90.00% Pirelli & C. Real Estate S.p.A. Telecom- Pirelli Broadband Solutions S.p.A. munications Milan Euro 10,120,000 100.00% Pirelli & C. S.p.A. Pirelli Cultura S.p.A. Sundry Milan Euro 1,000,000 100.00% Pirelli & C. S.p.A. Research and Pirelli Labs S.p.A. Development Milan Euro 10,000,000 100.00% Pirelli & C. S.p.A. Pirelli Nastri Tecnici S.p.A. (in liquidation) Sundry Milan Euro 384,642 100.00% Pirelli & C. S.p.A. Pirelli Pneumatici S.p.A. Tyre Milan Euro 256,820,000 100.00% Pirelli Tyre Holding N.V. Pirelli Servizi Finanziari S.p.A. Financial Milan Euro 1,976,000 100.00% Pirelli & C. S.p.A. Polo Viaggi S.r.l. Travel Agency Milan Euro 46,800 100.00% Pirelli & C. S.p.A. Iniziative Immobiliari 3 S.r.l. (before Pirelli Submarine Portolegno S.a.s. di Iniziative Immobiliari 3 S.r.l. Real Estate Portogruaro (Ve) Euro 39,520 100.00% Telecom Systems Italia S.p.A.) Progetto Bicocca Università S.r.l. Real Estate Milan Euro 115,742 50.50% Pirelli & C. Real Estate S.p.A. Progetto Salute Bollate S.r.l. Real Estate Milan Euro 100,000 100.00% Pirelli & C. Real Estate S.p.A. Partecipazioni Repeg Italian Finance S.r.l. Real Estate Milan Euro 500,000 100.00% Real Estate S.p.A. Rofau S.r.l. Real Estate Milan Euro 10,000 100.00% Altoﬁm S.r.l. Servizi Amministrativi Real Estate S.p.A. Real Estate Milan Euro 520,000 100.00% Pirelli & C. Real Estate S.p.A. Servizi Aziendali Pirelli S.C.p.A. Services Milan Euro 104,000 95.00% Pirelli & C. S.p.A. 2.00% Pirelli Pneumatici S.p.A. 1.00% Polo Viaggi S.r.l. 2.00% Pirelli & C. Real Estate S.p.A. Information Shared Service Center s.c.r.l. Systems Milan Euro 1,756,612 50.00% Pirelli & C. S.p.A. Pirelli & C. Real Estate Facility Somogi S.r.l. Real Estate Milan Euro 90,000 100.00% Management S.p.A. Partecipazioni Vindex S.r.l. Real Estate Brescia Euro 12,000 32.00% Real Estate S.p.A. 37.00% CFT Finanziaria S.p.A. Luxembourg Pirelli Finance (Luxembourg) S.A. Financial Luxembourg Euro 270,228,168 100.00% Pirelli & C. S.p.A. Poland Driver Polska Sp.ZO.O. Tyre Warsaw Pol. Zloty/mil. 100,000 73.50% Pirelli Polska Sp.ZO.O. Pirelli Polska Sp.ZO.O. Tyre Warsaw Pol. Zloty/mil. 625,771 100.00% Pirelli Tyre (Europe) S.A. Romania S.C. Cord Romania S.R.L. Tyre Slatina Rom. Leu/000 24,990,100 80.00% Pirelli Tyre Holding N.V. S.C. Pirelli Tyres Romania S.R.L. Tyre Slatina Rom. Leu/000 77,169,800 95.00% Pirelli Tyre Holding N.V. 5.00% Pirelli Pneumatici S.p.A. Russia OOO Pirelli Tyre Russia Commercial Moscow Russian Rouble 950,000 95.00% Pirelli Tyre (Europe) S.A. 5.00% Pirelli Tyre Holding N.V. Slovakia Pirelli Slovakia S.R.O. Tyre Bratislava Slov. Koruna 200,000 100.00% Pirelli Tyre (Europe) S.A. Spain Euro Driver Car S.L. Tyre Barcelona Euro 600,000 25.00% Pirelli Neumaticos S.A. 26.00% Proneus S.L. Omnia Motor S.A. Tyre Barcelona Euro 1,502,530 100.00% Pirelli Neumaticos S.A. Pirelli Neumaticos S.A. Tyre Barcelona Euro 45,075,908 100.00% Pirelli Tyre Holding N.V. Proneus S.L. Tyre Barcelona Euro 3,005 51.00% Pirelli Neumaticos S.A.

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Company Business Headquarters Share Capital Percentage Percen- Held by ownership tage of vote Sweden Pirelli Tyre Nordic A.B. Tyre Bromma Swed. Krona 950,000 100.00% Pirelli Tyre (Europe) S.A. Switzerland Agom S.A. Tyre Conthey Swiss Franc 50,000 80.00% Pirelli Tyre (Europe) S.A. Agom S.A. Bioggio Tyre Bioggio Swiss Franc 590,000 100.00% Pirelli Tyre (Europe) S.A. Pirelli Société de Services S.a.r.l. Financial Basel Swiss Franc 50,000 100.00% Pirelli Société Générale S.A. Pirelli Société Générale S.A. Financial Basel Swiss Franc 28,000,000 100.00% Pirelli & C. S.p.A. Pirelli Tyre (Europe) S.A. Tyre Basel Swiss Franc 1,000,000 100.00% Pirelli Tyre Holding N.V. The Netherlands Iniziative immobiliari 3 B.V. (before Pirelli Submarine Telecom Systems Holding B.V.) Real Estate Amsterdam Euro 4,500,000 100.00% Pirelli & C. Real Estate S.p.A. Pirelli China Tyre N.V. Tyre Heinenoord Euro 8,045,000 100.00% Pirelli Tyre Holding N.V. Tyre Holding Pirelli Tyre Holding N.V. Company Heinenoord Euro 250,000,000 100.00% Pirelli & C. S.p.A. Pirelli Tyres Nederland B.V. Tyre Heinenoord Euro 18,152 100.00% Pirelli Tyre (Europe) S.A. Sipir Finance N.V. Financial Heinenoord Euro 13,021,222 100.00% Pirelli & C. S.p.A. Turkey Celikord A.S. Tyre Istanbul Turk. Lira/mil. 29,000,000 50.733% Pirelli Tyre Holding N.V. 0.27% Pirelli Pneumatici S.p.A. Turk-Pirelli Lastikleri A.S. Tyre Istanbul Turk. Lira/mil. 140,000,000 62.90% Pirelli Tyre Holding N.V. 0.15% Pirelli Pneumatici S.p.A. United Kingdom Central Tyre Ltd Tyre London British Pound 100,000 100.00% Pirelli UK Tyres Ltd Courier Tyre Company Ltd Tyre London British Pound 10,000 100.00% Pirelli UK Tyres Ltd CPK Auto Products Ltd Tyre London British Pound 10,000 100.00% Pirelli UK Tyres Ltd CTC 1994 Ltd Tyre London British Pound 984 100.00% Central Tyre Ltd Pirelli Finance Pirelli International Ltd Financial London Euro 250,000,000 100.00% (Luxembourg) S.A. Pirelli Tyres Ltd Tyre London British Pound 16,000,000 100.00% Pirelli UK Tyres Ltd Pirelli UK Finance Ltd Financial London British Pound 6,969,280 100.00% Pirelli UK Ltd "C" Tyre Holding Pirelli UK Ltd "A" Company London British Pound 85,535,300 100.00% Pirelli Tyre Holding N.V. Pirelli UK Ltd "C" Finance Holding London British Pound 11,625,978 100.00% Pirelli & C. S.p.A. Company Pirelli UK Tyres Ltd Tyre London British Pound 85,000,000 100.00% Pirelli UK Ltd "A"

North America Canada Frederic Town Pirelli Tire Inc. Tyre (New Brunswick) Can. $ 6,000,000 100.00% Pirelli Tyre (Europe) S.A. U.S.A. Wilmington Pirelli North America Inc. Tyre (Delaware) US $ 10,00 100.00% Pirelli Tyre Holding N.V. Wilmington Pirelli RNC Inc. Commercial (Delaware) US $ 1 100.00% Pirelli Tyre Holding N.V. Wilmington Pirelli Tire LLC Tyre (Delaware) US $ 1 100.00% Pirelli North America Inc. "A"

Central/South America Argentina Pirelli Argentina de Mandatos S.A. Services Buenos Aires Arg. Peso 500,000 100.00% Pirelli Société Générale S.A. Pirelli Neumaticos S.A.I.C. Tyre Buenos Aires Arg. Peso 19,016,500 95.00% Pirelli Tyre Holding N.V. 5.00% Pirelli Pneumatici S.p.A. Brazil Muriaé Ltda Financial Santo Andrè Bra. Real 80,000,000 100.00% Pirelli Pneus S.A. Novacorp Consultora e Serviços Corporativos Ltda Holding Santo Andrè Bra. Real 6,000 99.98% Pirelli S.A.

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Company Business Headquarters Share Capital Percentage Percen- Held by ownership tage of vote Pirelli & C. Real Estate Ltda Real Estate Santo Andrè Bra. Real 2,000,000 100.00% Pirelli S.A. Pirelli Pneus Nordeste Ltda Tyre Feira de Santana Bra. Real 29,991,402 100.00% Pirelli Pneus S.A. Pirelli Pneus S.A. Tyre Feira de Santana Bra. Real 342,085,095 96.05%98.77% Pirelli Pneumatici S.p.A. 3.68% 0.80% Pirelli S.A. Pirelli S.A. Financial Sao Paulo Bra. Real 49,189,271 100.00% Pirelli & C. S.p.A. Pneuac Comercial e Importadora Ltda Tyre Sao Paulo Bra. Real 12,913,526 100.00% Pirelli Pneus S.A. Chile Pirelli Neumaticos Chile Limitada Tyre Santiago US $ 1,918,451 99.98% Pirelli Pneus S.A. Pneuac Comercial e 0.02% Importadora Ltda Colombia Pirelli de Colombia S.A. Tyre Santa Fe De Bogota Col. Peso/000 3,315,069 92.91% Pirelli Pneus S.A. 2.28% Pirelli de Venezuela C.A. 1.60% Muriaè Ltda 1.60% Pirelli Pneus Nordeste Ltda Pneuac Comercial 1.60% e Importadora Ltda Mexico Pirelli Neumaticos de Mexico S.A. de C.V. Tyre Mexico City Mex. Peso 35,098,400 99.98% Pirelli Pneus S.A. Pneuac Comercial e 0.02% Importadora Ltda Servicios Pirelli Mexico S.A. de C.V. Tyre Mexico City Mex. Peso 50,000 99.00% Pirelli Pneus S.A. Pneuac Comercial e 1.00% Importadora Ltda Venezuela Pirelli de Venezuela C.A. Tyre Valencia Ven. Bolivar/000 20,062,679 96.22% Pirelli Tyre Holding N.V.

Africa Egypt Alexandria Tire Company S.A.E. Tyre Alexandria Egy. Pound 393,000,000 86.79% Pirelli Pneumatici S.p.A. 0.03% Pirelli Tyre (Europe) S.A. Alexandria Tire Company International Tire Company Ltd Tyre Alexandria Egy, Pound 50.000 96.00% S.A.E. South Africa Pirelli Tyre (Pty) Ltd Tyre Sandton S.A. Rand 1 100.00% Pirelli Tyre (Europe) S.A.

Oceania Australia Pirelli Tyres Australia Pty Ltd Tyre Pymble - N.S.W. Aus. $ 150,000 100.00% Pirelli Tyre (Europe) S.A. New Zealand Pirelli Tyres (NZ) Ltd Tyre Wellington N.Z. $ 100 100.00% Pirelli Tyres Australia Pty Ltd

Asia China Yanzhou Evolution Tyre CO. Ltd Tyre Yanzhou Chin. Renminbi 500,000,000 60.00% Pirelli China Tyre N.V. Japan Japan Kabushiki Kaisha Tyre Tokyo Jap. Yen 2,700,000,000 100.00% Pirelli Tyre Holding N.V. Singapore Pirelli Asia Pte Ltd Tyre Singapore Sing. $ 2 100.00% Pirelli Tyre (Europe) S.A.

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Investments accounted for by the equity method

Company Business Headquarters Share Capital Percentage Percen- Held by ownership tage of vote Jointly controlled companies Europe Italy Olimpia S.p.A. (*) Holding Milan Euro 4,630,233,510 57.66% Pirelli & C. S.p.A. Company (*) Under IAS, the percentage is 60.45%

Associated Europe Germany Industriekraftwerk Breuberg Gmbh Cogeneration Hoechst/Odenwald Euro 1,533,876 26.00% Pirelli Deutschland Gmbh Tizian Wohnen 1 Gmbh (before aptus117.Gmbh) Financial Berlin Euro 25,000 45.00% P&K Real Estate Gmbh Tizian Wohnen 2 Gmbh (before aptus118.Gmbh) Financial Berlin Euro 25,000 45.00% P&K Real Estate Gmbh Italy Agorà S.r.l. Real Estate Milan Euro 10,000 40.00% Pirelli & C. Real Estate S.p.A. Pirelli & C. Real Estate Facility Altair Zander Italia S.r.l. Real Estate Milan Euro 100.000 50,00% Management S.p.A. Aree Urbane S.r.l. Real Estate Milan Euro 307,717 34.60% Pirelli & C. Real Estate S.p.A. 0.28% Pirelli & C. S.p.A. Bernini Immobiliare S.r.l. Real Estate Milan Euro 500,000 14.00% Pirelli & C. Real Estate S.p.A. Cairoli Finance S.r.l. Real Estate Milan Euro 500,000 14.00% Pirelli & C. Real Estate S.p.A. Capitol Immobiliare S.r.l. Partecipazioni Real Estate (before Realco LSF S.r.l.) Real Estate Milan Euro 10,000 33.00% S.p.A. Castello S.r.l. Real Estate Milan Euro 1,170,000 49.10% Pirelli & C. Real Estate S.p.A. Continuum S.r.l. Real Estate Milan Euro 500,000 40.00% Pirelli & C. Real Estate S.p.A. Credit Servicing S.p.A. (before Servizi Immobiliari Banche - S.I.B. S.p.A.) Real Estate Milan Euro 1,809,500 47.37% Pirelli & C. Real Estate S.p.A. Dixia S.r.l. Real Estate Milan Euro 2,500,000 30.00% Pirelli & C. Real Estate S.p.A. Dolcetto 8 S.r.l. Real Estate Milan Euro 10.000 35.00% Centrale Immobiliare S.p.A. Domogest S.r.l. Real Estate Florence Euro 1,050,000 50.00% Centrale Immobiliare S.p.A. Pirelli & C. Real Estate Elle Dieci Società Consortile a.r.l. Real Estate Milan Euro 100.000 40.00% Property Management S.p.A. Elle Nove Società Consortile a.r.l. Real Estate Milan Euro 100.000 34.90% Edilnord Gestioni S.p.A. Pirelli & C. Real Estate Elle Tre Società Consortile a.r.l. Real Estate Milan Euro 100.000 40.00% Property Management S.p.A. Erice S.r.l. Real Estate Milan Euro 10,000 40.00% Pirelli & C. Real Estate S.p.A. Eurostazioni S.p.A. Holding Rome Euro 160,000,000 32.71% Pirelli & C. S.p.A. Pirelli & C. Real Estate G6 Advisor Financial Milan Euro 50,000 42.30% Agency S.p.A. Geolidro S.p.A. Real Estate Naples Euro 3,099,096 49.00% Centrale Immobiliare S.p.A. Idea Granda Società Consortile r.l. Enviroment Cuneo Euro 1,292,500 49.00% Pirelli & C. Ambiente S.p.A. Immobiliare Prizia S.r.l. Real Estate Milan Euro 469,000 36.00% Pirelli & C. Real Estate S.p.A. Induxia S.r.l. Real Estate Milan Euro 836,300 18.00% Pirelli & C. Real Estate S.p.A. Iniziative Immobiliari S.r.l. Real Estate Gavirate (Va) Euro 5,000,000 44.07% Pirelli & C. Real Estate S.p.A. Le Case di Capalbio S.r.l. Real Estate Milan Euro 10,000 20.00% Pirelli & C. Real Estate S.p.A. Partecipazioni Real Estate Localto S.p.A. Financial Milan Euro 5,200,000 35.00% S.p.A. Partecipazioni Real Estate LSF Italian Finance Company S.p.A. Financial Milan Euro 10,000 30.00% S.p.A. Pirelli & C. Real Estate Facility Malaspina Energy S.c.a.r.l. Real Estate Milan Euro 100.000 50.00% Management S.p.A. Pirelli & C. Real Estate Facility MP Facility S.p.A. Real Estate Milan Euro 1,000,000 50.00% Management S.p.A. Nivola S.r.l. Real Estate Milan Euro 10,000 35.00% Pirelli & C. Real Estate S.p.A. Orione Immobiliare Prima S.p.A. Real Estate Milan Euro 104,000 40.10% Pirelli & C. Real Estate S.p.A.

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Company Business Headquarters Share Capital Percentage Percen- Held by ownership tage of vote Perseo S.r.l. (before Pegaso S.r.l.) Services Milan Euro 20,000 50.00% Pirelli & C. S.p.A. Progetto Bicocca la Piazza S.r.l. Real Estate Milan Euro 3,151,800 26.00% Pirelli & C. Real Estate S.p.A. Progetto Corsico S.r.l. Real Estate Milan Euro 100,000 49.00% Pirelli & C. Real Estate S.p.A. Progetto Fontana S.r.l. Real Estate Milan Euro 500,000 23.00% Pirelli & C. Real Estate S.p.A. Progetto Gioberti S.r.l. Real Estate Milan Euro 100,000 50.00% Pirelli & C. Real Estate S.p.A. Progetto Lainate S.r.l. Real Estate Milan Euro 25,500 25.00% Pirelli & C. Real Estate S.p.A. Quadrifoglio Milano S.p.A. Real Estate Rome Euro 11,230,000 50.00% Pirelli & C. Real Estate S.p.A. Rinascente/Upim S.r.l. (before Tamerice S.r.l.) Real Estate Milan Euro 10,000 20.00% Pirelli & C. Real Estate S.p.A. Riva dei Ronchi S.r.l. Real Estate Milan Euro 100.000 35.00% Pirelli & C. Real Estate S.p.A. Serenergy S.r.l. (before Progetto Ambiente Alfa S.r.l.) Real Estate Milan Euro 25,500 50.00% Pirelli & C. Ambiente S.p.A. SMP Melﬁ S.r.l. Tyre Melito (Na) Euro 3,511,906 50.00% Pirelli Pneumatici S.p.A. Solaris S.r.l. Real Estate Milan Euro 20,000 40.00% Pirelli & C. Real Estate S.p.A. Tamerice Immobiliare S.r.l. Real Estate Milan Euro 500,000 20.00% Pirelli & C. Real Estate S.p.A. Pirelli & C. Real Estate Facility Telepost S.p.A. Real Estate Milan Euro 120,000 20.00% Management S.p.A. Trixia S.r.l. Real Estate Milan Euro 1,209,700 36.00% Pirelli & C. Real Estate S.p.A. Turismo e Immobiliare S.p.A. Real Estate Milan Euro 120,000 25.00% Pirelli & C. Real Estate S.p.A. Verdi S.r.l. Real Estate Milan Euro 20,000 43.74% Pirelli & C. Real Estate S.p.A. Luxembourg Afrodite S.à r.l. Real Estate Luxembourg Euro 4,129,475 40.00% Pirelli & C. Real Estate S.p.A. Artemide S.à r.l. Real Estate Luxembourg Euro 2,857,050 35.00% Pirelli & C. Real Estate S.p.A. Colombo S.à r.l. Real Estate Luxembourg Euro 420,000 35.00% Pirelli & C. Real Estate S.p.A. Doria S.à r.l. Real Estate Luxembourg Euro 445,000 35.00% Pirelli & C. Real Estate S.p.A. IN Holdings I S.à r.l. Real Estate Luxembourg Euro 4,595,725 20.50% Pirelli & C. Real Estate S.p.A. Inimm Due S.à r.l. Real Estate Luxembourg Euro 240,950 25.00% Pirelli & C. Real Estate S.p.A. Partecipazioni Real Estate MSPRE Luxembourg NPL S.à r.l. Real Estate Luxembourg Euro 12,500 25.00% S.p.A. Vespucci S.à r.l. Real Estate Luxembourg Euro 420,000 35.00% Pirelli & C. Real Estate S.p.A. Portugal Mirandia - Trading e Consultoria Lda Real Estate Madeira Euro 5,000 25.00% Pirelli & C. Real Estate S.p.A. Tronador - Consultoria Economica Lda Real Estate Madeira Euro 70,955 25.00% Pirelli & C. Real Estate S.p.A. Spain Signus Ecovalor S.L. Tyre Madrid Euro 200,000 20.00% Pireli Neumaticos S.A. The Netherlands Alceo B.V. (before MSREF V Italy Holding B.V.) Real Estate Amsterdam Euro 18,000 33.00% Pirelli & C. Real Estate S.p.A. M.S.M.C. Italy Holding B.V. Real Estate Amsterdam Euro 20,000 25.00% Pirelli & C. Real Estate S.p.A. Masseto 1 B.V. Real Estate Amsterdam Euro 19,000 33.00% Pirelli & C. Real Estate S.p.A. Max B.V. (before MSREF Holand Holding B.V.) Real Estate Amsterdam Euro 18,000 45.00% Pirelli & C. Real Estate S.p.A. Popoy Holding B.V. Financial Amsterdam Euro 26,550 25.05% Pirelli & C. Real Estate S.p.A. Spazio Industriale B.V. Real Estate Amsterdam Euro 763,077 25.00% Pirelli & C. Real Estate S.p.A. Spazio Industriale II B.V. Real Estate Amsterdam Euro 20,000 35.00% Pirelli & C. Real Estate S.p.A.

Africa Tunisia Société Tunisienne des Industries de Pnéumatiques S.A. Tyre Tunis Tun. Dinar 42,078,240 15.83% Pirelli Pneumatici S.p.A.

North America U.S.A. Sci Roev Texas Partners L.P. Real Estate Dallas US $ 12,000,000 10,00% Pirelli & C. Real Estate S.p.A.

Central/South America Argentina Lineas de Transmision de Buenos Aires S.A. Pirelli Argentina (in liquidation) Services Buenos Aires Arg. Peso/000 12,000 20.00% de Mandatos S.A.

224 Preliminary information Directors’ Report Sustainability Report Consolidated Financial Statements

Other investments considered signiﬁcant as per Consob resolution no. 11971 of May 14, 1999

Company Business Headquarters Share Capital Percentage Percen- Held by ownership tage of vote Belgium Euroqube S.A. Services Brussels Euro 84,861,116 17.79% Pirelli & C. S.p.A. France Aliapur S.A. Tyre Lyons Euro 262,500 14.29% Pirelli Pneumatici S.p.A. Italy F.C. Internazionale Milano S.p.A. Sport Milan Euro 19,340,476 19.49% Pirelli & C. S.p.A. Fin. Priv. S.r.l. Financial Milan Euro 20,000 14.29% Pirelli & C. S.p.A. Servizio Titoli S.p.A. Services Turin Euro 126,000 12.38% Pirelli & C. S.p.A. Tecnocittà S.r.l. (in liquidation) Real Estate Milan Euro 547,612 12.00% Pirelli & C. Real Estate S.p.A. Poland Centrum Utylizacji Opon Otganizacja Odzyseu S.A. Tyre Warsaw Pol. Zloty 1,008,000 14.28% Pirelli Polska Sp. ZO.O. The Netherlands MB Venture Capital Fund I Participating Pirelli Finance Company G N.V. Financial Amsterdam Euro 50,000 14.00% (Luxembourg) S.A. United Kingdom Pirelli Finance Tlcom l Ltd Partnership Financial London Euro 1,20410.39% (Luxembourg) S.A.

225 Preliminary information Directors’ Report Sustainability Report Consolidated Financial Statements

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226 Preliminary information Directors’ Report Sustainability Report Consolidated Financial Statements

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